Centene Corporation
Q4 2007 Earnings Call Transcript

Published:

  • Operator:
    At this time, I would like to welcome everyone to the Centene Corp. fourth quarter 2007 financial results conference call. (Operator Instructions) Mr. Ed Kroll, you may begin your conference.
  • Edmund E. Kroll:
    Thank you, operator. Thanks and good morning, everyone. I’m Ed Kroll, Senior Vice President, Finance and Investor Relations for Centene Corporation. Thanks for joining us on today’s call. You should have a copy of the press release we issued this morning. If not, please call Libby Abelt at 212-759-5665 and we will send it to you immediately. Our press release issued this morning includes a table reconciling our GAAP financial statement presentation to non-GAAP amounts. We’ve included that table for comparability purposes, because it allows us to present our 2007 results excluding the previously announced restructuring charge. We will refer to those non-GAAP amounts at various points during this call. Michael Neidorff, Chairman and Chief Executive Officer, and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene, will host this call. Given our need to reschedule to this timeslot on short notice, our call will last no more than 45 minutes so as not to conflict with any previously scheduled conference calls. This call may also be accessed through our website at centene.com. A replay will be available today shortly after this call’s completion by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 outside the U.S. and Canada. The access code for both dial-ins is 34562229. Any remarks that Centene may make about future expectations, plans and prospects, constitute forward-looking statements for purposes of the Safe Harbor provision under Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene’s Form 10-Q dated October 23, 2007, and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so. Finally, just want to give you a heads-up for our 2008 Annual Investor Day in New York City, please mark your calendars for June 3, 2008 and we will have more detail to follow soon. Now I would like to turn the call over to Centene’s Chairman and CEO, Michael Neidorff.
  • Michael F. Neidorff:
    Thank you, Ed. Good morning everyone and thank you for joining this morning’s call. I will briefly review the highlights of the quarter and then turn the call over to Eric for his comment on the financials. Consistent with our policy over the last several quarters, we have other members of our senior management team available to answer your questions. The timing of this call and the circumstances are as unusual as you could expect to find. It is consistent, however, with our approach of providing information as soon as the results are clear. We will return to our normal time for the first quarter call on the fourth Tuesday following the end of the quarter at 8
  • Eric R. Slusser:
    Thank you, Michael, and good morning, everyone. Before I recap the highlights of the 2007 fourth quarter, I would like to point out two of the changes in our reporting format. First, effective with this quarter’s results, we are reporting all activity associated with our former FirstGuard subsidiaries as discontinued operations. All prior periods have been restated to reflect this change. Finally, as we announced on our last earnings call, our HBR and general and administrative ratios are now presented net of premium taxes. Please note that we have provided a table in our press release that shows our quarterly Medicaid and SCHIP ratios on both a gross and net basis for analytical purposes. Revenue from continuing operations grew to $777.4 million, which represents 25.8% growth compared to the fourth quarter of 2006. This increase was mainly driven by membership growth in Texas and Ohio, which are two markets that added SSI products in 2007. Our Health Benefits Ratio, or HBR, in our core Medicaid and SCHIP population was 84% for the 2007 fourth quarter, an improvement of 140 basis points compared to the 2006 fourth quarter, but an increase of 270 basis points sequentially. This sequential increase resulted primarily from pharmacy and other seasonality increases, and an adverse premium true-up with the state of Indiana of approximately $4.2 million. The HBR would have been lower had we been able to recognize the Georgia rate increase in the fourth quarter. The HBR for SSI population in the 2007 fourth quarter was 94.5% compared to 92.2% in the 2006 fourth quarter and 92.4% for the 2007 third quarter. The SSI HBR is higher than we expected due to higher utilization in Ohio. While the utilization in Ohio has contributed to this ratio being out of our guided range, our medical management teams continue to focus on effective case management for high cost members, preventing hospital readmissions and reducing ER visits by providing specialized care to members experiencing behavioral health issues. We remain confident that the medical management initiatives we have put in place, and the more familiar this population becomes with our managed care approach, will improve the SSI HBR in 2008. Turning to our general and administrative expenses
  • Operator:
    Your first question comes from the line of John Rex - Bear Stearns.
  • John Rex:
    Thank you. I just wanted to understand a few more things about how are you thinking about the impact of retroactivity. So, you are essentially seeing $20 million of retroactivity, looks like. And first, I want to just focus on that number and how one gets there. When I think about your Georgia premium revenue base and the quarterly premium, that would imply an effective rate increase of something more like 6% rather than the 3.8%. I’m just trying to understand why that seems like a higher percentage than I’m accustomed to in thinking of that premium base?
  • Eric Slusser:
    First of all, the 3.8% is an average across many different rate sales in the state of Georgia. The other issue is that as part of this new rate amendment, we are required to provide some additional services. And when you take into account those additional services, that bridges the gap between the 6% and the 3.8%.
