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Executives

Julie Loftus Trudell – Senior Vice President Investor Relations

James G. Carlson – President, Chief Executive Officer, Director

James W. Truess – Chief Financial Officer, Executive Vice President

Richard Zoretic – Chief Operating Officer

John E. Little – Executive Vice President

Analysts

John Rex – Bear Stearns

William D. Georges – JP Morgan

Greg Nersessian – Credit Suisse

Carl McDonald – Oppenheimer

Thomas Carroll – Stifel Nicolaus & Company

Joshua R. Raskin – Lehman Brothers

Peter Costa – FTN Midwest Securities Corp.

Darren Miller – Goldman Sachs

AMERIGROUP Corporation (AGP) Q4 2007 Earnings Call February 14, 2008 8:30 AM ET

Operator

Welcome to AMERIGROUP Corporations fourth 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 call is being recorded today, Thursday February 14, 2008. I will now turn the conference call over to Julie Loftus Trudell Senior Vice President Investor Relations of AMERIGROUP. Please go ahead.

Julie Loftus Trudell

Good morning and thank you for joining AMERIGROUP’s fourth quarter earnings conference call and web cast. I am Julie Lofts Trudell Senior Vice President of Investor Relations. The press release announcing our earnings was distributed yesterday after the close of the market. A replay of this call will be available from 9:30 am eastern time today to Thursday February 21st. The numbers to access this replay are in your earning press release. The conference call will be available through the investor’s page of the company’s website approximately two hours following the conclusion of the live broadcast for 30 days. The press release and this conference call are intended to be disclosures through methods reasonably designed to provide broad non-exclusionary distribution to the public in compliance with Regulation Fair Disclosure.

The Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 applies to this call as some of the statements we will mention today are forward-looking. We can give no assurance that they will prove to be accurate because they are of a perspective nature. The actual results that we produce in the future could differ materially from those we discuss today. I encourage you to read our annual report on Form 10K for the year ended December 31, 2006 that we filed with the Securities Exchange Commission and subsequent quarterly reports on Form 10Q and current reports on Form 8K filed with or furnished to the SEC for discussions of certain known risk factors that could cause our actual results to differ materially from current estimates.

In addition to Jim Carlson’s remarks this morning, Jim Truess will discuss our financial performance for the quarter and the year as well as the outlook for the full year of 2008. After you’ve heard from Jim Carlson and Jim Truess we’ll take your questions. Richard Zoretic our Chief Operating Officer and John Littel Executive Vice President of External Relations are also here to participate and add perspective. Before I turn our call over to our president and chief executive Jim Carlson I’d like to invite all of you to our 2008 investor day in New York City, on Friday September 5, 2008 beginning at 8:30 am. I’d now like to turn the call over to Jim.

James G. Carlson

Good morning and thank you for joining us on our call. This morning I’ll provide an overview of both the fourth quarter and the full year prior to a review of our financial highlights by Jim Treuss. Afterwards I want to briefly offer my perspective on growth and the business momentum we are experiencing. Let me start by reviewing some of the highlights of 2007, for AMERIGROUP this was a year of substantial accomplishments and positive sweeping change. We completed a seamless leadership and management transition, greatly expanded our capacity to offer new healthcare services for more people in both existing and new markets, surpassed important revenue and cash flow milestones as well as delivered financial results that steadily exceeded our goals. Even for a business as vibrant and rapidly evolving as AMERIGROUP the pace of change during 2007 was noteworthy. Our membership grew by 30%, we began Medicaid operations in two new states and we announced the expansion of our Medicare program from two to seven states. As of today close to 80% of our membership operates on the Facets platform and we will complete this roll out early in 2009.

For the first time in company history we recorded $1 billion in quarterly revenue at the same time we worked successfully with our state government partners to secure rates that are actuarially sound. Our initial 2007 EPS guidance was in the range of $1.80 to $1.95 which we comfortably exceeded with the $2.16 we reported last evening. Reflecting our ability to elevate our performance even as we navigated the inevitable changes presented throughout the year. Fundamentally we feel very good about our business and our ability to grow profitably thus on top of an outstanding 2007 our outlook for 2008 remains positive.

Turning now to specific fourth quarter highlights our disciplined approach to entering new markets and introducing products is paying off with better than expected membership growth complimented by effective control of medical costs across our markets. For the quarter we reported earnings per share of $0.57 with quarterly revenue of over $1 billion reflecting a 30% increase over the prior year. For the full year we earned $2.16 per diluted share with total revenue of $3.9 billion up 39% over the prior year. At the close of the year we served over 1.7 million members an increase of 395,000 or 30% compared with year end 2006. We are pleased with the health benefits ratio in the quarter which reflects the solid fundamentals of our business operations.

Let me quickly review our developing markets starting with Georgia. Overall we are pleased with our performance in this market. We are observing the impact we expected from a variety of medical initiatives undertaken earlier in the year. Membership declined sequentially as we expected due to the state’s Medicaid eligibility decreasing slightly and we expect this trend to continue in the first quarter. In January 2008 we entered into an amendment to our contract with Georgia increasing rates for the contract period for July 1, 2007 through June 30, 2008, as we announced last evening the amendment increased rates by 4.5%. While the rate increase is retroactive to July 1st, the retroactive impact of this rate increase is not included in our 2007 results and it will be reflected in the first quarter of 2008. This rate increase is another important contributor to the performance improvement in this developing market. Finally we were quite pleased to announce that our Georgia health plan was awarded new health care accreditation by NCQA. We are the only health plan to receive this accreditation thus far which was one year ahead of expectations. This reflects our commitment to not only honor but exceed the requirements of the original Georgia RFP.

