AMERIGROUP Corp. Q1 2008 Earnings Call Transcript

Apr.30.08 | About: Anthem, Inc. (ANTM)

AMERIGROUP Corp. (AGP) Q1 2008 Earnings Call April 24, 2008 9:30 AM ET

Executives

Julie Loftus Trudell - SVP, IR of AMERIGROUP

Jim Carlson - President and CEO

Jim Truess - CFO

John Littel - EVP of ER

Analysts

Josh Raskin - Lehman Brothers

Greg Nersessian - Credit Suisse

Tom Carroll - Stifel Nicolaus & Company

Daryn Miller - Goldman Sachs

Peter Costa - FTN Midwest Securities

John Rex - Bear Stearns

Gregg Genova - Deutsche Bank

Carl McDonald - Oppenheimer

Matt Perry - Wachovia Capital

Kevin Grundy - JPMorgan

Operator

Welcome to AMERIGROUP Corporation's first quarter Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded today, Thursday, April 24, 2008.

I will now turn the conference 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 first quarter earnings conference call and webcast. I am Julie Loftus Trudell, Senior Vice President of Investor Relations and with me here this morning is AMERIGROUP's President and Chief Executive Officer, Jim Carlson; Chief Financial Officer, Jim Truess; Chief Operating Officer, Dick Zoretic; and Executive Vice President of External Relations, John Littel.

Following our prepared remarks, we will be pleased to respond to your questions.

The press release announcing our first quarter earnings was distributed yesterday after the close of the market. A replay of this call will be available shortly after the conclusion of the call through Thursday, May 1. The numbers to access this replay are in your earnings press release.

The conference call will also be available through the investors page of the company's website approximately two hours following the conclusion of this live broadcast and we will leave it there 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 apply to this call as some of the statements we will mention today are forward-looking, including, among other things, our estimates for 2008. We can give no assurance that they will prove to be accurate because they are of a prospective nature. The actual results that we produce in the future could differ materially than those we discuss today.

I encourage you to read our annual report on Form 10-K for the year ended December 31, 2007 that we filed with the SEC, as well as subsequent current reports on Form 8-K filed or furnished with the SEC for certain known risk factors that could cause our actual results to differ materially from those in our current estimate.

At this point, I would like to turn the call over to Jim Carlson, President and CEO. Jim?

Jim Carlson

Thanks, Julie. Good morning and thank you for joining our call. This morning, I will provide an overview of both the first quarter and market developments prior to a review of our financial highlights by Jim Truess, and John Littel will then provide an update on the current political environment before we take calls.

The first quarter of 2008 provided reminders of a number of variables in the health insurance business from seasonal illness, recessionary pressures and interest rates on investment portfolios to the underwriting cycle and the importance of actuarial sound rates whether from Medicare Part D individual insurance or Medicaid.

Let me start with specific first quarter highlights. For the quarter, we reported earnings per share of $0.65 with quarterly revenue of $1.1 billion, reflecting a 31% increase over the prior year. While expected seasonality and trend would normally increase the HBR for the first quarter, solid performance across the majority of markets yielded favorable results for the quarter. Correspondingly, our health benefits ratio was 82.1% and our SG&A ratio was 13.3% of total revenues.

For the full year of 2008, we are updating our guidance to $2.35 to $2.45 per diluted share from the previously announced range of $2.46 to $2.61. The revision to guidance includes the impact of a non-cash charge associated with discontinuing operations in West Tennessee at our recently acquired health plan, Memphis Managed Care Corporation as well as our exit from the District of Columbia.

Our Tennessee subsidiary was not selected in the recent procurement for West Tennessee. Jim Truess will discuss this in further detail.

At the close of the quarter, our total membership was close to 1.7 million, which is a year-over-year increase of 356,000 members or 27% when compared to March of last year. Sequential membership decreased 23,000 or 1.3%.

We experienced some modest membership increases in our new Medicare markets and our new TANF/ABD market in South Carolina. On balance however, these were more than offset by some contraction in eligible beneficiaries in other markets and program changes.

Let me review a couple of brief market highlights.

First, we are continuing our efforts to move our middle Tennessee business from a developing market to a mature market, what one might identify as a path to profitability. As is often the case for a new market, we have experienced higher than average medical costs in our first year of operations in middle Tennessee. This experience is primarily due to high levels of individual nursing services in certain members' homes. We have been in discussions with the state over these costs and believe a solution is forthcoming.

Jim will provide you a more in-depth analysis later in the call.

We are disappointed that we were not selected for the West Tennessee region in the state's recent procurement. We believe we submitted a solid proposal and congratulate the Blues and United on their wins there. We remain proud of the work and commitment demonstrated by our colleagues in Memphis, as well as the ongoing work of our team in Nashville.

In Georgia, our efforts in that market have resulted in stable performance. However, membership declined sequentially as we previously predicted due to decreases in the state's Medicaid eligibles. While we expected this trend to continue into 2008, the size of the state's contraction was a little bit more than we had expected.

Texas experienced a net 19,000 member decline in the quarter, reflecting a contraction in the state's membership. We experienced a decline of approximately 13,000 ASO SSI members that were transferred to a new program. Our TANF membership decreased by approximately 12,000 members due to a backlog with the state's enrollment broker. The state has made efforts to catch up and mitigate this issue.

Offsetting these declines, CHIP membership increased in the quarter as the state eliminated the 90-day waiting period and switched to a 12-month renewal in place of the previous six-month provision. While we typically don't comment on the quarter in progress, we will point out that April's membership in Texas rebounded by about 10,000 members.

In Florida, the state legislature is dealing with a $7 billion shortfall in their budget and has proposed reductions in healthcare spending in excess of $1 billion. The budgets have just gone to a conference committee and we expect something to be finalized in May.

We are working with the Medicaid agency and state legislators to promote managed care expansions to generate savings, as well as program changes to offset any funding reductions. The awards for the Florida Healthy Kids expansion will be delayed until after the legislative session, which represents a delay from what we previously had expected. We plan to provide more detail on Florida on our next call.

