Centene Corporation (CNC)

CNC 
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Centene Corporation (CNC)

Q3 2012 Earnings Call

October 23, 2012 8:30 AM ET

Executives

Ed Kroll – SVP-Finance and IR

Michael Neidorff – Chairman, President and CEO

William Scheffel – EVP and CFO

Analysts

Peter Costa – Wells Fargo Securities

Chris Rigg – Susquehanna

Ralph Giacobbe – Credit Suisse

Joshua Raskin – Barclays Capital

Sarah James – Wedbush

Justin Lake – JP Morgan

Scott Fidel – Deutsche Bank

Carl McDonald – Citigroup

David Windley – Jefferies & Company

Brian Wright – Monnes Crespi & Hardt

Scott Green – Bank of America Merrill Lynch

Michael Baker – Raymond James

Presentation

Operator

Good morning and welcome to the Centene Third Quarter 2012 Earnings Conference Call. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll. Please go ahead.

Ed Kroll

Thank you, operator and good morning, everyone. I’m Ed Kroll, Senior Vice President, Finance and Investor Relations for Centene Corporation. Michael Neidorff, Chairman and Chief Executive Officer; and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene Corporation, will host this morning’s call. The call is expected to last approximately 45 minutes and may also be accessed throughout our website at Centene.com. A replay will be available shortly after this call’s completion also at Centene.com or by dialing 877-344-7529 in the U.S. and Canada or from other countries 412-317-0088. The playback number for both dial in, both replays is 100 188 06.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene’s Form 10-Q dated October 23, 2012, today and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. With that, I’d like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Michael Neidorff

Thank you, Ed. Good morning, everyone and thank you for joining Centene’s third quarter earnings call. This morning I will provide an update on the issues discussed at our June Investor Day and on our second quarter earnings call. I will then briefly discuss our quarterly results and certain macro issues, before turning the call over to Bill for detailed financial results.

Let me begin with Kentucky. Our focus has been and will continue to be one that our members receive the highest quality of care by the most cost-effective means. Two, that our provider networks receive fair compensation. Three, the plans meet statutory financial requirements. And finally, our shareholders receive a fair return on the capital employed.

We are proud of the positive improvements in health care outcomes we achieved in Kentucky. These include a 94% decrease in doctor shopping for narcotics; a 53% increase in hemoglobin A1C testing for diabetes; a 30% reduction in pharmacy costs; a 30% decrease in one-day hospital admissions; a 30% increase in well-child visits; a 23% reduction in hospital re-admissions and a 17% decrease in medical surgery costs.

In our two decades working with states, this is the first time we have failed to achieve a partnership with a state. We have experienced significantly higher than expected medical cost in Kentucky. This is due to an unprecedented amount of retroactively assigned members. Secondly, fraud risk adjustment methodologies, thirdly, policies that are inconsistent with a successful managed Medicaid program, and finally, significant data book issues.

We have tried to work with the state on these issues and while Kentucky has offered some changes, they were not enough to cover the higher than expected costs. I might add that this is not only Centene’s issue. It is our understanding based on statutory filings that the three plans combined lost just under $300 million in the first half of 2012. We believe this raises serious concerns about the sustainability of the program. Our Kentucky experience has taught us to be cautious with states that are, using managed care for the first time.

Yesterday, we filed a lawsuit in Franklin Circuit Court against the Commonwealth of Kentucky seeking declaratory relief as a result of the Commonwealth’s failure to completely and accurately disclose material information. As expressed in our press release, we will use and exhaust all available administrative and legal remedies to ensure the review of our grievances with the state. We believe we have a strong case, but will not comment further while these legal matters are pending.

Next, let’s discuss Texas. Our Margin Improvement plan for the Hidalgo expansion area is proceeding as expected, including the increased STAR+PLUS business we took on in the last two months of the quarter. Our HBR in Hidalgo is tracking in the mid 90% range. Our medical management efforts have gained traction, and we continue to move towards normalizing margins in Hidalgo in 2013. We previously indicated that we expected a 3.7% state-wide rate increase. Due to member mix, we received 4% effective September 1.

Now for an update on Celtic, in June we reported a high level of medical costs in our Celtic individual business. Our corrective actions to improve performance included a new national network contract, which took effect July 1. We are also putting in place targeted rate increases in the second half of 2012. Our HBR has improved from over 100% in Q2 to the high 80s in Q3. I would remind you that our Hybrid Celtic business in Massachusetts is performing in line with expectations and is not experiencing the same margin pressures we have reported in the balance of the Celtic book.

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