I’ll make a few brief comments on Tennessee but will not elaborate during Q&A since we are in the middle of a competitive bidding process there. Working in Tennessee has been a great experience for us. The state is knowledgeable, organized and committed to operating a well managed program. The integration of behavioral and physical help was wise and is working well for us Tenncare and most importantly for our members. While it is still early from a data standpoint, I can say that the middle region is operating within the range that we would expect for a new market such as this. As for the upcoming bid in the east and west regions of Tennessee we have decided to focus our efforts exclusively on the west grand region. We believe we are well positioned for the bid with the acquisition of the TLC plan which closed in the fourth quarter. TLC is a well run respected health plan and the integration has been extremely smooth. We are proud to be serving 170,000 Tennessee residents in the Memphis region and of course we expect the Tennessee bid will be very competitive.

In Ohio we received a 2.7% rate increase effective January 1, 2008. Overall, Ohio is operating within the range of our expectations for a newer market. The ABD program is still less than a year old and the TANF program is still relatively new. While it is a smaller market for us and not a high performer yet. We don’t see anything unusual on this market that would preclude it reaching average performance over time.

Turning to the Texas expansion into San Antonio and additional ABD populations. Texas remains our largest market and membership there increased by 54,000 members or approximately 13% and now stands at 460,000 members. ABD expansion which began in February is performing quite well.

Now on to our mature markets. In Maryland a 5.8% rate increase was effective January 1st. In Florida the initial increase we reported last quarter of 8.1% was subsequently impacted by a special legislative session called to address the state’s budget short fall. As we previously reported the outcome resulted in reduced rates for some hospital and pharmacy services beginning in January. In addition rates were reduced due to changes in co-payments for dual eligibles. These reductions were passed through to our rates. Our weighted average Florida rate increase is now 5.7% but the projected impact on gross margin is negligible.

With that let me focus on a couple of other topics before turning it over to Jim. The million share stock repurchase program that we announced last evening reiterates the strength of our balance sheet as Jim will go into later the primary purpose of this program will be to mitigate the dilution from options exercises and equity grants. So our performance was strong in the fourth quarter and for the year. For 2008 we are increasing our guidance to $2.58 to $2.73 per share from the previous range of $2.45 to $2.60 to reflect the benefit from the July 1st to December 31, 2007 retro increase in Georgia which will be recognized in the first quarter 2008. We believe that our increased

guidance gives credence to the underlying strength and stability of our business.

Finally, I want to give you a quick update where we stand with the key [inaudible] litigation. The appeals process is underway, and our team has found a detailed appellate brief which points out a number of compelling arguments with the trial courts procedures and the jury’s decision. The brief provides detailed evidentiary and legal support for five independent reasons that the judgment should be reversed. The brief may be accessed in its entirety at www.amerigroupinfo.com. Our final brief is due at the end of February following this we expect the 7th circuit court to set a date for oral arguments prior to rendering a decision. We expect that we could have a decision at the earliest by summer 2008, but there is a distinct possibility the process can go late into 2008. So with that I’d like to turn the call over to Jim Truess

James W. Truess

Good morning everyone, As I normally due each quarter, I’m going to provide an overview of our financial results for the quarter and year and then discuss our updated guidance for 2008. Net income was $31.1 million in the fourth quarter, resulting in diluted earnings per share of $0.57 versus $29.9 million or $0.56 in the fourth quarter of 2006, and compared to $31.2 million or $0.58 per dilute share in the third quarter of 2007. For the year net income was $116.5 million or $2.16 per diluted share versus $107.1 million or $2.02 per diluted share in 2006. Fourth quarter total revenues were $1.1 billion dollars reflecting a 33% increase in premium revenue compared to the fourth quarter of 2006. Sequentially total revenues increased $44 million or $4.3% compared with the third quarter of 2007. The sequential increase primarily reflects rate increases received in Texas and Florida in September. For the year total revenues increased 39.2% to $3.9 billion from $2.8 billion in 2006 reflecting 38.5% organic premium revenue growth.

About two weeks ago we announced that a fully executed contract amendment has been received from the State of Georgia. This amendment retroactively increased our average premium rate back to July 1, 2007. Well I think it would be reasonable for you to assume that this revenue would be recognized in the fourth quarter, given the various facts and circumstances associated with the full execution of this amendment in January the relevant accounting guidance leads to recognition of this revenue in 2008. By in large I think revenue recognition is a relatively straight forward issue in the managed care industry. The sequence of events in this situation were somewhat unique and therefore required a fairly technical accounting analysis and consideration of some esoteric questions. Regardless of the accounting treatment the important outcome is that we received a rate increase in Georgia effective July 1, 2007.

Fourth quarter investment income and other revenue was $23.7 million compared with $11.9 million in the fourth quarter of 2006. Sequentially investment income and other revenue increased $4.6 million or 24.1% from the third quarter of 2007. Investment income and other revenue increased in the fourth quarter primarily due to the incorporation of the newly acquired TLC family care health plan in west Tennessee with 170,000. These members are served under an administrative services only agreement with State of Tennessee. Just as a reminder, let me outline our investment policy. The company invests in a manner that preserves capital, maintains liquidity and earns competitive returns. All our investments are made in accordance with corporate policy and conform to state guidelines were applicable. We invest only in investment grade securities with an A or better long term rating or an A1P1 or better short term rating. We have no mortgage backed securities either pass through or CMO’s and therefore we have no direct exposure to the prime or sub-prime mortgage market. Also, we don’t have any CDO’s in our portfolio.

Health benefits as a percent of premium revenues were 82.9% for the fourth quarter of 2007 versus 80.4% for the fourth quarter of 2006. Sequentially the ratio was consistent with the third quarter of 2007. The health benefits ratio reflects strong revenue growth, solid performance in mature markets, improvements in developing markets, as well as favorable reserve developments that was similar to previous quarters. The favorable reserve development related predominantly to the first three quarters of 2007 and occurred primarily in Texas and Georgia. Excluding the favorable developments the underlying health benefits ratio in the quarter was in line with our expectations. The health benefits ratio for the full year 2007 was 83.1% versus 81.1% for the full year of 2006.