In New Mexico, we are moving closer to a launch date and we are waiting the third and final step in our decision process, which involves the rates that would support our go-live decision. Just to remind you, the scope of services defined under this program is very broad, encompassing both acute and long-term care services. As such, it represents a new model for states looking to integrate the management of long-term care with traditional Medicaid managed care.

The first quarter also marked our launch into Medicare Advantage, as well as additional SNP markets. This is intended to be a relatively small and deliberate rollout as our purpose is to carefully develop capacity and expertise as we evaluate additional opportunities for growth. While we are pleased with our progress in enrolling dual eligibles for our Medicaid membership, our total membership year-to-date is running slightly behind expectations in a few markets.

Before Jim gets into the financial details of the quarter, I would like to update you on a couple of additional activities. On our last quarterly call, we went through the decision factors we consider before every bid and each time we decide to accept business. These include analyses of the political and regulatory environment, the program's underwriting and the market's execution risk.

We also utilize these business decision factors each time we renew or expand existing business. In some instances, this assessment leads us to the conclusion that the business risk is simply too great or the opportunity will not be financially viable or both. That has become the case in the District of Columbia.

As we previously reported, we were one of four successful bidders in the reprocurement of the District's Medicaid Managed Care business. We ultimately elected not to participate in this new contract award.

Among our concerns is that we determined that there is no meaningful opportunity for growth in this market, yet the infrastructure demands for a small limited market are significant beyond what we believe are appropriate and atypical of what we encounter elsewhere, thereby creating unacceptable levels of execution risk.

The complaint filed by the District in DC Superior Court and referenced in our previous press release heightened our concerns regarding this market.

With respect to the complaint, we believe that the absence of qualified auditors led certain officials to reach mistaken conclusions and that the allegations advanced in the complaint reflect a fundamental misunderstanding of well-established rating and regulatory requirements.

Faced with such misunderstanding, our confidence in the likelihood of an acceptable rate environment has diminished. Most importantly, in the normal course of business, these kinds of issues are resolved through direct communications between a vendor and the regulatory agencies with oversight responsibility.

Our current contract expires on April 30, 2008 and we will not accept the new contract. While certain of the prudence of our decision, we are very disappointed for our DC staff who have been exemplary in their service to our country's neediest citizens who live in the shadow of our nation's capital. We have agreed to perform transition services relating to winding down this business through June 30, 2008. The effect of this decision is expected to be $0.05 per diluted share and is included in our updated 2008 guidance.

Next, I want to give you a quick update as to where we stand with the qui tam litigation. The appeals process is underway and our team has filed the final brief. The Seventh Circuit Court has set a date of June 4 for oral arguments.

Finally, I would like to close with an update on our future growth opportunities. Beyond market share gains and growth in the overall program, our organic growth typically comes in a combination of three different sources. The source with which you have the most visibility is RFPs.

As you can tell from the past year, a number of these are known well in advance while others develop rapidly. We examine virtually every one, but we don't necessarily expect to bid on every RFP nor will we be successful on every one in which we bid. On the known horizon currently are the Arizona RFP, which we bid on, Florida Healthy Kids and Florida Senior Care. A little further down the road are RFPs in Massachusetts and California.

The second source is through the expansion of our current business and products through the market share gains and through program expansions. While this is less visible to you, it is nonetheless a very vibrant pipeline of activity involving legislative and gubernatorial initiatives, regional growth and new populations.

An important example is our continued expansion of the aged, blind, disabled population and the associated long-term-care opportunity. As the economy tightens, states are compelled to make decisions about covering the baby boom population as it hits the aged portion of this category. On the horizon, there are potential long-term care expansions in Florida, Georgia, Virginia, Maryland and Tennessee; CHIP expansions in New York, South Carolina and Florida and additional Medicare markets and gains in 2009.

A third source is through de novo market entries. These tend to be slower growing opportunities that often provide a longer-term opportunity for additional growth, such as the addition of LTC populations. Virginia and South Carolina are examples of this and there are a couple of states being considered by us in 2008 and 2009.

We feel positive about the existing and unfolding opportunities and will continue to carefully evaluate every opportunity.

So with that, I would like to turn the all over to Jim Truess, our CFO. Jim?

Jim Truess

Thank you. Good morning, everyone. For the first quarter, net income was $35.1 million, resulting in diluted earnings per share of $0.65 versus $21.3 million or $0.40 in the first quarter of 2007. This compares to $31.1 million or $0.57 in the fourth quarter of 2007.

First-quarter total revenues were approximately $1.1 billion, reflecting a 30% increase in premium revenue compared to the first quarter of 2007. Sequentially, total revenues increased $11.6 million or 1.1% compared to the fourth quarter of 2007.

As we previewed on the last call, the first quarter reflects a retroactive rate increase in Georgia that was effective back to July 1, 2007. Upon final reconciliation with the state, this amounted to $10.4 million in revenue or $0.11 per diluted share after accounting for the associated premium tax.

Last quarter, we announced that we expected the impact of the retroactive Georgia rate increase to be approximately $12 million or $0.13 per diluted share. The slightly smaller impact was due to final reconciliation of retroactivity. Some members were enrolled with the company for a portion of a month and therefore premium was prorated. In most cases, these are newborns that come on part way through a month. They are in rates cells that receive the highest increases and therefore the partial month proration had an impact.

Beyond the Georgia retro increase, we experienced membership increases in our new Medicare markets and our new TANF/ABD markets in South Carolina, but on balance, these were offset by some contraction in eligible beneficiaries in other markets as Jim described earlier.

First quarter investment income and other revenue was $22.6 million compared with $12.7 million in the first quarter of 2007. Sequentially, investment income and other revenue decreased approximately $1.1 million from the fourth quarter of 2007 due primarily to declines in market interest rates. Overall, our average investable asset increased modestly during the quarter, but lower effective yields more than offset this impact.

