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Executives

Julie Trudell – SVP, IR

James Carlson – Chairman and CEO

Jim Truess – EVP and CFO

Analysts

Scott Fidel – Deutsche Bank

Carl McDonald – Citigroup

Tom Carroll – Stifel Nicolaus & Company

Charles Boorady – Credit Suisse

Sam Walsh – Goldman Sachs

Matthew Borsch – Goldman Sachs

Joe Coons – Barclays Capital

Chris Rigg – Susquehanna

Ken Levine [ph] – UBS

Doug Simpson – Morgan Stanley

Scott Green - Bank of America Merrill Lynch

AMERIGROUP Corporation (AGP) Q3 2011 Earnings Conference Call October 28, 2011 8:00 AM ET

Operator

Welcome to AMERIGROUP Corporation Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management’s presentation, you’ll be invited to participate in a question and answer session. (Operator Instructions).

As a reminder, this conference is being recorded today, Friday, October 28, 2011. I would now turn the conference call over to Julie Trudell Senior Vice President Investor Relations at AMERIGROUP. Please go ahead.

Julie Trudell

Good morning, and thank you for joining AMERIGROUP’s Third Quarter 2011 Conference Call and webcast. With me this morning our AMERIGROUP’s Chairman and CEO, James Carlson, and Chief Financial Officer, James Truess.

In addition, Dick Zoretic, our Chief Operating Officer and John Littel, our Executive Vice President of External Relations will be available for questions. The press release announcing our third quarter earnings was distributed this morning, a replay of this call will be available shortly after the conclusion of the call through Thursday, November 3, 2011.

The numbers to access this replay are in the earnings press release. The conference call will be available through the investors’ page of the company’s website approximately two hours following the conclusion of this live broadcast, for 30 days.

For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein, are as of today, October 28, 2011 and is not been updated subsequent to our initial earnings call. During this call, we will make forward-looking statements including statements relating to our growth prospects, rate, medical cost trends, the closing of the health class acquisition, as well as our 2011 and 2012 outlook.

Listen with caution that these are statements and are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations.

And we advice listeners to review the risk factors discussed in our press release this morning, and in documents we have filed or furnished to the SEC. I would now like to turn the call over to our Chairman and Chief Executive Officer James Carlson. James?

James Carlson

Thank you Julie. Good morning and thank you for joining our call. This morning, I’d like to talk for a few minutes about growth in both 2011 and 2012 including our recently announced Health Plus acquisition and our view of the future. But before I do, let me first start with a couple of highlights from the quarter.

This morning, we reported third quarter net income of $48 million or $0.96 per share. So our revenues for the quarter were $1.6 billion reflecting a $77 million sequential increase. A year ago, I shared with you our perspective that 2011 would be a year with pretty modest growth at least by our standards.

But more importantly, it would largely be a year in which we set the stage for significant growth in 2012 and beyond. Well that has certainly been born out during the year, so let’s review for a minute. In February, we expanded into an addition star plus service area in Texas.

In the summer, we were successful in significantly expanding our business in Texas which we estimate will add more than $1 billion in incremental annualized revenue. We were also awarded the new opportunity in Louisiana. We added, through legislative changes, additional populations and services in Ohio, New Jersey and New York.

In September, we expanded our service areas in Texas and lastly, we announced an important acquisition in New York earlier this week. At last month’s investor day, we commented that we expect to significantly exceed our normal 50% compared full year 2011.

We identified the key drivers of revenue growth in 2012 to be the reason for wins in Louisiana and Texas, as well as expansion in existing markets. With the announcement of our planned acquisition in New York, those updated scenarios suggest revenue growth for next year in excess of 40%.

Of course, there are a variety of timing factors that could affect the actual results. But the point is, the potential exists for pretty significant growth. Managing this growth is obviously a key operational objective. And actually we have been preparing for it for much of this year.

It’s important to remember we have successfully executed on the specific types of growth opportunities we are discussing. Existing market expansion, a new market start up, and a Bolton acquisition having done more than 80 implementations in our test.

Furthermore, the growth is nicely distributed across our three regions which are led by very capable regional leaders who will personally tie their efforts. Other than Louisiana, the growth is occurring in places where you have expanded the associates in place which means not only an ability to keep the ground running, but also to leverage existing infrastructure.

Our most recent development is the acquisition in New York that we announced on Tuesday. Health Plus has approximately 320,000 members in New York State’s Medicaid, Family Health Plus and Child Health Plus program and also includes approximately 3,000 Medicare Advantage members.

As you will recall, New York has the second highest number of Medicaid enrollees in the nation. It accounts for fully 13% of the nation’s Medicaid spent. Health Plus expects to generate approximately $1 billion of revenue in 2011. The acquisition is expected to be slightly diluted to our earnings per share in 2012 due to integration and one time transaction related cost, but earnings beginning in 2013.

Of course this transaction cost are front-end loaded, much depends upon the timing of the actual closing of the transaction. The purchase price of $85 million will be funded through available cash. The transaction is subject to regulatory approvals and other closing conditions is expected to close in the first half of 2012. Our existing health plan are relatively small in New York terms has consistently been a strong performer managing medical costs as evidenced by a consistently favorable MLR.

However, since we entered the market 2005, we have wanted to expand our presence in New York. Our reasons for this go beyond just the benefit of a larger and more efficient operation. Over the year the state has implemented changes and the rules for distribution, advertising and marketing. From a strategic perspective, we concluded we needed more significant scale to compete effectively.

The acquisition will provide greater access to quality care for AMERIGROUP and Health Plus members and long term cost savings for the State of New York City. Health Plus has many attributes that made it attractive to us. Their long standing commitment to the communities of New York, strong provider relationships and passionate, mission-driven employees.

The Health Plus’ parent, Lutheran Medical Center, this combination will allow them to fortify their finances and strengthen their focus on their core mission of serving the health care needs of their neighbors, something they have been doing quite well.

We have long believed that the financial and operational challenges in today’s health care environment which are dramatically escalated under the requirements of the Affordable Care Act could cause many hospitals to reconsider their ownership of Medicaid managed care plans and focus instead on their core mission. We have seen this in a few markets already and continue to believe we will see more of this activity in the coming years.

This opportunity allows us to harness the best of both plans. Experienced management and strong community based programs resulting in improved service outcomes and financial performance. We also believe that this acquisition is consistent with the objectives of New York’s Medicaid redesign team.

This effort, which was launched by Governor Cuomo shortly after his inauguration, has prioritized improving efficiencies for the state and increasing capacity for next year’s transition to mandatory manage long term care. Additionally, there has been a great deal of attention paid to the financial circumstances of certain hospitals that served the various burrows.

We believe that this is a good use of our resources, the return on investment is expected to be strong and that there continue to be sizable opportunities for growth in the city and state. Additionally, it allows us to strategically strengthen an existing market, enhances multiple product segments, promotes sufficient scale to compete and is consistent with our selection criteria.

