Centene's (CNC) CEO Michael Neidorff on Q3 2014 Results - Earnings Call Transcript

Transcripts

Centene (NYSE:CNC) Q3 2014 Earnings Call October 28, 2014 8:30 AM ET

Executives

Edmund E. Kroll - Senior Vice President of Finance & Investor Relations
Michael F. Neidorff - Chairman, Chief Executive Officer and President
William N. Scheffel - Chief Financial Officer, Executive Vice President and Treasurer
Jesse N. Hunter - Chief Business Development Officer and Executive Vice President
K. Rone Baldwin - Executive Vice President of Insurance Group Business Unit

Analysts

Joshua R. Raskin - Barclays Capital, Research Division
Christopher R. Carter - Credit Suisse (Deutschland) Aktiengesellschaft
Sarah James - Wedbush Securities Inc., Research Division
William Benjamin Brandt - Goldman Sachs Group Inc., Research Division
Andrew Schenker - Morgan Stanley, Research Division
Shawn Bevec - Deutsche Bank AG, Research Division
Michael A. Newshel - JP Morgan Chase & Co, Research Division
Steven P. Halper - FBR Capital Markets & Co., Research Division
David H. Windley - Jefferies LLC, Research Division
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Stephen Baxter - BofA Merrill Lynch, Research Division

Operator

Good morning, and welcome to the Centene Corporation Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, Head of Investor Relations. Please go ahead.

Edmund E. Kroll

Thank you, operator, and good morning, everyone. Thank you for joining us on our third quarter earnings call.

Michael Neidorff, Chairman and Chief Executive Officer; and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene Corporation will host this morning's call. The call 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 (877) 344-7529 in the U.S. and Canada, or in other countries by dialing (412) 317-0088. The playback number for both of those numbers is 10052334.

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 our most recently filed Form 10-Q dated today, October 28, 2014, 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.

As a reminder, our next Investor Day is Friday, December 12, in New York City. Please mark your calendars. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Michael F. Neidorff

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's Third Quarter 2014 Earnings Call.

During the course of today's call, we will discuss our strong third quarter results and provide updates on Centene's markets and products, and our view of the Affordable Care Act. I will begin with highlights of our third quarter financial results. We reported third quarter diluted earnings per share of $1.34, or $1.22 when excluding the $0.15 impact of the ACA health insurance fee and $0.06 of transaction costs, and an income tax benefit of $0.33 related to periods prior to the third quarter of 2014.

We added 1.1 million new members year-over-year in the third quarter. This represents a 42% increase to 3.7 million covered lives. Premium and Service revenues grew 53% to $4.2 billion.

The HBR increased 80 basis points sequentially to 89.7%. This reflects an increase in new business, primarily attributable to the increase in high acuity membership. Bill will provide further HBR detail, including new and existing business mix.

Overall, we continue to see, as well as anticipate, stable medical trends. Now on to markets and product updates.

First, we will discuss recent Medicaid activities.

Florida. In August, we completed the phase in of Centene's 9 regions under the state's MMA program. At September 30, we had approximately 355,000 MMA lives in the state. Also in August, we completed the phase in of all 11 regions and is the sole provider for the Child Welfare Specialty Plan, Florida's new Foster Care program. And as of September 30, we had approximately 24,000 Foster Care beneficiaries in the state. These 2 contracts are the primary drivers of our 31% sequential membership growth in Florida.

The MMA and Foster Care programs are performing according to plan, which is at a higher HBR than historical memos. This is consistent with our plans. Medical costs, including pharmaceuticals, are in line with our expectations.

Illinois. In July, we began operating a new administrative and specialty services contract with the Cook County Health and Hospital system. This contract serves nearly 100,000 new members under the CountyCare program. The size of the program is expected to grow as CountyCare enters additional state Medicaid programs. Also in September, Centene began serving additional members under Illinois' current Medicaid program as Medicaid expansion.

Mississippi. The rollout of MississippiCAN expansion of an additional [indiscernible] lives is expected to commence at the end of 2014. This will continue to the third quarter 2015.

Louisiana. This past Friday, the state announced a notice of award for a pre-procurement of its value health program. We are pleased that our Louisiana subsidiary was recommended for a contract.