Health benefits as a percent of premium revenues were 82.1% for the first quarter of 2008 versus 83.4% in the first quarter of 2007 and compared with 82.9% for the fourth quarter of 2007.

As is the case in most quarters, the health benefits ratio is impacted by a range of factors. First off, absent other impacts, we anticipate that the first quarter will experience the highest health benefits ratio for the year. This is due to expected seasonality and trend in contrast to limited rate increase activity during the first quarter.

One other factor that had an impact this year was the extra day in February due to leap year. We received the same premium for the month, but members had one extra day to potentially consume medical services.

Controlling for these predictable factors, medical costs were largely favorable or in line for most of our markets. Texas was a strong contributor on the positive side. Trends in both the TANF and ABD populations remain stable, impacting both medical estimates in the quarter, as well as generating favorable reserve development.

On the other hand, we experienced higher medical costs in the middle region of Tennessee and raised our estimates for incurred costs in prior periods. We are now in the stage of having maturing data with improving visibility on medical costs.

There is one area, private duty nursing, where costs are elevated above our expectations. This is quite unique to this market and is associated with a comparatively generous benefit design and programmatic changes in the state, which provides higher levels of coverage for home-based services to Medicaid beneficiaries in lieu of institutional nursing home care.

These changes began prior to the start of the new managed care program last year and resulted in certain members utilizing substantially higher levels of individual nursing services in their homes around the clock, seven days a week in many instances as we assumed responsibility for the population.

While we support efforts to provide home and community-based services to our members, premium rates need to reflect the utilization and costs. We have been in regular dialogue with the state on this issue and believe there is general agreement on the issue between the two managed care plans and the state.

There are two primary actions that we will address this issue.

First, the state has the discretion to implement a rate increase and have indicated that they will do so shortly and apply it retroactive to April 1. Second, the benefit design for private duty services is under review in order to bring the program more in line with other states who are remaining clinically appropriate.

At this time, we are not going to comment further on the detailed specifics of these changes while discussions with the state are ongoing, but believe the changes will serve to significantly mitigate the impact. These issues should be resolved during the second quarter and we will update you on this next quarter. Beyond private duty nursing costs, regular medical costs are largely in line with our expectations.

While we haven't completed our quarterly statutory filings yet, you should expect that the medical loss ratio reported in Tennessee to be well over 100%, driven by both medical expense estimates in the quarter, as well as unfavorable prior period development. Again, this experience is primarily driven by private duty nursing.

Given the scale and diversity in our business today, we are able to absorb these impacts as evidenced by our aggregate performance this quarter.

Moving onto SG&A, the selling, general and administrative expense ratio was 13.3% of total revenues for the first quarter of 2008 versus 12.7% in the first quarter of 2007 and compared to 13.1% in the fourth quarter of 2007.

Experienced rebate expense in Texas associated with favorable performance in the state held SG&A at an elevated level in the quarter. The medical expense estimates in the quarter, as well as revisions to prior estimates, were favorable and we share some of these benefits with the state under the experienced rebate model.

As was the case last quarter, the results in Texas lowered the health benefits ratio, but through the experienced rebate mechanism, increased the SG&A ratio. Outside of the increased experienced rebate expense, SG&A was in line with our expectations.

First quarter tax rate was 38.1% versus 37.8% for the fourth quarter of 2007. The increase in rate is primarily attributed to an increase in the blended state income tax rate.

Cash flow from operations was slightly negative for the three months ended March 31, 2008. While net income was solid, cash flow in the quarter was impacted by a decline in net working capital of $52.8 million. The primary driver was a decline in the claims payable liability of $34.3 million. A reduction in other short-term liabilities also contributed to the decline in cash flow from operations.

While cash flow from operations was negative during the quarter, I don't believe that is indicative of full year results. More likely, cash flow from operations relative to net income would return to more normalized levels of 1 to 1.5 times that we would anticipate for a year with this type of revenue growth.

Cash and investments at quarter end totaled $1.5 billion. Unregulated cash and investments were $524 million, of which $173 million was unrestricted compared to $206 million in the fourth quarter of 2007. Unrestricted cash in the quarter was impacted by the scheduled pay down of debt.

Days and claims payable was 53 days, down four days from 57 last quarter and remains at the higher end of our expected range of 45 to 55 days. The decline in days reflects the balance sheet impact of favorable prior period development and a reduction in claims on hand during the quarter.

As I noted last quarter, we had a couple of markets with slightly higher inventories at year end. Those have been eliminated now.

During the first quarter of 2008, we announced a stock repurchase program. Since then, we have purchased approximately 100,000 shares of common stock for approximately $3.6 million.

Our existing Board-approved share repurchase authorization is for 1 million shares. We are currently considering increasing the authorization level of the program in the future.

Turning now to our 2008 estimates. We have updated our guidance for the full year of 2008 to $2.35 to $2.45 per diluted share from the previously announced range of $2.46 to $2.61.

Estimates are predicated on the following assumptions, among others. Organic premium revenue growth is expected to be in the 11% to 12% range versus the previous estimate of above 15%.

Investment income and other revenue growth is expected to be slightly below the prior year versus the previous estimate of slightly above the prior year due to the expected conclusion of operations in West Tennessee.

Health benefits ratio of approximately 83% of premium revenues for the full year, lower than the previous estimate of the mid-83% range.

Selling, general and administrative expenses in the low 12% range versus the previous estimate of below 12% and fully diluted shares outstanding of approximately $54.5 million versus the previous estimate of $55 million.

The 2008 earnings outlook does not reflect any dilutive or accretive impact from AMERIGROUP's possible entry into New Mexico's long-term care program and developments or rulings in the pending qui tam appeal.

The revision to guidance reflects two discrete adjustments, as well as our normal updates for the entire business that we do each quarter. First, the result of the recent procurement announcement in West Tennessee had the largest impact. We have a certain amount of goodwill and unamortized intangibles on the balance sheet associated with the acquisition in West Tennessee that we completed last year. We expect to record a charge in the second quarter for the goodwill write-off. We also have transition costs and severance charges we expect to incur. In total, these are worth approximately $0.15 on an EPS basis relative to our previous guidance. Second, our decision to exit the District of Columbia also has an associated goodwill write-off and transition costs. These amount to about $0.05 on an EPS basis.