Finally, since our last report, we have received further information on outstanding premium (inaudible). In New York, we have received a 3.7% increase, retroactive to April 1st. In Florida, net of hospital rate changes, our increase was 0.6% effective September 1 and finally in Georgia, we received a 2.5% increase.

We expected Georgia rates to be finalized in the fourth quarter and we’ll recognize the portion of the rate increase associated with the third and fourth quarter at that time. We are virtually complete with all the reductions [ph] for calendar year 2011. Net of benefit changes and provider key schedule changes, the weighted average rate change for 2011 is down approximately 1% reflecting cost experience in the states respective base periods.

We have always believed that the potential for growth in this industry is significant. Here at AMERIGROUP and a little more than a quarter, we have seen existing market expansion, a new market start-up and a bolt on acquisition resulting in the potential for revenue growth above 40% in 2012. And that’s where the $50 billion pipeline we have discussed but still ahead of us and the potential to participate in dual eligible integration.

In fact, if the past year is a prologue to the future, our success during 2011 bolsters our confidence as we look ahead.

With such a robust pipeline, our growing focus on long-term services, the opportunity to integrate and care for the eligible population, and the recognition by state and federal officials of the value proposition of the private sector, we believe that AMERIGROUP is extraordinarily well positioned for these and other opportunities that will emerge.

And so with that, I’ll turn the call over to Jim.

Jim Truess

Thank you. Good morning, everyone. Today I want to cover highlights in the quarter and wrap us some comments on our outlook. For the third quarter, net income was approximately $48 million resulting in diluted earnings per share of $0.96. This compares to $44 million or $0.83 in the second quarter of 2011.

In the third quarter, we achieved significant growth in revenue due to expansions in existing markets as well as the one-time retroactive premium adjustments.

Premium revenue for the third quarter of 2011 increased 7.4% to $1.6 billion versus $1.49 billion in the third quarter of 2010. Sequentially premium revenue increased $77 million or 5.1%.

The most significant impact on the sequential premium revenue change was increased membership and expanded coverage services in New Jersey including the carve-in pharmacy services for the aged, blind, and disabled as well as the move of additional aged, blind, and disabled population into managed care.

Third quarter premium revenue was also positively impacted by approximately $20.4 million of retroactive premium revenue or $0.25 earnings per diluted share relating to Georgia and New York.

Let’s go to the details on that.

First, Q3 premium revenue includes the impact of retroactive premium rate adjustments in Georgia. We recognize $40 million of premium or $0.17 earnings per share reflecting retroactively increased premiums rates back to 2006.

The state is providing these old premium rates in recognition of a lower member count now applicable to prior periods after the state completed their special duplicate member clean up over the last few quarters.

The special duplicate member clean-up activity that the state initiated this year appears to be largely complete. It looks as though duplicate member recruitment volumes have now returned to traditional levels.

Second, while unrelated to duplicate members, we also recognize approximately $3.5 million of premium revenue or $0.04 earnings per share retroactive to September 1st, 2010 related to an increase in new-born supplemental rates in Georgia.

The state tightened the eligibility criteria for cases that receive supplemental premium payments beginning in September of 2010 and this necessitated an increase to the payment amount to keep the plans full on an actuarial basis.

Finally we received confirmation of our rate increase in New York which was retroactive to April 1st, 2011. We recognized approximately $2.9 million of premium revenue or $0.04 earnings per share associated with the retroactive portion of the New York rate increase applicable for the second quarter.

Third quarter investment income and other revenues were $4.1 million compared to $4 million in the second quarter of 2011.

Health benefits expense as a percent of premium revenue was 83.9% for the third quarter of 2011 versus 80.5% in the third quarter of 2010 and compared to 84.1% in the second quarter of 2011.

The health benefits ratio was favorably impacted by 110 basis points due to the various retroactive premium revenue items recognized in the quarter as I mentioned a moment ago.

We recognize about $8.7 million of favorable approved reserve development in the quarter, however, the net impact on the health benefits ratio and EPS was significantly lower because the favorable development drove increases in premium rebates under the gain sharing models in place with our state.

The net positive impact on our third quarter health benefits ratio from favorable development was about 20 basis points. This compares to 50 basis points in the second quarter of 2011.

Excluding the retroactive premium items in the net favorable development, the health benefits ratio would have been approximately 85.1%, this compares to a similarly adjusted number in the second quarter of 83.8%.

This underlying sequential increase in the health benefits ratio is primarily driven by the recent premium rate changes primarily in Tennessee and Texas.

Medical cost trends remain consistent with what we discussed with you last month at our investor day trending within our long term range of 3% to 5%. Outpatient services continues to be the primary factor yielding trend as in patient cost generally remain muted. Let me provide you with some thoughts in the HBR as it relates to the fourth quarter.

We expect the HBR to rise in the fourth quarter reflecting the normal seasonal rise in medical cost. This is a reminder, in most cases; our populations have incurred the lowest medical cost for seasonality in the third quarter. The fourth quarter typically reflect the higher HBR than the third quarter since the seasonality factor increases as we move toward the winter months with peak seasonality in the first quarter.

Selling, general and administrative expenses were 8.2% of total revenues for the third quarter of 2011 versus 7.1% in the third quarter of 2010 and compared to 8% of the second quarter of 2011. The sequential increase in selling, general and administrative expenses was in line with expectations. For the nine months ending September 30th, 2011, selling, general and administrative expenses were 7.9% which is tracking right in line with our expectations for the year.

The third quarter tax rate was 37.2% versus 36.2% in the second quarter of 2011. The rate increase from the second quarter is primarily due to reductions in tax exempt interest income and an increase in non-deductible expenses. Cash and investment of September 30th, 2011 totaled $1.85 billion of which $298 million was unregulated compared to $255 million of unregulation cash and investment at June 30th, 2011.

During the quarter, we repurchased approximately 1.7 million shares of common stocks at an aggregate cost of $77 million pursuant to our ongoing share repurchase program. The debt to total capital ratio increased to 16.9% as of September 30th, 2011 from 16.6% as of June 30th, 2011.

Medical claims payable as of September 30th, 2011 totaled $545 million compared to $520 million as of June 30th, 2011. Days and claims payable represented 37 days of health benefits expense consistent with the second quarter of 2011. Cash flow from operations totaled $243 million for the nine months end of September 30th, 2011 and $129 million for the three months end of September 30th, 2011.

More specifically, the key drivers of Cash flow in the quarter were solid earnings an increasing claims liability and lower tax payments along with other favorable changes and working capital accounts. Cash flow from operations in the third quarter was about 2.7 times net income which is above our expected or average range of 1.25 times to 1.75 times net income.