As part of the reprocurement, all beneficiaries will be placed in a full risk health plan. We anticipate serving 320,000 to 350,000 lives under the new contract. This will move -- this will more than double our annual revenue in the state. We expect to have this contract in place early in the first quarter of 2015.

Texas. In September, we successfully launched a new contract to serve STAR+PLUS members in 2 Medicaid rural service areas.

Moving on to dual eligibles. At September 30, we had 16,400 dual eligible members in Illinois and Ohio. Membership will continue to increase slightly throughout the remainder of 2014 in these 2 states. We continue to expect Michigan, South Carolina and Texas to go live with their dual demonstration projects during the first half of 2015.

Now a brief update on the ACA. First the health insurer fees. Centene has received signed agreements from 15 of our 17 applicable states, which provides for the reimbursement of the health insurance fee on a grossed up basis. This represents approximately 60% of the total amount.

CMS recently clarified that states should factor in the health insurer fee in setting rates paid to Medicaid's managed care clients.

We expect to receive a contract amendment from Texas in the fourth quarter of 2014. This is reflected in our guidance.

Next, Health Insurance Marketplaces. At September 30, we had 76,000 enrolled in paid exchange lives. The demographics of our enrollees continues to be in line with our pricing. Members are predominantly lower income, and over 90% are eligible for premium subsidies. The financial performance of our exchange business is in line with and slightly ahead of our expectations.

Lastly, Medicaid expansion. We ended the quarter with approximately 193,000 expansion lives in 6 states. Longer term, we continue to view this as a growth opportunity as more states adopt expansion.

Now hepatitis C therapies. We continue to manage the utilization of hepatitis C drugs in a responsible way on behalf of our state customers. Our medical management capabilities in Centene's clinical policies, in addition to sound state guidelines, have enabled us to successfully manage hepatitis C costs. Our experience to date has been consistent with our estimates. The net cost impact to Centene in the third quarter of 2014 declined sequentially. However, future costs are likely to increase as new therapies continue to be approved. In early October, an all oral hepatitis C drug was approved with genotype 1 patients. We are engaged in ongoing discussions with our states to ensure that all new treatments are properly managed and fully reflected in our reimbursement.

A quick comment on rates. We continue to expect the 2014 composite rate adjustment to be relatively flat. This is reflected in our updated guidance. In conclusion, we are pleased with our operating and financial performance during the first 2 quarters of the year. We expect to maintain this positive momentum in the fourth quarter 2014 and beyond. We are raising our 2014 financial guidance accordingly. It is important to note that excluding the tax benefit we recognized this year, we still have increased our EPS guidance by $0.14 at the low end and $0.09 at the high end. We look forward to seeing you at our December 12 Investor Day in New York City. Thank you for your interest in Centene, and now I'll turn the call over to Bill.

William N. Scheffel

Thank you, Michael, and good morning. As I begin this morning, let me first recap our third quarter EPS results. Our press release laid out the components of our results in the table on Page 1.

First, our GAAP EPS was $1.34 per diluted share. Similar to the first 2 quarters of 2014, there is a $0.15 impact related to the health insurer fee. And our acquisition transaction costs were $0.06 in Q3. The final item is a tax benefit of $0.33 related to the reversal of amounts accrued in prior periods, related to the limitation on compensation deduction applicable to certain health insurance issuers. In late September, the IRS issued final regulations on the application of the limitation on compensation deductions. Based on our analysis of the final regulations, we now believe that we are not subject to the limitation for 2013 and 2014. Therefore, we reversed the amounts previously recorded for 2013 of approximately $0.24 per share and $0.09 per share for the first half of 2014, for the total benefit of $0.33 per share.

The net of these adjustments is $1.22 per share for the third quarter of this year compared to the $0.88 per share reported in the third quarter of 2013.

Additionally, the third quarter this year also benefited by approximately $0.06 per share from not having to record the tax expense related to the limitation. Going now to our normal discussion of results. Premium and Service revenues approached $4.2 billion in the third quarter, an increase of 53% over the third quarter last year. The premium increase results from expansions in Florida, Ohio, Washington and Illinois and the addition of the California, New Hampshire, and Health Insurance Marketplace operations between years.

Our service revenues increased by $265 million between years, reflecting the growth in the carrier health and the addition of U.S. Medical Management. Our consolidated health benefits ratio was 89.7% this quarter, an increase of 190 basis points from last year's third quarter and 80 basis points sequentially.