While we expect our revenues will be higher in middle Tennessee due to the rate increase, we are trimming our overall premium revenue growth rate somewhat due to a lower rate of growth in our new Medicare business and a slower rollout in South Carolina, along with eligibility declines and mix shift in Georgia. Altogether, these revenue changes have a slight impact on earnings of about $0.02 EPS.

With regard to the guidance statistics, the premium growth is down for the reasons I just detailed, along with the exit from DC.

HBR is down due to the strong performance in the first quarter. On balance, medical costs remain stable and in line with the revenue changes.

The estimated SG&A ratio is raised somewhat due to the impact of the experienced rebate expense in Texas along with transition costs in West Tennessee and DC.

Embedded in the West Tennessee and DC impact I described earlier is an estimated $10 million charge that will be recorded on the depreciation and amortization line.

And finally, the estimated share count has been reduced slightly due to the lower share price in the market, which reduces the potential dilutive impact of employee stock options.

With that, let me turn the call over to John for some political commentary. John?

John Littel

Thanks, Jim. Let me make a couple of observations, some of which might be known and others not so. While we still don't have a clearly set Presidential contest, I think there are some insights that are becoming clearer.

First, if you examine the healthcare proposals and the rhetoric from each of the three candidates, you see that there are more things in common than not. Coverage of children, strengthening Medicaid, expansion of offerings like the Federal Employee Benefits Program, tax credits, and an enhanced role for government are contained in various ways in all three of the remaining candidates' plans.

Healthcare will continue to play a prominent role in the debate and we would expect this to intensify as we move into the general election. So at that point, they will be highlighting their differences. However, to pass, any meaningful reform will have to be bipartisan and address four principal areas; cost, accessibility or coverage, portability and information technology.

Second, it's likely that we will see expansion of government-sponsored programs next year, regardless of the winner of the Presidential election. Poverty indicators, including Medicaid enrollment, generally lag behind a recession for approximately 18 months. So, this will initially take the form of increased Medicaid enrollment due to unemployment and shrinking commercial coverage.

Congress is also likely to act in the early part of the year to expand SCHIP. Medicare will continue to grow based on retirement demographics, but we may also be debating a potential expansion of this program to cover near elderly individuals, possibly through a buy-in program as part of efforts to cover the uninsured.

Lastly, it is becoming increasingly evident that the states, particularly in tough economic times, cannot do healthcare reform on their own. The problems in Massachusetts and the failure of reform in California are critical considerations for the next President.

Even more importantly, the tsunami you have often heard us describe of costs associated with the wave of retirees and persons with disabilities will be magnified by the state's fiscal shortfalls. As a result, there will be considerable pressure on politicians to provide relief, not only to individuals, but also to states and a need, if not a requirement, to use more efficient means of delivering the care. Some of you may recall, for example, the FMAP assistance from 2003 and 2004.

Broader economic challenges are not necessarily bad things for our business despite some instances of short-term pressure on the rating process. For instance, in the long run, we believe that tight economic conditions will improve the overall market by strengthening the demand for our value proposition and providing opportunities for us to differentiate our capabilities in serving the financially vulnerable disabled and frail elderly. The groundbreaking program in New Mexico is a great example of this and we should expect to see more states going down the same path.

So lots of moving parts on the political front, but I believe we are starting to have some positive visibility for next year. Jim?

Jim Carlson

Well, thanks, John. Let me wrap up with a couple of thoughts, the political pressure for and the likelihood of comprehensive healthcare reform continue to grow. The economy-driven financial pressure on states is driving a demand for exactly the kind of focused, innovative and integrated products we offer. Tougher economic times limit governments' ability to continue ineffective, unaccountable, open-ended and expensive fee-for-service programs.

Today, Medicaid Managed Care is an accepted vehicle for controlling costs and improving quality, possibly the only consistently proven model available. These systems we have built, the relationships we have developed with the government and the services we offer are the ones policymakers are increasingly recognizing as an answer to the challenges they face.

We are pleased and I believe that you can be too that in a challenging environment our core business performed according to our expectations and that we continue to produce strong results. However, you can be certain that our team will work harder and smarter to overcome any challenges and continue to succeed in this environment.

We are committed, but not complacent with the stability of our medical costs. We will also continue to be diligent in assessing every opportunity, whether current business, new RFPs or acquisitions against the standard of viability and value for our members, state partners and shareholders. In doing these things and doing them well, we will be a stronger company.

Thank you for your interest in our work and in the future we see before us.

Now let's open the call for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Josh Raskin of Lehman Brothers.

Jim Carlson

Josh, go ahead.

Josh Raskin - Lehman Brothers

Usually I get cut off after my question, not before. Just on the guidance, I just want to make sure I am getting this right. You had taken the EPS overall down $0.11 to $0.16 from last quarter. If I added up Jim's numbers, the $0.15 for Tennessee, the $0.05 for DC and then $0.02 for the lower growth, I guess we can argue about whether that's one-time or not, but that's $0.22. Is it fair to say that there is really sort of a $0.06 to $0.11 boost in what you could call sort of core operations?

Jim Truess

Yes, Josh, this is maybe how I break it down and maybe we'll just work off the top end of the range since it's kind of easier. So you have $0.15 for West Tennessee, $0.05 for DC and then the $0.02 on the revenue side that we mentioned. We picked up a couple of cents on the share count change and then we obviously had to factor in our good performance in the first quarter as well. So when you put all those together, that's how we get from the $2.61 down to $2.45.

Josh Raskin - Lehman Brothers

Okay. So it doesn't sound like there is a change in your expectations for the next three quarters; it was just a little bit better in the first quarter and the share count offset?