With a Cash Flow multiple of 2.7 times in the quarter, the natural inclination as we [ph] deem is a high quality quarter which is nice but an outside multiple in one quarter is usually due to favorable timing items and what is favorable one quarter yield an unfavorable timing item in the subsequent quarter and a below average multiple.

Large variability in the multiple comes to be driven primarily by changes in working capital account not just timing and premium payments, tax payments or movement in the claims liability to name just a few. And while they can impact operating cash flow positively or negatively in any given quarter, it doesn’t really represent a change in fundamental business performance or the generation of deployable cash.

So we’re pleased with the strong Cash Flow in the quarter and a large net income multiple but expects us to trigger lower fourth quarter Cash Flow with a lower associated multiple. More importantly, we anticipate solid Cash Flow for the full year of 2011 with a net income multiple within our expected range of 1.25 times to 1.75 times, and most importantly the generation of significant free cash flow for the full year.

We are maintaining our full year 2011 outlook parameters. Let me briefly touch on each of the parameters. We expect total revenue growth and an upper single-digit percentage rate for the year. We expect a full year health benefits ratio to fall within the range of 83.9% to 84.9%.

Although I should mention that in light of the favorable impact on the third quarter ratio from the retroactive premium, we now believe the probability of our – of our full year 2011 health benefits ratio finishing at the upper end of our range is low.

On the SG&A side we believe that the ratio for the full year 2011 will be about 7.9% plus or minus 20 basis points, again, consistent with our previous expectations and includes both Texas and Louisiana start-up cost.

We continue to believe that a net-income margin range of 2.5% to 3.5% represents an achievable long-term operating performance target for our company. And we expect to operate in this range for the full year of 2011.

We continue to expect the share count to be within the range of $50 million to $51 million for the full year.

At our Investor Day in September, I provided a few comments on some of our emerging expectations for 2012. Our perspective today remains effectively the same with the exception of the revenue growth rate.

I noted then that in 2012, we expect to significantly exceed our normal targeted revenue growth rate. I mentioned that we have run scenarios in which revenue would increase an excess of 30% compared to full year of 2011.

In light of our announcement on Tuesday, we now have scenarios to place our revenue growth rate above that 30%. We anticipated the key drivers of revenue growth in 2012 to be a recent procurement wins in Louisiana and Texas as well as expansion in existing markets.

Now bear in mind there is always a possibility that the implementation time frames could change and that rates could be lower than currently anticipated. But those were our working assumptions in September.

Now with the announcement of our planned acquisition in New York, we can detail scenarios in which revenue growth exceeds 40%. Of course there are a variety of timing factors and other unknowns which have significantly impacted revenue level we ultimately achieve in 2012.

We continue to assume that the full year HPR will be higher in 2012 than 2011. There are three primary factors driving this. First, we think it’s prudent to project that the new business will run at a higher HPR than the average of the existing mature business in its first year.

Second, the HPR on the existing business will be pressured somewhat due to the rate actions received this year that will continue in force through a portion of 2012. And finally the health benefits ratio was favorably impacted by prior year development in 2011 and our practice is to assume no net development in the future.

We are targeting a lower SG&A ratio in 2012 than we are projecting for full year 2011 continuing the long-term trend that we’ve achieved since 2006. We believe there continues to be scale benefits from the business expansion we are pursuing.

We’re going to address our specific 2012 outlook parameters on our fourth quarter earnings call in February.

So with that, let me conclude here so we can preserve some time for questions. Thanks for your time and attention this morning. Operator, we’d like to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). Our first question comes from the line of Scott Fidel with Deutsche Bank.

Julie Trudell

Hi, Scott. Operator, we might have to go to the next ...

Scott Fidel – Deutsche Bank

I’m sorry. I was on mute. Can you hear me now?

Julie Trudell

Oh, there you go. Yes.

James Carlson

We got you.

Julie Trudell

Go ahead, Scott. Scott maybe click the ...

Scott Fidel with Deutsche Bank

I’m sorry. Can you hear me now?

Julie Trudell

There you go.

Scott Fidel – Deutsche Bank

Sorry about that. First – I was on mute there – first question just on if you could help us size the transaction cost around the Health Plus deal and what do you think, you know, accretion could look like excluding sort of the integration and transaction cost.

It looks like you got a pretty attractive price on the acquisition, less than 0.1 time sales. So we think you have the potential to make this pretty accretive.

James Carlson

Yes. We’re pretty – good morning, Scott. We’re pretty excited about this transaction, it’s something we’ve wanted to achieve for a long time to get some scale there. You know, we’ve got a great management on the New York plan getting, you know, getting an agreement with a great leadership team at Heath Plus gives us a pretty good enthusiast of what this could look like.

In terms of the startup costume I was like – to say – but before you answer, just say that this is business that’s running pretty well for a long time and, you know, we think that we did better, we think we’ve got some practices from medical management care coordination standpoint that we do nationally that will benefit the expedition but when we put them together, I think we could have a pretty good business. So, go ahead, Jim.

Jim Truess

Yes, that’s right. Just a couple things I’d add. You know, in our work with this plan, you know, we really can see two distinct opportunities. We think when you put these organizations together, the ultimate effectiveness on management and medical cost can be a significant improvement.

And so we certainly feel good about our opportunities there. And then, you know, we recognize that – you know, when you look at the national scale economy into the AMERIGROUP and you really can integrate two separate operations, that naturally have a similar duplication because they’re independent entities you put those together, there’s a lot of scale economies there so we see – we see some distinct improvement on SG&A.

So, you know, I don’t think this morning, we’re going to quote specific accretion numbers for the future but we certainly feel optimistic about the potential to get significant accretion in the future and as Jim mention in his prepared remarks, you know, we feel – we feel very good about the return on investment.

As far as the specifics around integration cost and that sort of thing, I guess there’s a couple of things that I want to mention. You know, first as we describe the transaction, we’re really acquiring the, you know, certain assets of this plan, and so operationally the way this is going to work is – if someone analogous to enrolling a whole – new group of members and so as they come on to our books in the beginning not only we’ll be booking their expected medical cost, we’re also building in a normal actuarial margin that we put on top of our best estimate and expected medical cost.

So that gives a certain amount of, you know, of higher health benefits ratios in the beginning like you normally see and it takes, you know, 2, 3, 4 months to kind of gets reliability up to the full level and have all that’s actuarial margin build. So between that, kind of normal transaction cost and, you know, certain integration that will incur in the beginning, that’s really the driver on why we mention that. You know, we’re not – you don’t know how things necessarily going to be accreted in the first thing.

We expect, you know, some small modest dilution but, again but, again, a lot of that will be timing sensitive as to when it closes and how things all play out. But, you know, I think you can be certain, I mean, as we’ve talked about, you know, M&A at different times over the year, I think we’ve always, you know, try to convey this idea because we believe it that, you know, we’re a pretty discriminating or thoughtful purchaser and we’re always looking an opportunity and you just need that alignment of a good opportunity and a willing buyer and seller.