The increase between years and sequentially is primarily attributable to the increase in higher acuity membership. As discussed during our Investor Day in June, the higher acuity products, like long-term care and dual eligibles, have higher targeted loss ratios. This results in an increase in our consolidated HBR, when the portion of our revenues from higher acuity membership increases. But then we also benefit from a lower G&A ratio due to the higher premiums received for these members.

For the third quarter, 27% of our revenues came from new business and 73% from existing business, similar to our second quarter split. The HBR for our new business was 91.4% in the third quarter and 89.0% for our existing business.

Our general and administrative expenses ratio was 8.0% this quarter compared to 9.1% last year, an improvement of 110 basis points. This year's third quarter includes $0.06 per share of acquisition transaction costs. Sequentially, we are down by 60 basis points from the second quarter. The continued reduction in our G&A ratio primarily reflects the benefit of the leverage we are receiving from our higher revenue base. For the third quarter, we recorded $32 million of revenue related to the reimbursement of the health insurer fee. And in September, we paid $126 million to the IRS for our 2014 fee. For Texas, our largest state, we continue to expect to receive a signed agreement before year end. And for all of 2014, we believe that the health insurer fee will net out and will not impact our overall results.

Investment income was $5.7 million in the third quarter compared to $4.8 million last year. Interest expense was $9.3 million this year compared to $6.6 million last year, reflecting a higher balance on our revolver and new issuance of the $300 million of senior notes earlier this year. Our effective income tax rate for the third quarter excluding the effects of noncontrolling interest was 24.8%, which reflects the benefit of the final compensation deduction regulations discussed earlier.

Excluding the favorable impact from prior periods, the third quarter rate would've been approximately 46%, the rate we expect to apply to the fourth quarter this year as well. Our diluted earnings per share for GAAP purposes was $1.34 compared to $0.88 last year. Diluted shares outstanding were 60.7 million shares for the third quarter compared to 59.7 million shares in the second quarter.

At September 30, we had $2.9 billion of cash, investments and restricted deposits, including $70 million held by unregulated entities. Our risk-based capital continues to be in excess of 350% of the authorized control level, excluding any statutory impact related to the treatment of the health insurer fee during the year.

Our total debt was $955 million at quarter end, including $140 million of borrowings under our revolving credit agreement. Our debt-to-capital ratio, excluding our $71 million nonrecourse mortgage note was 35.0%. Medical claim liabilities totaled $1.6 billion at September 30 and represented 43.1 days in claims payable.

Cash flow from operations was $442 million for the third quarter and $854 million year-to-date, both of which were over 5x net earnings for each of the respective periods.

Our full year guidance numbers have been updated to reflect our third quarter results. For 2014, we expect Premium and Service Revenues of $15.3 billion to $15.8 billion. Diluted earnings per share, $4.35 to $4.50; consolidated health benefits ratio, 88.9% to 89.4%; general and administrative expense ratio, 8.2% to 8.6%; and an effective tax rate for the year of 40% to 42%. Diluted shares outstanding, 60.0 million to 60.4 million shares. We have included a table in our press release reconciling our EPS guidance provided as part of our second quarter press release to today's updated guidance. Our 2014 guidance assumes we will receive the signed health insurer fee agreement in Texas, our most significant state in terms of dollars, in the fourth quarter. As a result, we believe there will be no significant impact to the quarter -- to the company for the full year related to the health insurer fee. For income taxes, we have recognized a $0.24 benefit during 2014 related to prior years and acquisition transaction costs are expected to total $0.12 per share for all of 2014.

We also believe that based on our 2014 revenue estimates, we will not be subject to the additional tax related to the limitation on compensation deduction in 2015. Our business expansion costs for the year are estimated to be $0.55 to $0.60, and include $0.12 in acquisition transaction costs for U.S. Medical Management, Louisiana and Spain. Third quarter, expansion costs were approximately $0.14, which is less than we previously estimated due to a lower amount of acquisition costs. This now concludes our prepared remarks, and operator, you may now open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Joshua Raskin of Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

So the question -- just around the tax rate. I just want to make sure I understand it. Is it a permanent change that will -- it sounds like you're expecting it, Bill, to continue into '15. But what exactly changed around the deductibility compensation expenses? And I think, you said it was revenue dependent i.e. should we think about this 45% to 46% tax rate for eternity, or is there something that can change that would put you back up towards that 50% tax rate?