Jim Truess

Yes, I mean what we do every quarter is we look at the whole business. We go through every single market and certainly the fact that we are seeing favorable performance in many of our markets, we are very gratified by that and that we expect to continue. But then in other places, we are also careful.

We know that we are still early in the rate season. We are working through some issues there and we are careful about our assumptions. Jim talked a bit about Florida. We are obviously watching that very closely. So we make many, many changes. Some of them might be plus $0.01, minus a $0.01, but on balance, they largely come back altogether.

Josh Raskin - Lehman Brothers

Okay. And then just the $0.15 on West Tennessee, you guys had recorded $10 million in goodwill I believe when you did the acquisition last fall. I assume the entire thing is getting written-off. You haven't done anything before now, have you?

Jim Truess

No, we haven't written-off anything before now. The only thing I would say is the actual goodwill that's on the books is slightly less than that. Some of the acquisition cost was attributed to intangibles and fixed assets and some of that has amortized off a bit since our operations there.

But in total between the two, a little bit, pretty small amount in DC and then the majority of it in West Tennessee. The total amount is $10 million between the two of them together.

Josh Raskin - Lehman Brothers

Got you. Okay. And then just last question, as you think about organic membership growth in your states, I know you guys mentioned in April, you had a little bit of a rebound and it sounds like you got half the Texas membership back. But you didn't mention anything in Georgia. And I am just curious in this economic environment, how do you model or what are you guys thinking in terms of sort of same-store or same-market organic growth?

Jim Carlson

Well, I think sometimes these things are a little counterintuitive relative to the headlines we read about the recession and so forth and what it actually does to these programs. We have been through times like this before. 2003-2004 comes to mind when there was pressure on state budgets. There was obviously recessionary pressures following 2001 and so forth.

So I will ask John to follow on and make a couple of comments about what we sort of expect at the state level and how that informs how we look at the way we go forward.

John Littel

Sure. I think all of our states are looking at what they would call increased organic growth on the enrollment side, not so much huge or an early ramp up, but certainly for this 18- to 20-month period following the pressures on them as they kind of filter down. So I think if you look at a lot of the state budget processes that are going on right now, you see the states sort of building in some expectation for that.

We don't really see the states -- we see the states being more stable I think than in the past with their enrollment processes and I think you see still a lot of opportunities, as Jim mentioned, in the growth where they are expanding the CHIP program and things like that. So I think those things sort of balance out.

Josh Raskin - Lehman Brothers

Again, it sounds like you guys haven't seen anyone sort of playing around with eligibility or anything like that at this point.

John Littel

No, I think there is no evidence that states are deliberately shrinking the size of these programs beyond what their sort of published eligibility levels are.

Josh Raskin - Lehman Brothers

That's helpful. Thank you.

Operator

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

Greg Nersessian - Credit Suisse

Hey, can you hear me?

Jim Carlson

Yes.

Greg Nersessian - Credit Suisse

Okay, great. Just a couple of quick questions. I guess first, Jim, could you just quantify the amount of the Texas experience rebate in the quarter? I guess maybe about the SG&A impact and then the MLR impact in Texas?

Jim Truess

Sure, I would be happy to. Let me put my finger on that statistic here. Sorry, it is taking me a minute to find it here in my notes. We had about $20 million of total favorable development. We had about $9 million of experience rebate. So when you net those back, that was the number.

Greg Nersessian - Credit Suisse

And that is all in Texas?

Jim Truess

Yes.

Greg Nersessian - Credit Suisse

Or the $20 million is more than just Texas?

Jim Truess

It is really that is all in Texas. When you look at the rest of the markets, we had some pluses and minuses. As I mentioned, we had some unfavorable development in Tennessee that we recorded. We had some favorable developments in other markets that largely balanced off, so it was really a net Texas story this quarter. So $20 million in Texas, $9.2 million in experience rebate and a net of about $11 million.

Greg Nersessian - Credit Suisse

Okay. And that experience rebate, is there a timing component of that where you'd typically pay that out in 4Q and 1Q or would you expect to see that kind of every quarter as the prior rolling quarter's experience matures? I guess how do we model that in going forward?

Jim Truess

Yes, you always have a couple of periods that are in play because you do initial calculations and then we do follow-on calculations as you have all the run-out. So we always have a couple of periods in play. We actually paid out a fair amount in the first quarter as we talked about last year. We had a very good performance in Texas again and we are sharing some of that with the states, so we paid out a certain amount in the first quarter. We accrue up some more, so there is always a rolling component to it, but there is a specific schedule on these contract years.

Greg Nersessian - Credit Suisse

I guess you are not guiding to additional-- in other words, if there's another high single digit $1 million payment to the state, that wouldn't be in your guidance?

Jim Truess

What we do in our guidance is we really synchronize our expectations for medical performance in Texas and we synchronize that with any experience rebate that would be associated with that so our guidance is fully included.

Greg Nersessian - Credit Suisse

In that? Okay.

Jim Truess

Yes.

Greg Nersessian - Credit Suisse

Okay. And then secondly, I just wanted to clarify on the Tennessee, I guess the home nursing issue. I just wanted to understand your commentary that that is driving the higher medical costs, I guess excluding those costs -- I guess, one, if you could quantify those costs, it would be great. But excluding those costs, are you saying your MLR would be closer to the 2007 level versus the 100% plus or would it be closer to a mature market level?

Jim Truess

No, I would say that excluding the private duty nursing, it would be more in line with what we would expect for a newer market and so I think that it is interesting what you see in a new market. We have a few categories where things are a little better than we expected, a few categories a little higher. On balance, excluding the private duty, they are very much in line. But I think at a year into the program, we generally don't expect to be down at a mature level for a new market like this.

Greg Nersessian - Credit Suisse

Okay. And then just finally, I'm sorry, the adjustment of the revenue guidance, sounds like it is predominantly the membership. Is there any change in your yield assumptions for the year just based on economic conditions?