And, you know, we maintain pretty strict parameters as to how things need to be in order for us to pursue something and just met those parameters. So, we certainly feel very good about the opportunities in the future.

Scott Fidel – Deutsche Bank

Got it. And just a follow-up, just on the M&A, I guess context to our environment more broadly for Medicaid and, you know, you announced your acquisition earlier this week and then right after that, we saw a commentary announced and acquisition of a private Medicaid plan and just interested if, you know, clearly there’s been an intensification of rate pressure on the Medicaid side and frankly a lot of the private Medicaid operators operate with lower margins and with frankly less capital cushion and some of the public companies.

So, do you sense that we’re starting to see more willingness on the private side of somebody’s Medicaid operators to look to exit the market because of some of the, you know, fundamental pressures we’ve seen in the market on the right side?

James Carlson

I hope so. Yes, I spent a few industrial conferences – we’ve been asked that question and I predicted that this would eventually happen. I guess I could predict long enough sooner or later you’ll be right.

But the way I look at it as if you’re running a hospital and you’re looking at all of the requirements of the Affordable Care Act and you’re looking at sort of a tipping point that we’re reaching relative to states, interested managed long-term care programs which really have nothing to do with running acute care services in a hospital.

You may have to be putting capital up to help develop your, you know, your medical staff into an accountable care organization, you have the ongoing TAPPA [ph] requirements of running a hospital and you’re running at one market, it gets to be a pretty, I think, interesting strategic questions as to whether you want to compete companies like us, United Healthcare, the biggest in the industry and so forth.

And so, it doesn’t surprise me to see a couple of these transactions hit the finish line this week, you know, commentary around reporting one as well and all the details that seems directionally consistent strategically of what we’re talking about.

And the narratives of their performance, I think you have to recognize depending upon who the owner is they may be operating their business for sort of different strategic purposes. I mean, we really think that this is the strong management team that working with our folks is going to be able to unlock some incremental performance up there.

We also like that they’ve done a superb job from our quality management standpoint. You get extra revenue in New York, you know, if you drive good quality score that they’re – they do very well in that regard, they got a great brand in Brooklyn. And where we see other opportunities to grow our business particularly where we can enter market we’ve long wanted to be in or strengthen the conditions with existing market and increase our, you know, share position. We’re going to be, you know, very enthusiastic about those opportunities. I mean, I hope we get more of them to look at.

Scott Fidel – Deutsche Bank

Okay. Thank you.

Operator

Your next question comes from the line of Carl McDonald with Citi.

Carl McDonald – Citigroup

Hey, thank you. I was hoping to better understand the purchase price on the New York transaction and this could be a situation where you pay the 85 million and then you’re also funding the (inaudible) on top of that?

James Carlson

Jim, do you want to address Carl’s question.

Jim Truess

Thanks. That’s right, Carl. You have it exactly right. So the 85 million is really for the asset that we’re acquiring. We’re not acquiring the balance sheet of (inaudible) so what we’ll ultimately do is put mind into our entity to boost the industrial capital over time in line with expansion of the business.

Carl McDonald – Citigroup

And who, you know, rough numbers, are you thinking, you know, something in the middle of the low 100 million range?

Jim Truess

It’s in a ballpark. Yes, our general target has been to run our plans around 400% of RBC. We’re away above that at the moment, but that’s generally our target and in long-term, that would be our profile there as well.

Carl McDonald – Citigroup

And, you know, technical question on the merger accounting. Because the purchase price is so low, does this still have amortization in it or not be a factor as we think through the accretion dilution?

Jim Truess

Probably a little bit. Yes, a little bit.

Carl McDonald – Citigroup

And last question. Give us a sense of where the historical margins of the acquired plan have gone relative to your corporate average.

James Carlson

Historically, they run, you know, substantially below our corporate average. I think, you know, it’s generally I think their margins have been pretty modest and, you know, as Jim mentioned, a lot of times, you know, there’s different set of objectives the different organizations are targeting and, you know, we really see, you know, back to what I mentioned earlier, the incremental gap that is maybe you take – how can we take a business that’s running some modest margins, gins some – more effectiveness around, managing medical cost that’s beneficial to us obviously but that’s official in the state in the long run and also effectively gain a lot of administrative cost efficiency over time due to our national scale, so we see both of those.

Carl McDonald – Citigroup

I know it’s a little hard to tell with providers long-term plan, who’s making what but would you say it’s been, you know, on average profitable or unprofitable?

James Carlson

I’d say on average profitable but modestly so relative to our corporate average.

Carl McDonald – Citigroup

Great. Thank you very much.

Operator

Your next question comes from the line of Tom Carroll with Stifel.

Tom Carroll – Stifel Nicolaus & Company

Hey, another follow-up question on Health Plus. Is there a dual special needs plan in what you acquired and if so what’s the PMPM on that business? And then I was wondering if you could just breakout the enrollment for each of the buckets that you’re acquiring.

Jim Truess

Shed a little light on the scope of operations there. I mean, there’s over 3,000 Medicare advantage members (inaudible) on top of that.

James Carlson

Yes, I’m not sure, you know, precisely how many of those members are dual versus straight up and (inaudible) so that’s – if that’s an important fact to you, we can get back to you on the detail. But they have had a great rapidly growing Medicare business over the course of last year, which we’re pleased to see and when you combine it with our membership, you know, we have a little – little both the Medicare members there that we can build upon.

Tom Carroll – Stifel Nicolaus & Company

So the 3,000 are not all duals?

Jim Truess

No.

James Carlson

No. We’re not quite sure how many of them are duals but they’re certainly not all duals.

Tom Carroll – Stifel Nicolaus & Company

Okay. And then could you may break up the Medicare lives a bit? I think that you mentioned, you know, there’s some different populations there not just all tenants.

Jim Truess

Hey, Tom, I don’t want to go through all of the specifics. I mean, we’re, you know, we have an agreement with them but that’s really their information to disclose. So I’m not going to give the specific breakdown on their membership on our call like this at this stage of the game.

Tom Carroll – Stifel Nicolaus & Company

All right, I understand that. Just a quick follow-up. On your – Jim on the MLR commentary you had, you said 4Q is expected to rise. I assume that’s rising off of your reported third quarter number not the adjusted third quarter number?

Jim Truess

We’re rising up the adjusted third quarter number as well.

Tom Carroll – Stifel Nicolaus & Company

Okay. Thank you.

Jim Truess

Yes.

Operator

Your next question comes from the line of Charles Boorady with Credit Suisse.

Charles Boorady – Credit Suisse

Thanks. Good morning. Just a couple of quick questions on the revenue growth for next year, you talked about growth in excess of 40% now versus the 30% range that Truess [ph] talked about.

And it looks like the Health Plus revenues would get you to a bigger change than 10%. So I’m just wondering what assumptions you’re making on the timing of Health Plus in Texas specifically with respect to getting to the 40% range in 2012?

