WellCare Health Plans, Inc. (WCG)

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WellCare Health Plans, Inc. (OMI)

Q3 2012 Earnings Call

October 31, 2012 8:30 am ET

Executives

Gregg Haddad - Vice President, Investor Relations

Alec Cunningham - Chief Executive Officer

Tom Tran - Senior Vice President and Chief Financial Officer

Analysts

Tom Carroll - Stifel Nicolaus

Scott Green - Bank of America Merrill Lynch

Melissa McGinnis - Morgan Stanley

Carl McDonald - Citigroup

Matthew Borsch - Goldman Sachs

Josh Raskin - Barclays Capital

Michael Baker - Raymond James

Brian Wright - Monness Crespi

Sarah James - Wedbush

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the WellCare Health Plans Third Quarter 2012 Financial Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Wednesday, October 31, 2012.

I would now like to turn the conference over to Mr. Gregg Haddad, Vice President of Investor Relations. You may begin, sir.

Gregg Haddad

Good morning and thank you for joining us. Today, we will be making forward-looking statements, including but not limited to, our 2012 financial guidance. Various risks and uncertainties such as those described in our filings with the SEC, including our 2010 Annual Report on Form 10-K and 2012 quarterly reports on Form 10-Q, may materially impact those statements. While these risks and uncertainties may cause our future results to differ from today's statements, we are not undertaking any obligation to update or revise any forward-looking statements.

Certain financial information that we will discuss this morning, includes adjustments to expenses related to previously disclosed government investigations and related litigation that we believe are not indicative of long-term business operations. We will identify results that have been adjusted. In addition, please refer to our news release published this morning for supplemental schedules that reconcile results determined under generally accepted accounting principles, or GAAP, to adjusted results.

Our news release is published on our website at www.wellcare.com. In addition, today, we will be discussing medical benefits ratios or MBRs for the Kentucky Medicaid program that are modified to reflect the development of medical benefits payable in the period in which the services were provided. A reconciliation of these non-GAAP and GAAP measures was published in our news release.

Following our prepared remarks, we will address your questions, and we request each participant to ask no more than two questions. Our discussion today is led by Alec Cunningham, WellCare's Chief Executive Officer and Tom Tran, Chief Financial Officer.

I will now turn the discussion over to Alec.

Alec Cunningham

Thank you, Gregg, and good morning, everyone. Today I will update you on our recent activities and our priorities and plans for the remainder of the year. Following that, Tom will discuss the quarter's financial results and detail our updated 2012 financial guidance.

Our third quarter results fell short of our expectations, principally due to an unanticipated issue in Georgia Medicaid and performance that was below our target for the Kentucky Medicaid program.

Georgia results were negatively impacted by a partial disallowance by CMS of the revenue reconciliation settlement that we and the other Medicaid plans negotiated with the state in 2011. The settlement resolved issues with certain premium payments that covered from the inception of the program through the settlement and resulted from a comprehensive review and negotiation involving the three health plans that operate in the program. Our discussions with the state regarding its appeal rights relating this matter are ongoing.

In Kentucky, operating results for the third quarter did not achieve our target due in large part to claims activity dating back to the fourth quarter of 2011 and the first quarter 2012. As you recall, during much of that time, our members were in the contractual transition of care period, and consequently we were not able to manage utilization or other elements of the program as we do now. In addition, we experienced significant membership churn and growth in the Kentucky program during that period.

More recently, as a result of the conclusion of the open enrollment period that ended earlier this month, we anticipate a net membership increase of at least 36,000. Given our uncertainty about these individuals' health conditions and utilization, our outlook reflects a cautious view relative to this membership. As a result of these items, we have reduced our guidance for 2012 adjusted net income per diluted share.

Absent the Georgia revenue issue and our cautious view on the November membership increase in Kentucky, we were tracking toward the lower end of our prior earnings guidance. Our performance otherwise is consistent with our expectations and we will continue to execute effectively on our top-three priorities. I would now like to discuss some of our progress on these initiatives.

We have continued to make meaningful investments in our first priority, which is improving healthcare quality and access. Regarding NCQA accreditation following last spring's strong performance in Hawaii, we are preparing for our Florida review next month. We continue to target accreditation for all of our health plans and anticipate further progress over the next few quarters.

With respect to the recently published Medicare star ratings, while we saw gains in the number of measures, the average of our plans ratings decreased modestly year-over-year. These star ratings are based on 2011 data, so we have known about our challenges for some time and we have implemented targeted initiatives to address them.

We continue to invest in a wide range of activities that are specifically directed to the lower income populations that we serve. Our most recent data indicates progress on closing care gaps and improving operational performance despite the challenges presented by certain characteristics of our membership.

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