Jim Truess

I guess you might say more indirectly in the sense of -- in a couple of the markets, we are expecting a little bit lower mix and then to the extent we have trimmed our Medicare assumptions a little bit, those obviously are high PM/PM members. So it is more membership-driven, but it's changing the weighting a little bit.

Greg Nersessian - Credit Suisse

But no change in your outlook for rate increases from the states based on budgetary issues?

Jim Truess

No, I don't think I would say that. I think we are always looking at all the different states and looking at our experience, looking at what we believe would be actuarially sound rates in the states and then also looking at just being practical about what the budgetary environment is. And so certainly, we are taking into account the situation in Florida and other situations that may exist in other states. So we always update those each quarter if we think an update is appropriate.

Greg Nersessian - Credit Suisse

Okay, great. Thank you very much.

Operator

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

Tom Carroll - Stifel Nicolaus & Company

Good morning. Can you hear me okay?

Jim Carlson

Yes, Tom, good morning.

Tom Carroll - Stifel Nicolaus & Company

Good, want to confirm that. Just actually a quick follow-up on Greg's question there about favorable development in Texas. You said there was roughly $20 million in the market and that basically accounted for companywide when you net some of the other moving pieces. Was that $20 million the majority of the $34 million decline in medical claims payable?

Jim Truess

No, I'd say the decline in medical claims payable was probably in two pieces. So I would say half of it was associated with favorable development and the other half was associated with just getting caught up on a couple of these markets where our inventories were at elevated levels at year end.

Tom Carroll - Stifel Nicolaus & Company

Okay. How much of the favorable development impacted the P&L in the quarter?

Jim Truess

That would be the $20 million that I just mentioned.

Tom Carroll - Stifel Nicolaus & Company

So all of it then? Okay.

Jim Truess

Yes. I mean that is all booked in as a reduction to medical expenses in the quarter.

Tom Carroll - Stifel Nicolaus & Company

Right. I just wanted to confirm that. And then one other thing, on Florida, John, I wonder if you could talk about what is potentially your view of a worst-case scenario there, the budgetary issues in Florida, how that potentially impacts the Medicaid program and what AGP plans to do to manage it?

John Littel

Well, I am not sure it's appropriate or even realistic for me to kind of guess as to what a worst-case scenario is. I can kind of tell you where we are right now and I think it is one of those things where every day you get a little bit more clarity, but that is the process we go through everywhere. It is a tough budget environment in Florida and there are a lot of moving parts there as they try to process about $1 billion in reductions to their Medicaid program.

So the House and the Senate have each passed a budget. They are about pretty different. They have about $300 million in differences between the two. So they are in conference committee right now and they are sort of negotiating those things. I kind of look at it from where do I think we are going to be in a month. Florida has a good history of actuarial soundness and certainly all this puts pressure on the rates, but we also have some potential pickups that Jim mentioned. We had the opportunity to eliminate the MediPass program in a couple of areas, which anything we can do to get rid of the PCCM program I think is a good thing there and a good growth opportunity.

We have the opportunity to expand the long-term care diversion program, which is really an excellent opportunity for companies like ours. And I think on the rate front, we will be looking at how do you combine whatever the legislature's recommendations or funding of rates are with service level changes, program or benefit changes, freezes in provider rates and things like that.

So we will continue to work closely with the state. It is not in some ways dissimilar to New York last year where we were looking at a zero and we ended up little slightly ahead, but it was really kind of offset by freezes in reimbursement rates and actually bringing the trend down. So if we are in a place where there is pressure on rates, we will be working with the states to say, okay, that is all right, but you have to push the trend down by doing these things.

Tom Carroll - Stifel Nicolaus & Company

The follow-up to that I have is on the PCCM business or business or program in Florida, the state would really have to act to move those enrollees over to managed care companies. Is that correct?

John Littel

Correct. Right now, they have counties where there is no managed care and they have other counties where the PCCM program exists concurrently with managed care programs.

Tom Carroll - Stifel Nicolaus & Company

What do you think the traction is of that?

John Littel

Well, I think traction there is -- in the long run, I think there is a commitment by the state to end the MediPass program. I think the Governor has said that; the previous governor said it. I think that what they have been trying to do is make sure that the services match it. So what I would anticipate seeing is if they do push something this year, it would be based on eliminating the MediPass program in places where there are two managed care programs already, two managed care companies so that they don't have to go through any kind of an expansion program or sort of drag companies in, which is exactly what we have been telling them. If you already have managed care in place, you have no reason to run this program. The other thing that they are doing relative to that is looking at potential cuts to the actual per month payment to PCCM providers. So if they go down from $3.00 to $1.50 or $3.00 to $2.00, they are putting more pressure on that program and less interest among providers to participate in it.

Tom Carroll - Stifel Nicolaus & Company

Just lastly, a quick admin. What was your total premium tax in the first quarter '08?

Jim Truess

That was approximately $20 million, $22 million.

Tom Carroll - Stifel Nicolaus & Company

Great, thank you very much.

Jim Truess

Thanks Tom.

Operator

Your next question comes from the line of Daryn Miller of Goldman Sachs.

Daryn Miller - Goldman Sachs

Hey, good morning.

Jim Carlson

Good morning.

Daryn Miller - Goldman Sachs

The $0.15 for Western Tennessee, is that all a 2Q event?

Jim Truess

No, I don't think so. Really the $0.15 -- the change to or the impact on what was built into our guidance really has a couple of pieces. One is the write-off of the goodwill, which we expect to recognize that in the second quarter, but you have to remember that, in our previous guidance, we had expected to have ASO revenue in November and December.

So we won't have that anymore and then we have some transition costs and severance and so the impacts of all of that won't all play through in the second quarter and part of it is going to depend on exactly how we work out all the details on the transition and all that. So I actually can't sit here today and say exactly when all of these pieces will hit and how much will be in the third, how much will be in the fourth, but the goodwill piece and that write-off will be in the second quarter.

Daryn Miller - Goldman Sachs

Thank you. A couple of questions on Texas, what was the MCR in that market?