Jim Truess

Sure. Jim will get the a lot of modeling that’s been going on.

Charles Boorady – Credit Suisse

Here to.

Jim Truess

Yes, not surprisingly I think. We’re all working on our spreadsheet.

Charles Boorady – Credit Suisse

We’re happy to swap spreadsheets with you.

Jim Truess

Yes. It has to do with – obviously it has to do with the timing. And so, you know, there’s certainly scenarios that we have better – above 40%. But our general expectation is, you know, Texas in the first quarter and then Health Plus has obviously covered it to pin down precisely given the, you know, regulatory approvals that we need to go through.

But our working assumption at this point is in the first half of the year. So that’s why obviously depending upon what sort of sub period or revenue do we ultimately report next year on Health Plus. You know, it’s probably an assumption to be less than their full year of this year because of the timing.

Charles Boorady – Credit Suisse

You got it. And then just on the – on the question of what you’re really paying for Health Plus and capital, how much enough front capital will you need to put in the state versus just capital you build normally by enrolling the lives and retaining the capital for the premiums?

Jim Truess

Well generally, when you think about the capitalization targets you have to hit for any given state, it really goes back – it really functions from what’s your year-end reported business volume that drives through the RBC ratios and that sort of thing if it’s a state that has RBC.

You know, generally the rule that we’ve talked about given our 400% of risk-base capital target that we generally work to, which is, you know, substantially above the regulatory requirement. As a rule of thumb that generally works to about, let’s say, 12% to 14% or revenue.

So I think that gives you a bulk part as to what’s our ultimate trajectory will be for this business when it comes in to our entity. Now that doesn’t mean, you know, we need to get there on day one. We have a certain amount of time obviously.

We have the capacity to get there on day one, you know. We could easily get there on day one if we so chose. But, you know, we’ll ultimately build a, you know, what we feel like is a rational ramp up in that capital position overtime.

And as it’s been our objective in the past continue to be in the future that all of our plans will stay. We’re generally around that 400% level.

Charles Boorady – Credit Suisse

And then finally just a big picture, can you talk about, you know, the timing of the transaction and later the very strong organic growth that you’re expecting next year. What are you doing as an organization to manage risk and all that growth?

James Carlson

Yes. That’s a very important question. It’s a top of mind question for us because we are, really are faced with our profound growth horizon, you know, 17 years after being a company.

We got this – you know, a year ago at Investor Day we talked about, I guess, $30 some billion pipelines, 17 of that’s come to market. We faired very well in that. You know, we sort of got everything we wanted out of it. We might have even added another state that we are at more comfortable of some of what we saw there.

And so I think when we’re thinking about new market selection and M&A, you know, the bar gets a little higher for exactly which ones you’ll do. You know, we’re certainly – because when we think about new markets we want to make sure they are going to be good for the long run. We like the markets that have fully to deploy all of our product offerings.

When we look at M&A, we’re going to be pretty rigorous about making sure our rate of returning calculations are met. We’re going to look at the ability to integrate things. We certainly will look hard at how well the companies already are being run. That’s why it’s like Health Plus has a great management team doing a great job there.

I don’t know what our appetite is quite frankly. I think we’ll just take them as they come up and see how we’re doing from an implementation standpoint. We’ve got, you know, I mentioned in my prepared comments, I think our regional structure really serves us well here. It’s one of the reasons we sort of going out of our way to invest in the future (inaudible) and Aileen McCormick and Brian Shipp. It’s nice that each one of them has one of the big projects and they have the band which to be able to integrate pieces of our company operating platform as – I think there’s anybody we could have doing a job like that.

So it’s – you know, we announced in the middle of the year the expansion of new service center off in Texas. I would say in hindsight that was a little bit of a marker that we thought we might do well there in the procurement.

We wanted to make sure we had, you know, resources deployed closer to the customer in that regard. It’s out of the ground, people have been hired. Our staffing is up in 2011 much more than our, you know, percentage of members grew which is a reflection of preparation to be able to take this work onward.

We’re got a few leaders we’ve already appointed in Louisiana doing a great job. And they’ve already had there sort of on sight readiness review for the State of Louisiana. So they’re tracking real well there.

But we’re really monitoring all of this. This is going to be the issue for all of us at the senior executive levels of the company. It’s going to be a dialogue we keep with our board. You ought to make sure we don’t get out of our skis and bite off more than we can do well.

We want to grow profitability. And to do that, you really have to think about integration and implementation, you know, 24 by 7. And that’s what we’re going to do.

Charles Boorady – Credit Suisse

So it sounds like to sum it up you have the financial, you know, capital, the human capital you’ve expanded the Texas operational capabilities. So I guess just for Health Plus and those lives, is there anything else you’ll need to do to extend capacity there in technology or call centers, or other operations to accommodate this growth?

And if so is there a timeline or milestones that we should be looking for you to hit in anticipation of that growth coming in?

James Carlson

I think we look at it as more of – a lot of, you know, blocking and tackling that has to go on here. We integrated our claim systems completed at a couple of years ago.

So it’s good news that, you know, we have common systems with this particular property. So that should speed that part of the implementation in terms of incremental investments.

We think about IT right now, I think we’re probably more interested in making sure we’re keeping pace with what we think our table stakes in the future relative to being able to interact with providers and consumers with new computing capabilities, new access pathways and so forth.

But there’s not sort of a big infrastructure build that we have to undergo just to catch up what we’ve already sold. Jake [ph] do you want punctuate that?

Unidentified Participant

Yes, just one thought real quick, I mean Health Plus is much more about integration of resources as opposed to ramp of resources. For us Louisiana by contrast new market is much more about ramping of resources. So nothing else.

Charles Boorady – Credit Suisse

Thank you.

James Carlson

Yes. In terms of the – yes, the capital base for this, and it’s nice to be able to do a transaction and, you know, be able to take it on with existing capital resources.

I think shareholders want us to use our capital wisely obviously we've been active in share repurchase and so forth. And that’s one wide use of shareholder funds. I think the people who have watched us for a long time like to see us growing like this. I think we have a good reputation as managers of our business. And it’s nice that we don’t have to even dilute anybody or change the debt structure to take on a yield like this or this other growth for that matter.

Charles Boorady – Credit Suisse

Thanks.

Operator

Your next question comes from the line of Matt Borsch with Goldman Sachs.

Sam Walsh – Goldman Sachs

Hi. This is Sam Walsh on for Matt. As a follow-up to your expected growth rate, revenue growth rate of 40% next year, I was wondering if you could share your initial thoughts regarding what the annualized revenue run rate in Louisiana might be.

James Carlson

Well, we have obviously our internal projections. I’m not sure how comfortable we are with going public with those right now.

Jim, what do you want to say about that?