The selling general and administrative expense ratio was 13.1% of total revenues for the fourth quarter of 2007 versus 14.2% in the fourth quarter of 2006 and compared with 12.6% in the third quarter of 2007. The sequential increase in SG&A expense primarily due to an increase in experience rebate expense in Texas, composed of two distinct parts. First, an accrual of $7.4 million associated with the resolution of audit items on all open experience rebate filings for prior years. As was detailed in previous AMERIGROUP SEC filings, the company has been working with state of Texas on this question, and we have now reached a final resolution. Second, a significant amount of expense was reported in Texas for experience rebate expense associated with the favorable reserve development in the state.

Bringing medical expenses and SG&A together for a moment, on a net basis, the favorable reserve development recorded in the quarter was fully offset by these two experience rebate items. For the full year 2007 the selling general and administrative expense ratio was 12.6% compared with 13% for the full year 2006. The fourth quarter tax rate was 37.8% versus 37.9% for the third quarter. The slight rate decrease is primarily attributable to a reduction in the blended state income tax rate. Cash flow from operations totaled $351million for the twelve months ending December 31, 2007, with $97 million during the quarter, representing approximately 3.1 times net income. This reflects another solid cash flow quarter, demonstrating the benefits of the rapid growth in our business this year.

Cash and investments at quarter end totaled approximately $1.5 billion. Unrestricted cash and investments for the fourth quarter was $206 million. Days in claims payable was 57, up two days from 55 last quarter, and slightly above our expected range of 45 to 55 days. The days increase due to a third quarter in the Tennessee claims liability. The expanded services now offered in Texas associated with the fruit change last quarter and a slight increase in claims inventory in a couple of markets.

The AMERIGROUP board of directors has approved a stock repurchase program whereby the company may repurchase 1 million shares of its common stock. While this is a modest program to start we believe it is appropriate to partially mitigate the increase in diluted share count that otherwise occurs on an ongoing basis due to stock option awards and exercises as well as stock ramps. As I’ve mentioned in the past our hierarchy for deployment capital is as follows: our first priority is to reinvest in the business, the second priority is acquisitions where appropriate and the third priority is share buy backs. While we intend to deploy the bulk of our available cash flow towards the first two categories a modest portion can now be directed towards buy backs.

Turning now to our 2008 guidance. We are raising our 2008 full year estimates to the range of $2.58 to $2.73 per diluted share. This is an increase from the previous range of $2.45 to $2.60 per diluted share to reflect the benefit from the retro-active component of the July 1, 2007 rate increase for Georgia which will be recognized in the first quarter of 2008. Estimates are predicted on the following assumptions among others; organic premium revenue growth is expected to be above 15%, investment income and other revenue is projected to grow at a rate in the low to mid teens, health benefits ratio in the mid 83% range, SG&A expense below 12% and fully diluted shares outstanding of approximately $55 million. The 2008 earnings outlook of $2.58 to $2.73 per diluted share does not reflect any dilutive or accretive impact from the possible entry into New Mexico’s long term care program. A possible change in the west Tennessee’s administrative services only contract with Tenncare and developments or rulings in the pending [Keytam] litigation.

Fundamentally we feel very good about our business. Our performance this quarter was solid and our outlook for 2008 remains positive. Since we gave out our initial 2008 guidance in October a lot has happened in the financial markets, one development which is relevant to our operations is the Federal Reserve’s aggressive efforts to reduce interest rates which predominately impact the short end of the yield curve. Since we have a substantial amount of fixed income assets that tend to be toward the short end of the yield curve, we now anticipate that our effective investment yield will likely decline as we move through 2008. Given that investment income makes a materially contribution towards our earnings we need to factor this change into our estimates. With the announcement of the retro-active rate increase in Georgia we are raising our estimates to reflect the value of the rate increase for the third and fourth quarters of 2007 that will be recognized in the first quarter of 2008 which amounts to approximately $0.13. Exclusive of this change we’re maintaining our previous earnings guidance in light of the interest rate environment.

Let me cover one last item related to guidance. Although we don’t give quarterly guidance I recognize that the seasonality of our business can sometimes generate questions. The distribution of medical costs across the year is an important attribute in our business. With regard to quarters historically our populations have incurred the highest medical costs in the first quarter while rate increases tend to be more heavily weighted toward the back half of the year. The result is that earnings are usually lowest in the first quarter with an associated higher health benefits ratio. For those focused on quarterly estimates I think it’s worthwhile to consider seasonality from a historical perspective. If you look back to the first quarter of 2007 you’ll see that it represented about 18% of full year earnings. With that let me turn the call back to Jim.

James G. Carlson

All around us the momentum for the solutions we offer is growing stronger. Both the headwinds of state budgetary challenges and the tailwinds of ABD expansion in covering the uninsured for companies with our capabilities and track record opens up exciting new vistas of opportunity. Our responsibility is to discern what constitutes a viable accretive business opportunity in the midst of all this change. I think it’s important for you to understand some of our evaluation processes because it will provide an effective window into our decision making in the coming months and years. You’ve heard us talk about our government relations in development work in the past. It suffices to say that if any state is interested in developing innovative products, moving new populations into managed care or covering the uninsured, we will be engaged in a meaningful way. Our team has and will work with regulator and legislators anywhere in the country to utilize our experience and best practices to help them meet there goal. But that does not mean we will bid on every RFP or pursue every expansion opportunity. Whether it is organic growth a new state RFP or an acquisition we will continue to apply a comprehensive and disciplined evaluation to every opportunity. We believe in real partnerships with our states and committing for the long haul so it’s especially important that we get it right in the first place.