Jim Truess

Generally, we aren't giving out loss ratios by market, but I think that the experience in Texas obviously is good. It's similar to what we have seen in other quarters and it is better than the company's average.

Daryn Miller - Goldman Sachs

And the favorable development, is that coming from any specific parts of the medical budget?

Jim Truess

It is fairly broad-based. You have to remember, we have many different submarkets in Texas and different parts of the state and they all tend to be performing quite well. We have a very diverse population of members and there is lots of positives across many markets and across different population bases.

Daryn Miller - Goldman Sachs

And did it relate to any quarters more than others? Is it primarily fourth quarter of last year or earlier in the year?

Jim Truess

Yes, it certainly tends to be most significant in the fourth quarter and then tapers and has an impact back in the third quarter and a little bit in -- you just don't tend to have much IBNR when you get back many, many quarters. So you don't tend to have as much of an impact back there.

Daryn Miller - Goldman Sachs

Okay and then one last question on qui tam. You had indicated oral arguments in June. As far as some kind of decision on that, do you have a timeframe of when you would expect to hear back?

John Littel

I just think that is in the Court's hands and we have been sort of conditioned to expect it would take at least weeks, if not months and possibly even quarters to get to a final answer on that. So it really depends upon a lot of factors that are all governed by the Court.

Daryn Miller - Goldman Sachs

Thank you very much.

Operator

Your next question comes from the line of Peter Costa of FTN Midwest Securities.

Peter Costa - FTN Midwest Securities

Hi, I am a little confused on the Texas rebate going forward. Is that something you planned -- you have that included in your numbers to have Texas rebates in there or not because it seems like it is part of why the upside happened this quarter was the Texas rebate. So it seems like it wasn't in your previous guidance, but now it seems like it is in the future. Is that correct or am I somehow confused?

Jim Truess

No, I think you are confused. Basically, our performance was better in the quarter in Texas so we had to record some -- we recorded additional experience rebate and the experience rebate amount that I gave you is the piece that is isolated to the favorable development. So when we say the net impact of favorable development is $11 million, that is being very precise about the value of the favorable development and the value of the experience rebate associated with that favorable development.

We often expect to have -- this quarter, we expensed some experience rebate associated with good performance in the quarter and so that's something we always have built into our expectations if we are projecting that Texas is going to perform at a level where there is going to be some sharing that goes on. If Texas is better than that, then in essence our gross margin will be better and experience rebate will be higher. Does that make sense?

Peter Costa - FTN Midwest Securities

Yes, but then if core Texas was better this quarter, does that imply that you have got more factored in now for future quarters in experience rebates in Texas?

Jim Truess

Yes, we have trued up our estimates and we have trued up our estimates because our trends are favorable in Texas, so our expectations for performance in Texas are updated.

Peter Costa - FTN Midwest Securities

Okay. Thank you.

Operator

Your next question comes from the line of John Rex of Bear Stearns.

John Rex - Bear Stearns

Yes, on essentially the same topic, so Jim, I just want to be clear on how you are describing this. So you think about roughly maybe $10 million of net positive impact in your earnings this quarter from the favorable development. Is that okay to say that if we then net out what you paid back to Texas that runs through the G&A line?

Jim Truess

Yes.

John Rex - Bear Stearns

Essentially when you think about that and kind of the impact and the $20 million on the MCR line, I guess the question is do you want to leave us with the view that that kind of inflates the run rate or do you want to leave us with the view that you put that back in the reserves essentially so it doesn't impact your run rate?

Jim Truess

John, are you thinking of run rate on SG&A?

John Rex - Bear Stearns

I am thinking of run rate earnings and run rate medical -- and I guess then medical costs.

Jim Truess

Okay. Yes, so what we do every quarter, and we did the same thing this quarter, is we really go through each of our markets and we update our projections based on what our most recent experience is, what our trends are indicating and then as we talked about earlier, what our expectations are around membership levels and premium rate increases. So we factor all of those things in.

When you have, as we are seeing in many of our markets, our performance is good and in some cases better than our expectations. To the extent that we feel that that is appropriate and we think that is going to continue, we will factor that into our analysis. The second thing you always have to take into account in Texas is you have this experience rebate model, so you may give some of that benefit back to the state and we obviously factor that into our calculations.

John Rex - Bear Stearns

I guess the point I am getting to is just kind of the implication from what you're saying and I am not sure if this is what you want to imply. If we say you are just kind of getting pricing exactly to trend, there is no favorable development. We know that is not the case. I know that's unrealistic going forward. But you pull out the favorable development. You pull out the Texas experience rebate and you pull out the impact of Georgia in the quarter and you're talking to $0.40 a share run rate. I am not sure that is kind of what you want to -- how you want to portray it or not?

Jim Truess

No, I wouldn't want you to portray it that way and I think here are a couple of things to think about. One is obviously the Georgia thing was a unique event to this quarter and I think that's something that we all expected. It came in a little lower than we previously talked about. But I think you have to remember there is always a range of dynamics that are going on in the quarter. And so the two positive factors we are spending some time on this morning talking about obviously is the Georgia revenue and our good performance in Texas. But we also experienced -- we had a tough quarter in Tennessee and I think we talked about the reasons for that and we also talked about the solution.

So I think if you go down the road of saying I am going to take out the two good things, but I am going to leave in the bad thing, I guess you are basically characterizing the most bear case or kind of pessimistic scenario and so I wouldn't want -- that's certainly not my view going forward and I hope others wouldn't share that.

John Rex - Bear Stearns

Okay. And do you want to update us kind of roughly on how you think about EPS progression now, kind of roughly percentages? I think I know you don't give discrete EPS guidance, but kind of roughly percentages. I assume that has changed a little bit?

Jim Truess

Yes, it has changed a little bit. I think that the normal progression for us, if you look back over history and that could be helpful, sometimes it is not helpful because there is often little issues here and there. But in any case, normally you would expect the first quarter would be our lowest EPS. It would come up in the second and third quarter and then it would just taper a bit in the fourth quarter and that just more has to do with trends and the way rate increases happen for our markets.