Jim Truess

Yes. I think, you know, we’ve talked – it’s a little hard to know exactly what the, you know, what the distribution membership, I think the working assumption probably that there we have, probably most people have either that is – you know, it will be – it will be somewhat equally distributed.

And I think that, you know, our estimate at this is this is very early. I think the results on this could obviously change, but it’s approximately $250 million, let’s say. That’s assuming we get, you know, kind of our proportional share.

We could get more. We could get less, but that’s roughly what the – what’s our run rate number might be.

Sam Walsh – Goldman Sachs

All right, great. Thanks. And one other question if I may, on capital allocation I know that you’ve sort of spoken to organic growth, share repurchases, and M&A always sort of being on the table. I was wondering if in the context of the Health Plus acquisition whether or not the sort of rankings of these three buckets might be changing?

Jim Truess

No, I don’t think so. I think the ranking remains the same. I mean I think that, you know, as we’ve talked about we kind of have this hierarchy that we think about. And at the moment, we’re doing all of them which is great and I think that with the pipeline that’s out there, more likely than not, we’ll continue to see opportunities on the organic side that we’ll continue to pursue. M&A is always tough to tell, I mean you need this confluence of a buyer and seller and the right situation but that one’s hard to predict.

And then the extent we feel like and we certainly have hoped and expect to continue to generate strong cash flow until we have funds that we can deploy to the buyback program, we’ll continue to do that as well. I think it’s a little bit about, if you go back to some of the comments that I have in investor day, really tried to detail all of those different sort of dimensions that we look at and then our flexibility as it relates to this, not only the different alternatives to deploy capital but also kind of the sources of capital.

And so, I think that our ability to execute on all of these ideas from a capital deployment perspective, I do think speaks to the very strong financial capacity that we’ve been able to establish for this organization over the last certain number of years. Like a lot of the – you want to build this capacity and you hope you have the opportunity to put it to work and I think we’re seeing a nice confluence of events here where we’re able to put it to work.

But I certainly wouldn’t want anyone to expect but somehow now any of those three alternatives are ruled out. They’re not for the future. They’re all still in play and will continue to kind of mix and match them as the opportunities present themselves and we do our analysis and again, in the long term, it’s all about how do we find – where can we find the highest returns and we want to deploy those dollars against the highest returns and those – the categories will probably have in flow over time so that continues to be the strategy and it’s really unchanged.

Matthew Borsch – Goldman Sachs

All right, Great. That’s helpful. Thank you.

Operator

Your next question comes from the line of Josh Raskin with Barclays Capital.

Joe Coons – Barclays Capital

Hi guys, good morning. This is actually Joe Coons [ph] on for Josh. Actually just following up on that last point regarding capital deployment, I understand that the priorities haven’t necessarily changed but as you close this transaction, I think you said by the middle of the year next year, should we read into that as the actual dollar amount of repurchases and other forms of capital deployment will be lower next year than it is this year?

Jim Truess

It’s possible but I still think we have a lot of sources and a lot of dollars in play here so we still maintain a lot of flexibility and to the extent we continue to do it attractive and feel like we have the capacity. We’ll continue to pursue a share buyback alternative as well.

Joe Coons – Barclays Capital

Okay. Great, thanks. And on the SG&A ratio with the, I guess it’s sort of related to the Health Plus acquisition as well. I understand in your comments you mentioned this 7.9% plus or minus 20 bits. You’re targeting a reduction in that rate next year because this – does this acquisition change that at all? What type of magnitude should we expect just for modeling purposes going forward?

Is that sort of a slight reduction in that general perspective? And then I guess secondarily, how do the transaction cost and the implementation cost of this acquisition compare with the cost that you guys incurred in Louisiana and Texas?

Jim Truess

In some ways, some of the transaction (inaudible), that’s not a new market start-up. There are different products from the scale of it and somewhat analogous to what we might see in one of these – in a larger due market start-up coincidentally. And that being said thought, I think our posture is still as the same.

We are targeting today and obviously we are throwing in our budget planning process. We have finalized all of our plans and reviewed that with our board and all that but we’re continuing to target. One of our key strategies in 2012 is going to be a substantially lower SG&A ratio and as I mentioned investor day, (inaudible) essential, I’m not talking about 10 Basis points.

We want to do much more than that. Obviously, we got to get all our plans together and see how that all comes together but we do view that as a core part of the strategy and one of the benefits of being able to significantly expand our revenue our base and really leverage the scale economies we have in this company and it’s a lot about back to just building up money that Jim mentioned a while ago.

We really move to integrated systems quite a few years ago. We really dealt a lot of infrastructure over the years and we really have a capable engine here if you’ll allow the analogy. And so we plan on taking advantage of that and really leveraging this revenue and not building our SG&A expenditures at nearly the rate that our revenue growth is going to come up.

So we’re not backing away from our plan to push that ratio down substantially next year.

Joe Coons – Barclays Capital

Okay, great. Thanks, that’s helpful. And then I guess one last one. I’m just wondering if you can help me a little bit with the retroactive premium increase in Georgia. Should I read this to be as you know, essentially a reversal of what you guys took in the second quarter? I know the actual dollar amounts aren’t exactly the same, but they look, you know, very consistent sequentially.

But you know, I guess I’m just looking for a little bit more color there.

Jim Truess

Sure, and that’s a great question. I’m glad you asked it. I mean it’s actually – it’s just coincidental that the numbers happen to be fairly similar. As we mentioned last quarter, what Georgia did was go through a fairly special process over the last couple of months – a couple of quarters excuse me, with all the plans in the market.

And an aggregate when we looked at the total amount of premium that was recouped or adjusted by the state for us, for the full year due to this issue, that was about $25.5 million, and that’s in contrast to what – you know, normally we expect in a quarter, what’s been our experience in Georgia is a couple of million. So you can see that the amount of money that they recoup back through this whole special process was substantially larger than what we have seen in normal processes.

And we think now we’re kind of back to that normal cycle amount of the fee in quarters in the future. That’s much more than better comparison. And I think that’s why you know, what we said last quarter and the way we handle this issue, and I recognize – I don’t have perfect visibility on what other people have done, but I recognize or I believe that we probably handle this issue differently.

Hopefully all the disclosure and transparency we’ve given you guys have been helpful. But that was – this has been a fairly significant event. The way we handled it, was we said, we don’t know – we can’t tell with – it’s a high level of precision how the ultimate impact of these rates are going to change on our retroactive basis because the state really needs to accumulate everybody’s information and how much space recouped back from all plans.

But I think it was probably, one report I’ve heard was an excess of $100 million is what they recouped from all the plans. So we felt like last quarter that until we could see everybody’s information and see how that plays through, you really couldn’t put up an accurate receivable, although the accounting guide in some of these issue was such that there was discretion.

And in other words, if management was willing to assert that they’d put up a large receivable, and that was an accurate calculation, they could put up that receivable and that would be acceptable. We chose not to do that because in our judgment, you couldn’t make an accurate assessment of that without having access to everyone else’s information.