Thus, far most of our decisions have been positive ones I think we have the best portfolio of state partners in the industry and our decision to focus early on the ABD population gives us a competitive edge. While we await the outcomes of the Florida Healthy Kids and DCRPs and fine tune our Tennessee response we’re continuing to evaluate a pipeline of opportunity stretching into 2011. In thinking through these opportunities we considered three main factors: first we look at the state’s political and regulatory history and environment to determine their understanding and commitment to managed care and make an assessment as the attractiveness of the opportunity from this programmatic perspective. Secondly, we conduct a underwriting analysis using all available financial information to determine if entering the market is in the financial best interest of our shareholders. We analyze the Medicaid population in detail in bench mark to other markets. We assess the rates to determine their viability and we focus on the actuarial and underwriting processes used to set them. States are themselves prudent purchasers these days, our job is to insure that there financial projections are fair and logical. We now have almost 14 years of experience evaluating medical cost data and can apply both subjective and objective criteria to better understand what we can expect. Third, to better understand the execution risk we look at the states infra-structure from an operating perspective. We consider that the other possible competitors, unique characteristics of the provider community and the applicable service requirements. We study all special requests from states to determine if the program is structurally set-up for managed care to succeed. We are not afraid of tough regulatory environments, in fact we welcome those but we do want to insure that they’re fair and reasonable.

The collective experience of our team brings to a consideration of these factors in a bid-no-bid or a go-no-go decision spans many years and many different companies. We follow this discipline process in deciding whether or not to bid and whether or not to execute contracts that are offered to us, so if we decide to bid to acquire or to enter a market you should understand that it has met those three thresholds. I know this is a lot of information but it’s important for you to have a sense of the carefulness with which we approach every opportunity. It is our good fortune and design to be in a business that enables us to serve those who most need a little help, that enviable social charter you’ve heard me describe. We can ill afford to fail, so we must continue to be innovators and leaders in solving the health care challenges state-to-state. We know what works. What will we need to do to perform even more effectively, and how we can provide a fair return for you, positive outcomes for to our state partners, and better health care and lives for our members.

We can’t always promise immediate success, but we do commit to be forthright, prudent and focused. Operator will take questions now.

Question-and-Answer Session

Operator

(Operator instructions.) Your first question will be from the line of John Rex of Bear Stearns.

John Rex – Bear Stearns

First I just want to make sure that I’m assessing the run rate correctly, as I think, about the second half in order to help do that could you size for us the value of the new services you had to provide in Georgia beginning July 1, without the benefit of the rate increase. My understanding there were new services that were required to be provided before you got the rate increase, I just wanted to see what kind of drag that created in your earnings in the second half.

James G. Carlson

I’ll let Jim clean up anything I don’t get the first attempt here, but, the rate increase that we got in Georgia, what we would characterize that as a trend rate increase. The way we calculate it is really comparing the new rate schedule that we have compared with the old one. With all the changes in the specific rate cells, and were our membership aligns with those rate cells. The math was 4.5%, as you might imagine whenever we have an anniversary of a contract there may be new service requirements and so forth that a state asks us to meet, but there was no explicit additional services accompanied by incremental revenue within that 4.5% trend increase. Jim any color for that?

James W. Truess

No not much. The only thing that I’d add just as we mentioned, the value of that from an EPS perspective is about $0.13 and that’s what we’ve added to our guidance in 08.

John Rex – Bear Stearns

Ok, but for you guys specifically then the state did not require you to begin providing extra or new services beginning July 1?

James G. Carlson

Well there were no additional medical services, no new service area and no changes in population. I guess services is a word that could be described a number of ways. That’s the way I would look at it, there were no new requirements, especially, there was nothing accompanied by explicit premium to address then.

John Rex – Bear Stearns

Ok, so maybe it was just plan specific or some plans had to do that and others didn’t. Another question for you, in thinking about your guidance for 08, how have you looked at Florida in terms of rate increases? I know the governor there is proposing a decrease, it’s a long ways away, I just kind of thinking how you guys handicap that stuff when you’re setting your guidance.?

James G. Carlson

John why don’t you go ahead and pipe in on that.

John E. Little

We sort of forecast rate increases at the right time using a number of factors and we do consider the budget process and the rate increase process and so at this point you know, we’re evaluating Florida. They have a very good actuary soundness process by which they consider rates. They did tighten things in 2007 so at this point that’s just an initial budget projection and it involves some pass through things to certain provider groups but I think we have a rate increase that we will work towards.

James G. Carlson

And I think John if I may, remind our audience in a lot of what we can do when we see states with some specific budget challenges is remind them that there is a significant population that they are responsible for that is probably not in managed care. Florida is a great example of that they continue to perpetuate an unproductive unaccountable fee for service system that we think is needs to be retired and so that the managed care opportunity can grow there for us and we can provide better value for the tax period and so forth.

John E. Little

Over and over again we have reminded people that in most of our states usually about half the population that could be in managed care is not in managed care and for states with budget problems getting that population managed is one of the most prudent things that they can do.

John Rex – Bear Stearns

Do you have a cash operating cash flow guidance for 2008.

James W. Truess

You know we’re not putting out specific guidance but I think if you look back at our historical experience that’s a pretty good guide. 07 was a particularly strong year for cash flow particularly if you kind of think of it from a multiple netting and that was really reflective of this growth that was approaching 40%. I don’t think we’ll see that sort of multiple again but we continue to think 08 is going to be a good strong year for cash flow and will continue our trend of good performance in that arena.

John Rex – Bear Stearns

I mean would you expect it to fall all the way to something more like net income plus D&A or would you expect it to still be kind of the 2x range or kind of broad, broad parameters.

James W. Truess

I think probably 2x toward the top end of the range I might think about, but certainly it still a good strong multiple.