The difference this year though I think is obviously the first quarter was up higher than we would normally expect for the reasons we have talked about. The second quarter is now going to be a little bit depressed because we are taking these charges on goodwill for leaving these two markets. That is probably the big difference. I think outside of that, the pattern for three and four is probably pretty conventional.

John Rex - Bear Stearns

Okay. And just one other thing, just color again on the decline in the ABD membership that you had in the quarter, can you explain what that was due to again?

Jim Carlson

John, do you want to take that?

John Littel

It just reflects the planned movement of the SSI ASO population in Dallas-Fort Worth into the non-STAR+PLUS program that we have talked about in the past.

John Rex - Bear Stearns

Okay, thank you.

Jim Truess

One thing I may just add onto that just for folks that want to model that. As John mentioned, that was an ASO population and so I think we've received something like approximately $15 PM/PM for that population or $14 per month. So just for modeling purposes, I wouldn't want folks to think that is a normal ABD member with hundreds of dollars per member per month.

Jim Carlson

Well, folks, everybody is pointing to their watches around here. We still have a few more in the queue, so I am going to ask people just get their one best question in front of us so we can try to get through the queue here. Operator?

Operator

Your next question comes from the line of Gregg Genova of Deutsche Bank.

Gregg Genova - Deutsche Bank

Hi, can you hear me?

Jim Carlson

Yes, Greg.

Gregg Genova - Deutsche Bank

Hi, good morning. I guess my one good question would be -- maybe Ohio. I know we haven't spent any time on it and I know it is pretty small for you guys, but there has been a lot of commentary out there from competitors on higher medical cost trends. Are you seeing that and are you planning on staying in the current markets you are in? And then a quick sneak-in, if you could give the net favorable development in the quarter all-in, I know you've spent a lot of time on Texas, but did the other states wash out to zero?

Jim Carlson

I will take the first half and ask Jim to answer the second half. We are not where we want to be in Ohio, but we are by no means panicky or anything else and in fact, we did record a modest favorable PPD in the quarter for Ohio. Again, you are right. It's something like 3% of our membership. It is performing pretty much the way we expect a new and emerging market to perform. We certainly are watching the actions of competitors and so forth. We are not overly confident, but I do think that we are going to continue to stay in the market, work hard at it, and try to make good opportunity for ourselves there. Jim?

Jim Truess

Yes. And on the development side, we really zeroed in on the $20 million in Texas because that is by and large the net impact. There are pluses and minuses in the other markets, but they largely offset.

Gregg Genova - Deutsche Bank

So is all-in $20 million?

Jim Truess

Yes, that is it. That's very close to the all-in number.

Gregg Genova, Deutsche Bank

Thanks.

Jim Truess

Operator?

Operator

Your next question comes from the line of Carl McDonald of Oppenheimer.

Carl McDonald - Oppenheimer

Thanks. I just wanted to understand, in the second quarter particularly when you are going to take the charge. Are you going to spike that out specifically the amount, sort of give us the option of treating it as a non-recurring item or is that just going to be lumped into SG&A and the D&A?

Jim Truess

That would be helpful. I am happy to spike it out for folks if that would be helpful.

Carl McDonald - Oppenheimer

Yes, I think that would be helpful.

Jim Truess

Okay.

Carl McDonald - Oppenheimer

Thank you.

Operator

Your next question comes from the line of Matt Perry of Wachovia Capital.

Matt Perry - Wachovia Capital

Hi, good morning. I just want to make sure I understand the problems you have run into with the private nursing costs in Tennessee, you expect a resolution in Q2 retroactive to April I guess. Is that resolution built into your future guidance and is the retroactive piece also built into your '08 guidance?

Jim Truess

Yes, it is. And let me be clear on one thing. When we talk about retroactivity to April 1, it is April 1, 2008. So just make sure we are all clear on that. Yes, and we have built that in. We built that into our assumptions.

Matt Perry - Wachovia Capital

Okay, thank you.

Jim Truess

Operator?

Operator

Your next question comes from the line of Bill Georges of JPMorgan.

Kevin Grundy - JPMorgan

It is actually Kevin Grundy on for Bill. Two quick questions for you. First on cash flow for the quarter with that being negative, you spiked out the claims payable and half of that being owed to PPD and the other half I guess due to timing of payments. Can you talk a little bit about the other pieces there I guess in terms of unearned revenue and other current liabilities? And then the second piece, and I apologize if I missed this, did you break out the cash and non-cash on the impairment charges for Tennessee and for DC? Thanks.

Jim Truess

Sure, let me try to take those in order. So on the balance sheet side is the way it flows through to cash flow. On the unearned revenue, we were down and that just really had to do with the timing of a premium receipt in Ohio this quarter versus last quarter and on the accrued and other line, just has to do with timing of premium tax payments, some decline in our expected premium recruitments and then variable compensation payments that happened during the first quarter. So those were items that drove the liability down.

On the second piece, I'm sorry. Can you give me your question, your second piece one more time?

Kevin Grundy - JPMorgan

Yes, you touched on I guess the impairment charges that you're going to be taking for Tennessee and for DC. Have you quantified yet what the cash portion is going to be, what severances and so forth relative to the intangibles you are going to have to write-off?

Jim Truess

Yes, if you put the two together, $0.15 and $0.05 gets you $0.20. We are going to write off, as I mentioned, about $10 million on the D&A line, so it is about $0.12.

Kevin Grundy - JPMorgan

Okay, thank you.

Operator

Mr. Carlson, are there any closing remarks?

Jim Carlson

Yes, Julie, do you want to remind folks of the Investor Day we have scheduled?

Julie Loftus Trudell

It is September 5, so on a Friday, we will be having our Investor Day up in New York City at the Grand Hyatt, so we will be sending out reminders and you guys can RSVP to me as well.

Jim Carlson

Well, great. Well, thanks, everybody, for joining us this morning. We appreciate your interest in AMERIGROUP. Take care.

Operator

This does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!