  • John Rex:
    Okay. So effectively you come to the 6% for your guideline, the top line at least. And then I just want to think about how this looks versus where you had been. If I take essentially adjusting your 4Q report for the benefit of tax rate, so taking the $0.20 to $0.16 for the tax benefit you got, and I bring in half that benefit, so it’s about $0.14 a quarter of benefit. I’m getting to $0.30. I exclude the Indiana impact, I get to $0.36. So that still implies a pretty big miss from the low end of your guidance range, if I just take a half a quarter impact. Or as I recall, the way you configured this, the low end of your guidance range assumed you got the benefit for the 4Q period, but not the retroactivity for the 3Q period. So why does it looks like such a wide miss from your prior 4Q guidance?
  • Eric Slusser:
    I think some of your numbers are right in there. Our previous guidance assumes that we have the full effects of the third and fourth quarter in that guidance for the fourth quarter results.
  • John Rex:
    But not the low end, as I recall, the way you described it; or is the high end assumed the retroactivity all the way back and the low end assumed only for the 4Q. That was the way it’s always described if I recall correctly.
  • Michael F. Neidorff:
    Eric said actually that’s not how we looked at it. I have to avoid these ‘what ifs,’ because there are some very clear regulations on that. So I’ll try and answer as best I can. The guidance had in retroactivity in the range, we also talked about the Indiana, there was a lot of movement in and out, and Eric has tried to help people walk through that. So if you take out that, we also said that some of it was also some higher than expected costs on the ABD population impacted it as well. So when you take all that in when we were forecasting guidance, it was within the range, not at the high end of the range.
  • John Rex:
    No. You were always quite clear, the low end did not include the retroactivity for the 3Q period, only for the 4Q period. You were very clear on that.
  • Michael F. Neidorff:
    That’s not how we saw it, John.
  • Eric Slusser:
    When we gave and reconfirmed guidance in December, the full effect of the third quarter and fourth quarter rate was in that guidance.
  • John Rex:
    Okay. And you just didn’t update us that you have changed it to include retroactivity for the 3Q also at that period, at that point?
  • Michael F. Neidorff:
    Would you repeat that?
  • John Rex:
    So this is the first time that I am hearing in a public forum that the low end of your guidance range assumed retroactivity for the 3Q. This is the first time.
  • Michael F. Neidorff:
    We are saying that the range we gave assumes as recognizing when we gave it in December were the fixed rates, but there are other moving parts in there as well.
  • John Rex:
    But you didn’t tell us that.
  • Michael F. Neidorff:
    We didn’t tell you what?
  • John Rex:
    You did not tell us that the low end of the guidance range assumes retroactivity to the 3Q?
  • Michael F. Neidorff:
    If you and I talk about this maybe offline; we don’t want to take time from everybody else because there is a time constraint. But we gave guidance in total with that in there and guidance takes into it many factors, and that’s why there’s a range.
  • John Rex:
    Okay.
  • Eric Slusser:
    The additional point here is that we had always in our annual guidance had that in there also, and if you take these numbers and get to where that would be with that Georgia rate increase, you will see that the annual guidance would have been in our expectations also.
  • John Rex:
    Okay. So essentially you are saying is we should add back the full $0.28 and the $0.06 from Indiana to get to $0.50.
  • Michael F. Neidorff:
    We cannot comment on a ‘what if.’ I’d like nothing better than (inaudible), but the regs are very clear on what we can say, John.
  • John Rex:
    Okay.
  • Michael F. Neidorff:
    I can’t say, do not determine them. I am not going to...
  • John Rex:
    As an analyst community we are just trying to assess how you performed versus where you had thought you would perform, and so I’m not sure how we make that leap.
  • Michael F. Neidorff:
    I wish the regs allowed us to say more than we can. They are what they are. We have said we believe we had, and I said upfront, a solid performance in Q4.
  • John Rex:
    All right. Thank you.
  • Operator:
    Your next question comes from the line of Greg Nersessian - Credit Suisse.
  • Greg Nersessian:
    Good morning. First of all, I think I have to agree with John here. Your guidance was pretty clear that it did not include the retroactivity in the low end of the range, and in fact the 8-K that you issued in November when you got the rate increase, suggested that you hadn’t even finalized a retroactive rate increase in the third quarter. So I still like to understand that. As I look at the change in the 2008 guidance, is there anything else going on besides the Georgia rate increase in the first quarter that would lead to the $0.28 boost in guidance? What are the other moving pieces? Michael F. Neidorff We are quiet, because we are trying to be very careful. When we say we have spent a day being instructed on what we can and can’t say. It’s our tendency to want to say a lot and we’ve been instructed, that’s why there’s moments of silence because we are trying to think what we could say, Greg.
  • Eric Slusser:
    Greg, the 2008 guidance has been adjusted to reflect the movement of this revenue from the retroactive rate adjustment into our 2008 guidance.
  • Greg Nersessian:
    Okay. And there’s nothing else that you want to highlight in the $0.28 beyond that?
  • Eric Slusser:
    No.
  • Greg Nersessian:
    Okay, fair enough. And then on the restructuring charge, I think you mentioned $12 million, and then was the $9.7 million just the asset impairment?
  • Eric Slusser:
    And the severance.
  • Greg Nersessian:
    The severance is on top of that, or that’s included in the $9.7 million?