Operator

Your next question will be from the line of Bill Georges of JP Morgan.

William D. Georges – JP Morgan

Wondering if you could just help us a little bit with some detail around your guidance. First of all obviously your reiterating guidance excluding the revenue recognition from Georgia but you did mention expectation of slightly lower invested income so I’m wondering where you are going to make up that difference when you think about your earnings?

James W. Truess

Bill you know as we always do when we give out our initial guidance in October we’re working on a set of preliminary assumptions and we really work very hard in the fourth quarter to fine tune that, take into account the most recent information we have, look at our trends. I think you can see in the fourth quarter it was a real solid quarter. We have some markets there that are performing a bit better than we expected that we certainly feel very good about and so when we’re sitting here in February and we’re looking we know okay this interesting common environment is not quite as good as maybe we had hoped 90 or 100 days ago but the other fundamentals on our business are probably a bit better and we feel better about that so it’s kind of like a plus and minus and I think that’s pretty common and I would imagine during the year we’ll see some pluses and minuses that will factor in. But I think our ability to maintain our underlying guidance and kind of weather this down turn in interest rates is reflective of the good performance in our business.

William D. Georges – JP Morgan

Is it fair to say that that better performance would be reflected on both the revenue line or the medical loss line or a combination of the two? Can you help us dial in a little bit.

James W. Truess

I think it’s probably more on the medical and SG&A line. I don’t think our revenue expectations for 08 have probably changed that much.

William D. Georges – JP Morgan

Okay and then actually with respect to your revenue expectations how do you think about that 15% rolling up in terms of rate increases and membership increases and can you to give us more specifics around what you’re expecting on membership growth?

James W. Truess

Sure I can give you little bit on that. You know if you think about there’s probably two or three or four key drivers that lead to that total increase in revenue. The first off is we’re going to have four quarters of middle tendency revenue in 08 so that ‘s certainly an important contributor. We expect a certain amount of modest membership growth but it makes a contribution and then also we have our normal expected rate increase activity across the states and so as well we have some modest new market entry’s that we’re working on both in we’ve have a modest start in South Carolina. That’s a contributor and then also we’re expanding our Medicare product so kind of probably all five of those are making a contribution but I’d probably say rate increases kind of membership in our core markets in middle Tennessee is probably the three biggest.

William D. Georges – JP Morgan

Okay and just one last quick one can you just explain to us the mechanics of the experience rebate that you discussed in Texas?

James W. Truess

Sure I’d be happy to. Basically the way it works in Texas on both the star ship and the star plus product, there’s a sharing formula that functions off of the pre-tax income of our Texas plan and when their pre-tax income exceeds a certain threshold then you start to share in essence that out performance with the state and there’s different percentages and different tiers and actually the percentages have changed a bit over the years and there a little different over the products. But basically it serves as a model whereby the state benefits from the situation in which our performance is favorable and exceeds the threshold. And I think by and large we believe that we probably had more, we’ve shared more experience rebate with the state than any other plan in the history of the program. So we view that in a very positive light I think it allows us to demonstrate to the state in a hard dollar fashion that we are very efficient and effective provider of services and that there receiving the benefit of that through this experience rebate formula. But what it means for us and this is how it played through this quarter is we had, as I mentioned some favorable development in Texas. So what that means is our performance in some prior quarters was better than we expected so we had in essence more pre-tax income so we share some of that with the state. So I think it’s important for people to understand that in those instances when we have favorable development that’s benefiting our medical expense line but we’re seeing higher cost in our SG&A line to recognize that sharing.

Operator

Your next question will be from the line of Greg Nersessian of Credit Suisse.

Greg Nersessian – Credit Suisse

My first question was on the two RFPs you mentioned sort of pending today, the BC and the Florida Healthy Kids can you just remind us where those stand and what your expectations are in terms of the time line for 2008.

James G. Carlson

IO think DC we submitted quite a while ago and we’ve been patiently awaiting the final answer and we will get it to you as soon as we have it. The Florida Healthy Kids bid we’ve submitted just very recently. What’s the deadline on that John for an answer?

John E. Little

We turned it in January 28th. We expect an answer in the next six weeks from now and with a go live in Fall.

Greg Nersessian – Credit Suisse

Have they rebid the entire state for Florida Healthy Kids or you submitting in new regions where you’re not currently or you just looking to remain in the regions where you currently reside?

James G. Carlson

They are rebidding the entire program and we did have some incremental service areas that we’d like to gain and we’d like to hold on to what we have so we’ll see what happens.

Greg Nersessian – Credit Suisse

And a couple of quick ones, can you just tell us what the premium taxes in the quarter and then also what your cap ex expectations are for 2008.

James W. Truess

The premium tax in the quarter was about $22.6 million and our Cap Ex for 2008 is in the range of between $45 and $50 million.

Greg Nersessian – Credit Suisse

Then just finally wondering if you’re seeing any evidence yet of your medical management team about any high flu related activity in the first quarter of 2008 and if you’re baking that into your expectation of the first quarter as well?

James G. Carlson

Yes I think that I’ll make a couple of observations. First we won’t get into the first quarter prematurely here but as you can probably well imagine we have a pretty active program to outreach and anticipation of flu season a combination of outbound calling and actually direct contact with our service coordinators people who are particularly at high risk. We’ve engaged in that program yet again this year. I think the early information from our prior authorization work and so forth is no significant elevation in end patient costs. So far but we’re going to be vigilant about this throughout the quarter. You know it’s not unheard of to have a late in the quarter outbreak or spike and those things are the hardest to see when you don’t have enough claim information as you’d like to have. So we’ll be on it, our medical team is on it and you know we’ve always expected that is a component of some of the seasonality that Jim spoke about earlier.