Now we’re here in the third quarter, the state has done their work, we had an opportunity to redo that, we could see everybody’s information across the state and our piece of that was the $14 million. So that’s kind of how that played out. It just happened to be coincident.

What we reported last quarter was what we wanted you to understand last quarter was how much outer period activity was being recorded in the second quarter and that 13 point X million dollar number that we discussed by far.

That was the outer period amount, and we want you to understand that as you get a feel for what our underlying results were in the quarter so it just happens to be coincidental, those numbers are similar.

Joe Coons – Barclays Capital

Okay, that’s great. Thanks very much.

Operator

Your next question comes from the line of Chris Rigg with Susquehanna.

Chris Rigg – Susquehanna

Thanks, good morning guys. I just wanted to sort of talk with your MLR guidance at this point. I know – you know, you had some benefits in the third quarter from the attractive adjustment primarily in Georgia, but then you’re also going to have some catch up payments retroactive to July 1st in Georgia in the fourth quarter.

And I guess – and obviously some Texas rate issues that only impacted you for one month during Q3. But when I look through the numbers, you know, your MLR year-to-date and sort of the low 83% range, in order to get to your GAPP guidance, even on the low-end, it’s obviously a big increase, but to get somewhere close to the middle, and imply sort of at least a 400-ish basis points sequential increase in the MLR, is there any reason to think that that’s not a conservative sort of guidance point right now?

That you’re probably going to come in towards the lower end and not the midpoint?

Jim Truess

Yes, I think that’s fair. You know, we felt like we wanted to maintain our range, just – you know that we can as we move our ranges around this year that more than I would like, and we wanted to maintain some stability on that range. But you know, that’s with (inaudible) and now that I think the expectation is being operant [ph] to that range, the probabilities of that are low.

And in light of where we are year to date. So I think that’s a fair comment. Just a couple of things I think you got it exactly right. There’s going to be some favorable benefits ration impacting the fourth quarter assuming everything comes in Georgia and we’re booking again a little bit of retroactive premium for the normal rate in Georgia.

But remember there’s a fair amount of seasonality from the third to the fourth quarter and so, you know, all things being equal, we expect higher medical cost. And that effect is more powerful, the seasonality effect we anticipate is more powerful than the retroactive piece of Georgia.

And so that’s why back to Tom’s question just a minute ago when he said, well if you’re saying your kind of underlying ratio is 85-1, are you expecting up from the 85-1? And the answer to that is yes, we’re expecting up. And the reason for that is that the seasonality is more powerful than in Georgia.

Chris Rigg – Susquehanna

Okay. And then just to circle back up on the comments on the 2012 HBR, obviously you’re saying it’s moving higher, are you saying that it’s both related to the new business as well as sort of a reacceleration of trending?

You’re not just saying it’s only the result of new business, that’s correct right?

Jim Truess

That’s correct, it’s not just new business. And rather than I would say reacceleration of trend, I think what we’re seeing right now is you know, our trends has stabilized, they stabilized at the level above you know, where we were in 2010.

And our assumption is at this point in time in the future that we’d continue to see normal trends in the future. The important point though is you know, certainly for the first half of the year, a lot of our rates are locked in now.

We’ve gone through, we’re virtually complete other than in a couple of minor instances, virtually complete with our rates renewal cycle, you know, and as Jim mentioned earlier in his prepared comments that that come in at a relatively low, and in fact a slightly negative change.

So part of this effect is, you know, your rates are locked in and you’re going to continue to expect to get a certain amount of trend, I’m anticipating what we’re probably likely to see next year is potentially a steep ramp on earnings, and it comes about from in the first quarter of next year or generally pre revenue in most of these new markets, so we’ve got, you know, we’re trying to add staff, and we’re seeing the expenses from that, first quarter has got high seasonality, and we’re largely locked in on all the rate.

As you go through the year, we’re going to be into revenue on all the new business, we’ll be going through a new rate renewal cycle next year, you know, by the back half of the year will be past the start up phase, hopefully all three of these large opportunities in Texas, Louisiana, and New York.

And so we’re potentially on next year, a fairly steep sort of EPS profile compared to what we normally might see. And again, it’s back to a pretty significant change in the way our business is going to look. So next year might look a little different from an EPS profile than we’ve seen in years past.

Chris Rigg – Susquehanna

Okay, thanks a lot.

Operator

Your next questions comes from the line of Ken Levine [ph] with UBS.

Ken Levine – UBS

Thanks, good morning. The 8.7 million is favorable PVD in the quarter and I understand before the partially offsetting impact of the experience in the floor rebates. But what were the components of the 9 million favorable PVD in terms of allocating it to the prior quarters?

Jim Truess

Sure. We actually boost our estimates have been in the second quarter, just given increased visibility on that period now, we lowered a fair amount in the first quarter, and lowered it prior periods as well.

Ken Levine – UBS

Okay, and were there still some related to 2010 in that?

Jim Truess

There was, a small amount, but some yes.

Ken Levine – UBS

Okay, got it. And James, just going back to Health Plus for a moment, and if heard you correctly earlier you responded to questions around Health Plus and Medicaid that is something that you wanted to achieve for a long time. So what was sort of the leverage here in terms of making it happen now and making the timing right now, perhaps the function of the – are the sellers coming down?

James Carlson

Well I think – by a long time, I wouldn’t say Health Plus per se, just wanting to have more scale in New York, so I’ll clean that up a little bit, I’ll do that. I think that like a lot of things, it takes, you know, willing buyer and seller to leave. That certainly is a factor. But I do think perhaps some of the governor’s Medicaid redesign teams work as – just really forcing a lot of strategic re-evaluation in New York period.

I think the state probably has given signals from time to time that they would prefer some of this be consolidated. I think the state is concerned about the economic strength of some of the hospitals particularly one that serves safety net populations and so forth.

And so people who look pretty favorably upon the cash infusion that this represents for LMC. I think Wendy Goldstein and her comments in the press release pointed that out. It’s been a win-win for everybody and so I take sort of that confluence of events is – probably feel some of the timing here.

Ken Levine – UBS

Great, thanks for the time.

Operator

Your next question comes from the line of Doug Simpson with Morgan Stanley.

Doug Simpson – Morgan Stanley

Hey, good morning everyone and I hopped on the call late so I apologize if you had addressed this already but maybe if you could just talk a little bit about – you’ve got a lot of RFP activities, the decision to move ahead with the strategic deal and just how you sort of think about those two opportunities as complementary?

James Carlson

Yeah, I think it's important question because the backdrop for all of this is 2014 and what’s going to happen with the Affordable Care Act, you know, we obviously have to plan for Medicaid expansion and exchange participation and so the timing of the implementations of what’s in the RFP pipeline has to be considered to get the backdrop of what else are we going to be doing in 2014? It’s a lot of work.