  • Eric Slusser:
    Included in that number.
  • Greg Nersessian:
    So you are taking a smaller charge than you originally indicated?
  • Eric Slusser:
    Yes. When we worked through the elements of the severance piece of that, the number came in less than we had estimated.
  • Greg Nersessian:
    Okay. And then the Wisconsin rate, 3.5%, is that net of the pharmacy carve out?
  • Christopher Bowers:
    Yes, that rate increase is net of the pharmacy carve out, correct.
  • Greg Nersessian:
    Okay. So you would have had a much larger increase ex- the pharmacy. Is that going to influence your specialty revenue, your PBM revenue now and your PBM margin? How is that going to impact the cost of services line?
  • Michael F. Neidorff:
    That’s going to be out of there.
  • Eric Slusser:
    Yes. It will impact that business.
  • Greg Nersessian:
    Okay. Roughly how much of pharmacy revenues in Wisconsin did you recognize? How much of the PMPM was pharmacy?
  • Eric Slusser:
    We have estimated that this will have an approximate $50 million revenue line impact.
  • Greg Nersessian:
    Is it the annual or the 11 months?
  • Eric Slusser:
    The impact to 2008.
  • Greg Nersessian:
    Okay. And, then, the Ohio ABD, would you characterize that as the only driver here of the higher SSI MLR in the quarter and what level of confidence do you have in that the rate increases in Ohio are sufficient to get you down to the MLR that you are targeting there, given some less rosy commentary from some of the competitors that are there.
  • Michael F. Neidorff:
    I think two things. One, we still have confidence that if we can manage that population and managed care as a whole program in place as we have done elsewhere, it works effectively. And it was the primary driver; the thing that would have the greatest impact on the shift in the MLR plus our various plans. Secondly, the rate increase alone absent the medical management programs we are putting in would not be enough to bring it down in line; seldom would rates alone do that.
  • Greg Nersessian:
    Okay.
  • Michael F. Neidorff:
    So it’s a combination of the rate increase. That helps obviously, but then we have these other programs. I also want to point out that from our perspective we’ve had them maybe the full 60 days of being able to manage them...
  • Unidentified Corporate Participant:
    Right.
  • Michael F. Neidorff:
    There was a period of time when we couldn’t.
  • Unidentified Corporate Participant:
    Right. There was a grandfather period where we were not allowed to move patients from their current drugs over to our preferred drug list.
  • Greg Nersessian:
    Right.
  • Unidentified Corporate Participant:
    We are able to do that, we were able to get very nice downward trends in pharmacy, same with other services that have been authorized. But now with aggressive case management, aggressive leveling program not only looking at the in-patient, but also looking at the skills, nursing facilities, looking at the rehab days, we are very confident that working together as a team with our specialty companies we will be able to control these costs.
  • Greg Nersessian:
    Okay. Thank you.
  • Operator:
    Your next question comes from the line of Matthew Perry - Wachovia Capital.
  • Matthew Perry:
    Good morning. Just a couple of questions. First, can you go into a little more detail on this Indiana true-up? What exactly was that and will it recur at any point in 2008 or is it done?
  • Eric Slusser:
    No. That was a one-time item that was trued-up in the fourth quarter related to previous quarters and a duplication error that was discovered by the state of Indiana in their premium payment process.
  • Matthew Perry:
    So it’s simply a refund of an over-payment?
  • Eric Slusser:
    Yes, absolutely.
  • Michael F. Neidorff:
    Yes.
  • Matthew Perry:
    Okay. And, then, Texas Foster Care, you are still expecting that to start on April 1. Do you feel like you have very good visibility into that, given the fact it’s been delayed? What am I asking is, what are the chances it gets pushed back?
  • Unidentified Corporate Participant:
    I don’t expect at all that this thing will be pushed back. I will use your terms. We have great visibility into the process at this point in time and we are very confident that we are going to go live with the program and implement on April 1.
  • Matthew Perry:
    Okay. You often discussed start-up expenses and even quantified them for new markets. And I am not quite sure for how long you consider something in a start-up mode. If I look at South Carolina, you have been in there nine months or so. Yet you are talking about start-up expenses in 2008. Can you just talk to me about how you think about that?
  • Jesse Hunter:
    Typically when, like in South Carolina, for example, we included the start-up expenses until we were licensed on a full-risk base. So that’s typically what the cut-off point would be. Once we go live on a full-risk, it will be continuing operations as opposed to start-up operations. So I expect the same to be true for Foster Care as of 4/1. Florida once we start the conversion process, et cetera.
  • Matthew Perry:
    And any discussion around the number of members you might be able to pickup in 2008 in Florida?
  • Jesse Hunter:
    We haven’t talked about that. Our goal is to initiate the conversion processes in 2008.
  • Matthew Perry:
    Okay. That’s all I had. Thank you.
  • Operator:
    At this time, we have no further questions. Presenters, do you have any closing remarks?
  • Michael F. Neidorff:
    We just thank you and I will comment by saying, I am looking forward to returning to 8
  • Operator:
    This concludes today’s conference call, you may now disconnect.