William N. Scheffel

The final regulations which were issued in September laid out the calculations in terms of how this is to be done and essentially what happens is there's a 1 year lag. So the 2013 revenue amounts are calculated and depending on where those fall, they dictate whether you'd be subject to this limitation in 2013 and 2014 in that case because that was the first year of the tax. And so the tax is calculated based on, I will use a broad word like commercial revenues divided by total revenues and there's a limitation on how much that can be, whether you're subject to the tax or not. We are below those revenue -- below those de minimis tests in 2013. So therefore, we didn't have to pay tax for 2013 and 2014. And based on our 2014 revenues we don't think we will be applicable -- we will have to pay this tax in 2015. This is a year-by-year calculation and it will depend on our operations going forward. But obviously, it's something we'd be looking at very closely.

Joshua R. Raskin - Barclays Capital, Research Division

So. I mean, just to give us a sense, Bill, are you guys close to hitting the commercial limitation? Would you have to exit some exchange business to make sure you don't hit that? Like, just in terms of likelihood of this actually persisting?

William N. Scheffel

Well, I think right now, it's hard to have a good crystal ball forever but as I said, we don't think it's going to be applicable to us for 2013, 2014 and 2015. And I'll leave 2016 to some other time.

Joshua R. Raskin - Barclays Capital, Research Division

All right. And then just -- you didn't mention Florida. But after -- okay last quarter, I'm curious if you have got any more color on Florida specifically?

William N. Scheffel

Sure. I think in Florida, we've got 3 new products effectively going in there, including long-term care, the basic Medicaid program and the Foster Care program. I think with respect to long-term care, we're working with the states -- the state on finalizing the rates for September 1, and dealing with some of the issues there in long-term care, and we expect that to be done later this quarter. I think the other programs quite frankly, are performing near our expectations and what we originally contemplated when we prepared our bids and submitted those to the state.

Michael F. Neidorff

Yes. I would say -- I'll just add, Josh. As we impose [ph] that the MMA, the Foster Care as I said in my prepared remarks is consistent with our expectation, our pricing, pharmacy costs are in line and we have real-time pharmacy costs from our PBM. So we're comfortable with Florida. We're comfortable we're working to any issues that come up in Florida, as they have been very responsible partners at every level.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And then I'm sorry to sneak in a last one. But any commentary on 2015 revenues? I think you guys previously suggested $18.5 billion if you didn't win anything, et cetera, at the Investor Day. I assume, obviously, that's gone a little bit higher based on some of the contract wins but if there are starting...

Michael F. Neidorff

Yes. And I guess some people may try and figure out where it was going from there. But we're going to wait until December 12, when we just give a very complete picture of how we see it, Josh. And that's probably [indiscernible] we say we see it up by how much or something in that nature. I do expect it'll be stronger. I will tell you that.

Operator

Our next question is from Chris Carter of Crédit Suisse.

Christopher R. Carter - Credit Suisse (Deutschland) Aktiengesellschaft

Just on the MLR. I mean, a little bit higher than we expected. It looked like the new business MLR was down sequentially, so pretty good, but the existing business MLR was up. I mean, can you just give us any color in terms of what's driving that maybe?

William N. Scheffel

I think the primary thing is, we talked about is the higher acuity business. When the state rates each of these products, they have a targeted loss ratio and just, you're usually in the 90s for things, a lot of SSI products, a lot of long-term care and the duals, among other things. And so as that mix shifts towards more of that, you'll see an increase in the consolidated ratio. So we did not see an increase in medical cost trends or utilization really. I would say it's pretty much all mix at this point in time and nothing that was unusual from our vantage point.

Christopher R. Carter - Credit Suisse (Deutschland) Aktiengesellschaft

But I guess, did anything else really move into that bucket in the quarter?

William N. Scheffel

I mean, you've got stuff that was long term, some of the regions from long-term care in Florida would've moved into that bucket because they started last year in August, but only a little bit.

Christopher R. Carter - Credit Suisse (Deutschland) Aktiengesellschaft

Okay. And then just ...