Operator

Your next question will be from the line of Carl McDonald of Oppenheimer

Carl McDonald – Oppenheimer

If I heard you correctly it was 18% of the total, that’s inclusive of the $0.13 from the Georgia retro increase?

James W. Truess

No the 18% I was referencing was just what we recorded in 2007 so if you looked at our earnings in the first quarter of 2007 versus the full year. So I just think that’s a good place to start in thinking about what the seasonality looks like. Obviously in the first quarter of this year we’re going to see the Georgia revenue which will be different than the normal experience but I think if you put those two together that starts to give you, I think it’s worthwhile to look at as you think about quarterly forecast.

Carl McDonald – Oppenheimer

So if I’m hearing you correctly we should look at the historical forecast for the core business and then on top of that factor in the Georgia retro?

James W. Truess

I think that’s a good way to think about it.

Carl McDonald – Oppenheimer

Okay. And then the second question is just wanted to get a sense in Ohio I know you guys have been a little bit different than everybody else this year in the fact that you’ve actually made money at least in the first three quarters. I want to understand if you think that is because you chose to be in the better counties within Ohio? Or, if you think that’s just something that you’re bringing to the program that other’s aren’t.

James G. Carlson

Well, I guess if you’re going to have any creditability when you talk about developing markets you have to take both sides of the equation. I think it’s, again, pretty earlier to draw conclusion in Ohio, it’s a very small market for us. I mean population TANF population we’ve been at for about two years and the ABD population is brand new. I think relative to the ABD population though, and one of the reasons why I went through the detail I did relative to the bid, no bid, go, no go decision making process is that we did bring some discipline to that question of how many regions to bid on ABD. We only bid on three and that was because we did have some misgivings about some of the other characteristics that we saw in the market. So, perhaps that discipline is serving us well right now. I think we’ve got a raise increase that we think could have been a little stronger, I think we’d broadly characterize our performance as in line with our expectations. There’s been a little variability, when you get to the stat filings, don’t be surprised if you see a little negative PPD from a prior period here. We might have been a little too optimistic earlier on. But, I still thinks are still well within the normal range for us.

We’re glad to be in Ohio and we’re going to continue to work with the state and look for ways to grow our business and be more successful over time. One thing I should also point out, I know there’s a lot of interest in Ohio so I’ll go on a little longer here is that with the exit of one of our competitors from the Ohio market, we don’t operate in any of those markets. Not only will we not see a lift in membership but, we don’t have whatever impact some of those medical costs that they were experiencing, they won’t float through our P&L because we’re not in those segments of the market.

ANALYST

The last question is just on the SG&A, just very roughly it looks like there was somewhere in the vicinity of $25 to $30 million in onetime items in the 07, some of the experience rebates, charitable contributions, 10C start up costs and the like. Is there an assumption of a similar amount of spending in 2008? Or, are you assuming no new costs associated with sort of onetime items like that?.

James W. Truess

I think that we probably expect some of those onetime items to come down a bit. When you look at it from a year-over-year basis this was a somewhat unique year in the amount of expense we had on that experience rebate line as it impacts G&A. So, I think that’s going to come off a little bit. That’s partly why we’re guiding down a bit on our SG&A.

Operator

Your next question will be from the line Joshua Raskin with Lehman Brothers.

Joshua R. Raskin – Lehman Brothers

A quick question, I just want to make sure I understand, the first quarter you’re saying look at the historical patterns, 18% or so and then at $0.13 on top of that but, Jim, in the prepared remarks were you saying that there’s more seasonality in 2008? Or, should we just expect similar seasonality to last year?

James W. Truess

Our expectation at this point is similar seasonality to last year. Obviously, time will tell but, yeah I think that’s our expectation. I think this might be, for us, the seasonality might even be a little more acute than some other organizations. It just has to do with kind of two things that affect the HPR and our earnings. One, is the seasonality of medical costs and I think given the same populations that probably tends to be pretty consistent across organizations. But, we have some of our biggest markets, particularly Florida and Texas that receive their late increases late in the year in September so when you think about the relationship how our medical costs are trending and how our rates are changing, our just tend to be pretty back end loaded. So, I think it’s something worth taking into account when you think about the quarterly progression. When you look back at 07 you see that there was kind of a progression as we built through the year with the first quarter being the lowest and then increasing from there and I think that’s a reasonable pattern.

Joshua R. Raskin – Lehman Brothers

Then, on the experience rebate in Texas, I think I understand what that’s for, sort of that corridor type payment but, two questions on that. One, can you quantify the amount? Even if you just give us an annual total. Then, why is that not included in medical expense as opposed to putting it in G&A?

James W. Truess

Well, we put it in G&A because the way the model works is it is pre-tax income sharing so in other words it’s not really – in theory, you can be sharing because your SG&A expenses were lower than they otherwise were, or your medical expenses, or what have you. So, I kind of think of it as bottom line sharing. It’s a little different than in situations where we have a premium rebate or that sort of thing we’ll treat as a deduct to premium. So, for us we kind of handle it on a state-by-state basis depending on how the states define what the structure may be so because this one is bottom line we tend to put it in SG&A. I recognize it’s probably not – there’s no perfect answer to that but, that has always been our practice and that’s what we’re continuing.

Joshua R. Raskin – Lehman Brothers

Okay. Then, the dollar amount?

James W. Truess

The dollar amount is kind of composed of two pieces, as I mentioned in my prepared remarks so if you look at over the last few quarters we really see in our total development stabilize and somewhat normalize. Just to give everyone a little more color on where we ended up for the quarter, if you take the total development that we had all across the company and then you net the experience rebate that we had to accrue up because of the favorable development in Texas which was a component of the whole company, the kind of net number there was $7.7 million of kind of net favorable impact. Then, as I mentioned, we have this Texas experience rebate settlement of these older open audits that was about $7.4. So, that’s what we’re talking about. When you kind of put these two pieces together they really net off to almost nothing and I think that’s what the face of the financials are really giving a pretty good run rate view on the performance this quarter absence the fact that now we know we have some Georgia revenue that we didn’t know at the end of the year with certainty.