I think it really is going to force us to be quite decisive about things that look attractive to us that really, near and long term, helpful drivers of our business and we may very likely conclude there’s things that and other times would look attractive to us but we’re just going to not participate in because it would push a little harder than we need to be pushed either on the balance sheet or the EPS performance or just from a flat out implementation standpoint.

There’s no one single answer to this because granted we would like to have new markets and increase our footprint over time, that would be our bias but we don’t want to do it to the point where we can’t perform and I think we want to continue to try to produce results of this targeted EPS range of two and a half to three and a half percent net. We’ve been doing it for years and that sort of discipline ultimately will pay off.

And I don’t think we have to apologize as to whether we’re in a growing 40% or 50% or whatever the number is turns out to be. This is good growth by anybody’s standard and frankly, 2012 has been a bit of arrested from it. We’re going to see growth ’12; we’re going to have stop period in 2013. The RFP pipeline remains, maybe other M&A opportunities and then 2014, assuming no repeal.

A year ago, we called for 600,000 to a million incremental numbers and a merit group markets that we’ve had in Louisiana, strengthening our position in New York hasn't gotten smaller than the 47% of the Medicaid expansion happening where we already do business.

So it’s a lot of good strategic work to do and we like being on this environment because it’s dynamic and we think we make a difference when we go into these markets and we have ample opportunities to grow our footprint and presence.

Doug Simpson – Morgan Stanley

That’s helpful and as you’re thinking about pursuing RFPs versus potentially looking at incremental deals, how do you think about the likely Supreme Court decision and what’s going to happen with the election and just sort of the pack outlook, I mean, how do you factor that dynamic into your thinking about RFPs versus deals if at all at this point? I know it’s very hard to obviously have a conclusive view but just curious how you factor in that dynamic.

James Carlson

I think you really do have to stay flexible on your thinking. We have to operate our businesses as though this is the law on the land and until it isn’t; we have to prepare for it. With that said, even with some of the Supreme Court challenges and so forth, some of these things are pointed at the individual mandate and with parts out that feature from the rest of the act, very little has attacked the Medicaid expansion.

There are scenarios in which pieces of the act could be rolled back and the Medicaid expansion would still be there and so we think about the scenarios, we don’t have any choice but to plan forward of the act will be implemented as written and we’ll have to adapt just like everybody else will if that changes in any way. But I think the great news about this sort of growth horizon that we’re looking at is, even in an extreme scenario where there’s repeal or the political environment changed dramatically, not that it became a non-factor.

I call it tipping point that we reach where the state governments believe the private sector is an important ally for helping them manage these programs and managing the costs of these programs. And the $50 billion pipeline doesn’t go away if the act is repealed.

The growing policy awareness of the value of integrating services for those duly eligible for Medicare and Medicaid does not go away if this is repealed. And so, I think we’re going to be having sort of a high class problem figuring out where to grow for quite a few years ahead of us right now.

Doug Simpson – Morgan Stanley

Okay and then just as you're – I’m sure you commented on margins earlier but as we think about the last few years, obviously there’s been some volatility around the MLR for a number of reasons and you’ve all done your best to manage around that. As we’re looking at over the next year or two and you think about the business coming on, is it fair to think about the incremental diversification of the business and the growth of the footprint as having a dampening effect on some of that volatility?

What’s a reasonable expectation? I know you talked to the two and a half to three and a half but relative to some of the quarterly volatility, should we expect that to maybe moderate a little bit?

James Carlson

I don’t know that there’s a solution in and of itself from growth to change that phenomenon. We really have 11 clients right now. They’re fully insured. You don’t want to have the half of our business on a fee-based support to dilute this.

It’s a price taker economy. You can’t just price your way out of situations that you may not like. You have to attend [ph] your cost performance to the base that you have. I think for most small to mid size emerging companies, diversification is a business challenge.

We’d like our diversification these days relative to product segments and geographic markets but that doesn’t necessarily provide immunity from changes in medical cost trends or what we’re doing with right now which is a more modest pricing environment that’s derivative of the cost experience that we just went through.

So we tend to look at it as though, the margins are probably operate between this range. We just came off some quarters, a year ago; we were well above our range. We didn’t try to just abuse anybody the notion that they would settle back down into our traditional range and sort of here we are by the same token. We take some solace in watching our rate increase in Florida a couple weeks ago relative to the expansion counties or the reform counties where we didn’t benefit from it but the state saw that they had underfunded a population.

They put a 10% rate increase into that to save the private sector’s ability to perform because fundamentally they realized their better off with the private sector there than going back to an unmanaged, unaccountable fee for service system. So we look at our horizon and say, “At some point in time, we’re going to be at a better rate environment.” Hopefully our cost trends are stable at that point in time.

And so we'll flow, sort of up and down, through the scale over time based upon our relative performance. We take a lot of pride in pretty much outperforming the market and want to continue to be able to do that.

Doug Simpson – Morgan Stanley

Okay great. Thank you very much.

James Carlson

Sure. I think we’re running a little bit over. Do we have – squeeze in another question or should we?

Julie Trudell

We can do one more.

James Carlson

So one more question.

Operator

The next question comes from the line of Scott Green with Bank of America Merrill Lynch.

Scott Green - Bank of America Merrill Lynch

Hi, thanks for squeezing me in so I guess most of my questions were asked already but one is could you review what the MLR is on pharmacy benefits look like these days after a drug rebate equalization was passed? And maybe some of your drug rebates got squeezed I know additionally that benefit operated a little more favorably than the medical component.

Jim Truess

Yes Scott, I think as you can imagine as with the case with the regular medical service, there are a lot of deviations between state and that’s certainly the case on the pharmacy benefit as well. Obviously been a lot of changes and some of our states, point of view of our states are now carving pharmacy back in and there’s different actuarial assumptions that they seize and that sort of thing but I think that’s probably a little more granular that we’re going to go to get into giving MLRs on a subset of the business like that.

I think that’s as much as I have to offer at this point.

Scott Green - Bank of America Merrill Lynch

Okay, all right. Thank you.

Jim Truess

Thanks Scott.

Operator

I would now turn the call back over to Mr. Carlson for any closing remarks.

James Carlson

Great, thank you operator. Thank you all for joining us this morning. Sorry, I’ve run over here a little bit. It’s a busy day at the end of a very busy week. Appreciate you joining us on the call. I think we’ve been able to talk about some of the big themes that we hope to cover really are enthusiasm for combining Health Plus with our operation in the New York, you know, the big growth horizons that we’re seeing.

And hopefully, come away from the call believing that we’re sort of taking the implementation of all this business quite seriously. We’ve been preparing for it all year long and we’re going to be working pretty hard to bring this growth up profitably going forward so thanks again for joining us this morning and you all take care.

Operator

This concludes today’s conference call. Thank you all for participating. You may now disconnect.

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