Michael F. Neidorff

I would say, I think importantly, it's performing in line with expectations, and from a general trend standpoint it's doing just fine.

Christopher R. Carter - Credit Suisse (Deutschland) Aktiengesellschaft

Okay. And then just on the Louisiana contract. I know you guys said, you think you can hit kind of 320,000 or 350,000 members next year. I mean, I think that implies a pretty high retention rate of the CHS lives, I guess. How do we get comfort that -- you guys can kind of pick up those numbers as opposed to them being I guess, assigned to the new entrant, or even, United, I think that was in the share savings program?

Michael F. Neidorff

I'll let Jesse respond to that.

Jesse N. Hunter

Sure. Chris. I think, what the state has layed out, I think with some clarity, kind of the process, if you will, for how members will via [ph] move under the new contract. So as it stands today, we have 2 contracts, 1 full risk and then the CHS shared risk contract. So the formula that the state has laid out includes first and foremost member choice. And so we -- that's always the starting point. But the other 2 criteria are -- include primary care continuity, so having the same primary care from one -- kind of from one program or one product to the other. And then the -- we've got really the MCO history, if you will, so when we look at our experience having the operating, the shared savings contract for a period of time in 2014, and then the very strong primary care network overlap that exists between our kind of risk product and the shared savings product. We do have confidence with a retention rate for the CHS business that is reflected in that 320,000 to 350,000 member range under the new contract.

Operator

Our next question is from Sarah James of Wedbush Securities.

Sarah James - Wedbush Securities Inc., Research Division

You mentioned in the prepared remarks that you expect Texas to update the contract for the health insurance fee by year end. But I believe their session doesn't start until January '15. So if you could talk about what gives you confidence that there will be a...

Michael F. Neidorff

Well, I think there's 2 issues. I think there is the issue of when they sign the agreement and when they fund it. And what's important is that if they sign this year, we can recognize it and then if they fund it in, it becomes receivable. They fund it in the first quarter, January, February, that's fine. You just have to draw that distinction, Sarah, between a signed agreement and the actual payment. And we're talking about being able to recognize it in the fourth quarter.

Sarah James - Wedbush Securities Inc., Research Division

And then last question here is on the expansion eligible population. I know that last quarter there were some states that were still working through their backlog. In particular, I believe California had about 600,000. Can you update us on the progress of those backlogs in your expansion states? And should we think about expansion enrollment increasing through the end of the year? Or are you about -- where you expect today on that?

Michael F. Neidorff

Rone?

K. Rone Baldwin

Well, we have seen continued increases in enrollment in our Medicaid expansion states, especially Washington and California, to some extent, Ohio. We have seen states get through a lot of the backlog as you mentioned plus with respect to woodwork, we have identified woodwork as being a factor in those states where we have seen Medicaid expansion. So we continue to think, we'll see some growth in enrollment but it -- probably the bulk of it has happened through the 3 quarters at this point for 2014.

Operator

Our next question is from Matthew Borsch of Goldman Sachs.

William Benjamin Brandt - Goldman Sachs Group Inc., Research Division

This is Bo on for Matt. A quick question on service revenues, down sequentially. Is that a product of flattening Sovaldi?

William N. Scheffel

I think that's the simple answer. We did peak in the third quarter. As we said -- at the end of the second quarter, I think we said we thought we'd see some plateauing of those costs and revenues in effect and then the fourth quarter we expect to see that reverse with the new products.

William Benjamin Brandt - Goldman Sachs Group Inc., Research Division

Okay. Got it. And with these new products are there any new agreements, or can you provide any commentary on what some of the states are working on for potential carve-outs or reimbursement?

Michael F. Neidorff

I will start off and then ask Mary. I will start off and ask Mary, if she wishes to add something or Rone. But we are working with them now and we're following the same general procedures we did with the initial hepatitis C products. And so we see ourselves continuing on what was a very effective course. Rone would you give more color?

K. Rone Baldwin

Well, we've been working on this issue with the states and since the beginning of the year, both for Sovaldi as well as for the new therapies that are coming on. And the states have recognized the need to make an adjustment for these new therapies. The majority of our states have put in place or putting in place either a carve-out program or a kick payment or some sort of reinsurance, or we are not covering pharmacy in that actual state. So that can cover the majority of our states. The others have put in place some form of rate adjustments going, for 2014 and going forward. And so in aggregate, we think the states have responded with fairly meaningful programs to mitigate the costs of these -- existing therapies as well as the additional therapies going forward. But this is something we continue to work with the states on as well as the experience with these drugs emerges.