Joshua R. Raskin – Lehman Brothers

Last question, just from an organic membership growth, I know you guys talked about modest numbers overall but any color on any of the specific states? I think you mentioned Georgia down in the first quarter, not sure if you think that comes back but, just in terms of specific states where you think we could see some membership growth would be helpful.

James G. Carlson

Well, I think one of the things as the managers and operators of a business, we want to see growth everywhere. In fact, one of the specific activities we undertake as part of our budget and planning process is we really ask all of our CEOs to look at five different ways to grow the existing businesses that we’re in and they all have a concrete plan to attack that. But, we continue to be very optimistic about our ability to grow additional membership in Texas. We think Florida is starting to move back in the other direction, we’ve been pretty patient about that. Maryland despite the fact that the market is pretty mature, we continue to take share, it seems assumingly every year. So, those are some particular strong drivers of growth for us that we’ll expect big things from in 2008.

Operator

Your next question will be from the line of Peter Costa with FTN Midwest Securities.

Peter Costa – FTN Midwest Securities Corp.

Perhaps I missed it, did you give the exact dollar number of the PPD, the favorable PPD in the quarter? Can you give that?

James W. Truess

What I just mentioned was if you take the total development across the company and then you net that against the experience rebate that we had to accrue associated with that, it was $7.7.

Peter Costa – FTN Midwest Securities Corp.

Yeah but that’s not the favorable PPD in and of itself. Can you give that number?

James W. Truess

Yeah. The total growth development before the experience rebate, $16.5.

Peter Costa – FTN Midwest Securities Corp.

$16.5?

James W. Truess

Yep.

Peter Costa – FTN Midwest Securities Corp.

Then, can you explain the higher claim inventory? What caused that in those couple of markets and how many days did that account for in the two day rise in the DCP?

James W. Truess

It’s probably of the three factors I mentioned, it’s probably the smallest factor and I don’t think there’s any specific reason, just normal transactional activity that at the end of the quarter the inventory was up a little bit in a couple of our markets. So, I wouldn’t really attribute it to anything specific. I think that inventory is at a comfortable level again.

Peter Costa – FTN Midwest Securities Corp.

Okay, so it wasn’t a systems glitch or anything like that?

James W. Truess

No, actually our business process, I think on that side of the world continues to improve and we’re migrating all of our business over on to a single platform and that’s going quite well. Overall, I think we continue to kind of target our efforts around improving and streamlining and gain efficiency and doing more things electronically. So, we feel good about that and fell like we’re continuing to improve.

Operator

Your next question will be from Darren Miller of Goldman Sachs.

Darren Miller – Goldman Sachs

Looking at your PPD, is there any specific components of medical costs that are driving that?

James W. Truess

No, I don’t think I would necessarily isolate it down to a specific category. When we do our actuarial analysis we tend to look at the inpatient component of our business and then look at the cost of outpatient and other medical services together. But, I don’t know if I would necessarily attribute it to a specific category.

Darren Miller – Goldman Sachs

Can you give us any color on what your enrollment expectations in South Carolina are?

James G. Carlson

Well, I think it’s going to continue to be pretty modest. We have fully eight competitors in the first region, the greater Columbia area. We have a state that is not fully mandatory yet so people are able to select the fee per service program, although we are hopeful that changes over time. People can opt out of a program after 90 days if they want to go back into a fee for service. I just think those factors combined with the fact that it will take a while for all six regions to be fully operational, just compel us to have very modest expectations of how we’ll grow. But, nonetheless, I think when you go back to the three criteria that we use for deciding to enter a market we continue to feel very good about South Carolina. I think that it’s a program that is being set up to succeed. We think it eventually will be mandatory. We do think that the state has explicit goals to get more people into managed care. We do think there’s a prospect of getting the SChip program folded into managed care sometime during 2008. Those are all positive developments. I would mind seeing some a little consolidation among the competitors to make an easier path but, we’re as we always do. When we go into a market, we’re going in for the long haul, we’ll be there and over time we’ll be successful.

Darren Miller – Goldman Sachs

Will you provide your Georgia MCR for the fourth quarter?

James W. Truess

On the stat filing?

Darren Miller – Goldman Sachs

Yeah.

James W. Truess

The insurance is going to come down a little bit on Georgia because it was one of the markets in which we had the favorable development. I don’t know if I’ve seen the final, final number but I think it’s going to be in the very high 70s or low 80s, so it’s a pretty good number. Again, some of that is being helped along because of development.

Darren Miller – Goldman Sachs

Does the stat filing reflect the rate increase?

James W. Truess

That number I gave you does not.

Operator

Your next question will be from Matt Perry of Wachovia Capital Market.

Matt Perry – Wachovia Capital Market

Most of my questions have been answered but I do have a couple more. When you provide the MCR guidance for 08, mid 83% is that including the benefit of this retroactive rate increase in Q1? Or, is it excluding that?

James W. Truess

It’s including it. So, absent that we would have been a couple of ticks higher but that includes that affect.

Matt Perry – Wachovia Capital Market

Is it accurate, am I looking at it accurately to think excluding that retroactive increase you’re forecasting an increase in the MCR in 08 versus 07?

James W. Truess

I think that’s fair and I think that’s really driven by a couple of reasons, one is we had some favorable out of period development on that basis for the full year so we don’t expect that to reoccur. Also, when we think about there’s a combination of things going on here in different markets or pluses and minuses. I think we continue to believe that our developing markets are going to improve and those are going to get better. But, we also have some mature markets that honestly have outperformed. We’re not necessarily banking on that, we think over time most of these markets tend to normalize. If you have an underperforming market either through rates or initiatives we’re going to improve that. If we have an outperformed market that we’re not necessarily banking on sustaining that.