William Benjamin Brandt - Goldman Sachs Group Inc., Research Division

Will this be a continual rate negotiation with the states on a go-forward basis? Or have they made the adjustment and this will be applicable for 2015 going forward?

K. Rone Baldwin

Again it varies a little bit by state for the states that have put in some of the risk mitigation programs I mentioned previously. It's not a rate dependent issue for the states that are relying on this, more on a rate basis. There is an aspect where they want to look at the actual experience and then reflect that in the rates. So it's a mix.

Operator

Our next question is from Andy Schenker of Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

Just maybe a quick housekeeping one here. Looks like for the 2 recent -- the transaction costs for the deals here, you only booked about $0.06 in the quarter. I thought originally it was supposed to be a $0.12, did anything change there or maybe that's going to be fourth quarter? Anything we should be thinking about there?

William N. Scheffel

I think that our estimate we gave in July tended to be high. We actually came in at $0.06 or lower than what we thought we were after we did all of our purchase accounting and ran all the transaction through.

Andrew Schenker - Morgan Stanley, Research Division

Okay. Great. And then thinking about your investments and expectations for start-up costs in '14, can you kind of remind us how those ramped and progressed through the quarter year-to-date, and maybe how should we be thinking about some of those costs into 2015?

William N. Scheffel

I think that they're generally equal for each quarter depending on the acquisition transaction costs. So we had that in the first quarter and then somewhat in the third quarter. It's not unusual with some of the product start-ups that we'll have fourth quarter -- higher level of fourth quarter costs as we get ready to do a couple of those. But I don't know that there is great variability from quarter-to-quarter other than, which occurs as a result of acquisition transaction costs.

Andrew Schenker - Morgan Stanley, Research Division

Okay. So it's still the $0.60 to $0.65, I think you called out. Is that still what it is?

William N. Scheffel

I think I said $0.55 to $0.60 in my script.

Andrew Schenker - Morgan Stanley, Research Division

Sorry. Sorry, I missed that. Okay. And then for next year, I mean how should we maybe, just big picture, be thinking about that?

Michael F. Neidorff

We'll be talking about that on December 12.

William N. Scheffel

The only thing I'd say is we always expect to have business expansion costs. Now as our revenue grows the -- as a percentage of revenues it probably doesn't grow. It probably gets smaller, but it's still a hefty amount in terms of cents per share.

Operator

Our next question is from Scott Fidel from Deutsche Bank.

Shawn Bevec - Deutsche Bank AG, Research Division

This is Shawn Bevec on for Scott. Question about the MLRs. Obviously, higher acuity membership mix is likely to continue to grow, which will continue pushing your MLRs higher. Do you think that MLR trends going forward will sort of be in that low 90% range?

William N. Scheffel

Well, I think it depends where we end up from the mix standpoint. I would say they will get closer to 90%. I don't know if they'll get to 90% on a blended overall basis yet.

Shawn Bevec - Deutsche Bank AG, Research Division

Okay. And then one question on the exchange business. I know it's small for you guys, but can you talk about any of the 3Rs accruals that you've been making this year?

William N. Scheffel

At this point in time, we don't have any substantive dollars for the specific 3R accruals. We're continuing to develop information with respect to things like risk adjustment, et cetera, and there's a little bit of reinsurance as a result of claims over the certain dollar amount, but nothing of any great consequence.

Operator

Our next question is from Justin Lake of JP Morgan.

Michael A. Newshel - JP Morgan Chase & Co, Research Division

This is Mike Newshel in for Justin. First, just one clarification on the tax benefit. I think you mentioned that in addition to the $0.33 of prior period benefit in this quarter, there's also $0.06. And so is that basically a $0.12 benefit from -- for the fourth quarter?

William N. Scheffel

I think that's correct, right. I would say, rough numbers is $0.24 related to 2013 and before, $0.27 related to 2014.

Michael A. Newshel - JP Morgan Chase & Co, Research Division

And then, so essentially for the EPS number for the quarter excluding the tax benefit from the prior periods and the quarter itself comes to about $0.95, is that right?