Matt Perry – Wachovia Capital Market

If I think about 08 should I think about the snip plans that I think have run at relatively high margins recently. Should I think about those margins coming down more to a company average margin? Then, can you just talk about the growth you’ve seen in snip and Medicare and whether it’s kind of meeting your expectations?

James G. Carlson

I think relative to the margin progression we would expect that over time it will subside a little bit over where we start. We have the benefit in Texas primarily of having already managed these people in our Medicaid programs so it’s not a population we expect to experience over and over again. We’re probably going to be a little shy about getting into Q1 specifics in terms of Medicare but suffice to say we’re glad to be open for business, we do have members, we’ll probably give you a little more color on that at the end of the first quarter. We do have sort of a learn as we go strategy in place here. We’re not trying to get out in front of our skies relative to how quick we grow this business. We have a great team of people we’re assembling and we’re quite pleased with the start they’re off to so far in 2008. I think the watch word will be modest relative to its impact on our 2008 performance and that will be very consistent with our own internal expectations.

Operator

Your next question will be from Tom Carroll from Stifel Nicolaus.

Thomas Carroll – Stifel Nicolaus & Company

A couple quick questions here, just on Georgia again it looks like the Georgia retroactivity is worth about $11.8 million of incremental revenue. Tax adjusted, I get $0.13 per share which is what your guidance went up by which is what you guys have talked about. Do I have that all correct?

James W. Truess

I think you do. That’s very, very close to our calculations.

Thomas Carroll – Stifel Nicolaus & Company

And that will all be in first quarter 08?

James W. Truess

Correct.

Thomas Carroll – Stifel Nicolaus & Company

That’s surprisingly very clear. On other follow up on Georgia, do you anticipate the same type of process in future years?

James G. Carlson

I think we’ve looked at the Georgia experience that we’ve been through as really attributable to the newness of a fully managed care system. I think sort of startup growing pains so to speak. The state started with old data to build these rates, the experience that the plans were providing sort of cooperated some of that data and other areas were revealing in terms of other cost pressures and so forth. It took them a while to model that, they went out and got a second opinion to QA their process. It took them longer than anybody would have liked for that and we’re hopeful that we get back into a cycle that is consistent with our other markets where the rate process matches the contract anniversaries. We’re certainly in communication with the actuaries already about the new process but we’re not going to make a promise that we can’t 100% guarantee. The state will hopefully work with us and we’ll have this thing on a glide path that’s consistent with other markets that we’ve seen.

Thomas Carroll – Stifel Nicolaus & Company

So we shouldn’t necessarily be thinking about some kind of annual retroactive adjustment in Georgia every year, year in and year out, up or down.

James G. Carlson

I wouldn’t think so. We’ll hopefully be looking at the data together, concluding where the trends are and hopefully both parties will realize that the trends and the ability to manage these costs that the industry is bringing to the state a much better environment then what they had in the fee for service system. We’re spitting out 10s of billions of dollars of savings to tax payers at a crucial time and I think that we’re providing great value to the membership that we’re mutually responsible for.

Thomas Carroll – Stifel Nicolaus & Company

Second, Jim and maybe we can hear from John Littel on this too and I appreciate your comments on new markets and how you look at them but, my question is on Connecticut and it doesn’t look like AMERIGROUP is bidding on the reform of the Husky program which also includes the new Charter Oak expansion program. Could you maybe talk about why you’re not interested or what it is about the market that didn’t meet your criteria because it seems like a market opportunity that lines up very well with the suite of products that you developed over a number of years.

James G. Carlson

I think that’s a great question and in fact, people are probably wondering why I went through so much detail to lay out the criteria in the first place. Actually, we thought about there were a number of things going on here. For one thing, we talked in our investor day about our interest in Hawaii and that was a no bid for us and it was based upon failing a test of more than one of those three criteria. And, we disclosed this morning that we’re going to focus our attentions on west Tennessee as a result of an evaluation that we’ve done relative to the rest of the opportunity there. With Connecticut it’s the same sort of thing. We looked at the combination of the program environment, the underwriting and the execution risk associated with going into that market and we’ve concluded that it would not be a good fit for us at this time. John, if you’d like to elaborate on that, let’s go ahead and do so.

John E. Little

I think that really hits it. Tom, one of the things we want to do is get in early with the states and provide as much color and best practice as we can and help them design the programs. That doesn’t mean even then that we would bid on everything but, we do think even if we can favorably improve the process and kind of level set some of these things it would be helpful to us.

Thomas Carroll – Stifel Nicolaus & Company

A quick follow up on the Charter Oak piece of Connecticut. John, do you think that is a model that other states may follow?

John E. Little

Well, you know, the states are really collaborating a lot now on the various approaches they’re taking to covering uninsured. So, I think if you look out and you put it all in a grid and looked at it like we do you’ll find maybe four, five, six of the same components showing up in a lot of different states. So, part of it comes down to the enrollment process, the underwriting process, the roll, the premium that will be paid by the member. I think if you went from state-to-state you’ll find looking at different components that very few states are saying, “Hey I want the Massachusetts model. I want the Connecticut model.” It’s really drilling down to those components which is why we want to be working with the states and sort of helping them to see what’s the benefit of a Medicaid expansion? What’s the benefit of a buy in program? What’s the benefit of a three share program? And different things. So, I think you’ll see parts of it in different places.

Look folks, thanks for joining us. We’re going to draw this to a close at the bottom of our hour together and get you back on to your days. We appreciate your interest to the company and looking forward to talking to you out on the road and again in 90 days.

Operator

This concludes the AMERIGROUP Corporation’s fourth quarter conference call. Thank you for your participation. You may now disconnect.

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