William N. Scheffel

Well, we reported $1.34. So I understand your math, which pieces you take out and which ones you add in. But that's -- I'll leave that to you.

Michael A. Newshel - JP Morgan Chase & Co, Research Division

Okay. And just one more thing on the premium tax. You didn't mention California. Do you still expect to be reimbursed there, or is it just because it's so small that it's negligible either way?

William N. Scheffel

The state issued a letter earlier in the year indicating they're going to reimburse it. It wasn't of sufficient nature to actually record the fee at that point in time, but fully expect to receive that. In our case, we only had 2 months of operations in 2013, so it would've been subject to tax for this year. So it's very immaterial for us.

Operator

Our next question is from Steve Halper of FBR.

Steven P. Halper - FBR Capital Markets & Co., Research Division

Just regarding the Texas fee in the fourth quarter. What does the accounting look like? Is that just one big revenue adjustment in the quarter?

William N. Scheffel

Essentially, we -- yes. Well, basically, we obviously didn't record it in the first 3 quarters. So I think we reported an impact of $0.16 for Q1 and Q2, and $0.15 in Q3. So that would all reverse in the third quarter if we record -- receive the Texas one. So we'd have all 4 quarters.

Operator

Our next question is from Dave Windley of Jefferies.

David H. Windley - Jefferies LLC, Research Division

I was hoping you can talk a little bit about kind of rates, coming at it from a couple of angles. On the one hand, we are seeing some surveys that suggest that more states are adding benefits to Medicaid programs looking into 2015, so that would obviously be a need for an increase in your rates to cover that. On the other hand, I'm wondering to what extent, probably particularly in Medicaid expansion, where rates were high in year 1 in anticipation of pent-up demand and higher utilization from new populations. How do we think about blending those types of things together into a composite rate outlook for 2015? Anybody there?

Operator

I'm not sure, has the speaker location muted their line?

[Technical Difficulty]

Michael F. Neidorff

Can you hear us, operator?

Operator

Yes. It's clear now. Please go ahead.

William N. Scheffel

So I'm not sure if everybody caught all that or not. But with respect to new benefits that are added, that's generally covered by additional rates that are paid by the state. That's a normal process that occurs all the time. That's almost like a pass through in many cases and then with respect to the new Medicaid expansion rates, which were higher, let's say, because there was some concept of pent-up demand, that's all being discussed with the states as we move forward into 2015 and there's really no -- nothing new there at this point in time to say their rate adjustment will be very significant.

David H. Windley - Jefferies LLC, Research Division

So Bill, do you have a view on a rate -- a composite rate? Or should we expect something around flat like it was for -- or like you're anticipating for '14? Or is it too early to really think about a point estimate number?

William N. Scheffel

Yes. I would say it's fairly early. We don't expect to have significant rates increases in any cases. We've always said it's rather modest, particularly, net of changes in the Medicaid fee schedule. So we'll talk about that more on December 12 at our Investor Day, when we specifically cover 2015.

Michael F. Neidorff

Yes. It tends to be a state-by-state negotiation we do, and then we'll see that all rolls up, and we'll give you the number on the 12th.

David H. Windley - Jefferies LLC, Research Division

And then maybe a follow-up question. On your G&A ratio, is there -- I guess, is there a floor on that, as you're -- to the earlier question about MLRs moving up as higher acuity populations move into the mix or grow in the mix. Obviously, I would think that your offset would be leverage on SG&A. Is there -- what's the level at which you've kind of achieved full leverage and that number can't go any lower?

William N. Scheffel

That's a good question. I'm not sure I have an answer on that at this point. I think, obviously continue to go lower. We had 8.0% for this quarter, but we had $0.06 of transaction costs included in that number. So obviously, if you factor that out, it will be lower than 8%. So I think clearly, it can be in the 7s. How much we're in that, I don't know yet but I think we do obviously see the benefits, where we're just adding additional revenue, in that the fixed costs that we have are spread out over a wider base.

Michael F. Neidorff

I mean, it goes back to products mix, because if you think about in Louisiana, we're adding the standard Medicaid type population and in other states the high acuity. So it's how all that mix comes together.

Operator

The next question is from Chris Rigg of Susquehanna International Group.