Edmund E. Kroll - Centene Corp. Michael F. Neidorff - Centene Corp. Jeffrey A. Schwaneke - Centene Corp. Jesse N. Hunter - Centene Corp. Christopher R. Isaak - Centene Corp..

Joshua Raskin - Barclays Capital, Inc. Sarah E. James - Piper Jaffray & Co. Chris Rigg - Deutsche Bank Securities, Inc. Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Dana Nentin - Credit Suisse Securities (USA) LLC AJ Rice - UBS Securities LLC Michael Newshel - Evercore ISI Kevin Mark Fischbeck - Bank of America Merrill Lynch Christine Arnold - Cowen & Co. LLC Gary P. Taylor - JPMorgan Securities LLC Ana A. Gupte - Leerink Partners LLC Stephen Baxter - Wolfe Research LLC David Howard Windley - Jefferies LLC.

Good morning and welcome to the Centene Corporation First Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded.

I would now like to turn the conference over to Ed Kroll, Senior Vice President, Finance and Investor Relations. Please go ahead sir..

Thank you, Roco, and good morning everyone. Thank you for joining us on our 2017 first quarter earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer, and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call.

The call may also be accessed through our website at centene.com. A replay will be available shortly after the call's completion also at centene.com or by dialing 877-344-7529 in the U.S. and Canada, or in other countries by dialing 412-317-0088. The playback number for both dial-ins is 10103060.

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 most recently filed Form 10-Q, dated today, April 25, 2017, the Form 10-K dated February 21, 2017, 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. The call will also refer to certain non-GAAP measures.

A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2017 press release, which is available on our website at centene.com, under the Investor section. Finally, a reminder that our next Investor Day will be Friday, June 16, 2017, in New York City.

And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?.

the Freedom Caucus, a group of conservative Republicans in the House, who want a complete repeal of the ACA; secondly, the Tuesday Group, a group of moderate Republicans who are opposed to a simple repeal of the ACA.

They would prefer to see more modest changes and maintain aspects of the ACA, such as subsidies for low income in vulnerable populations and maintaining the current language for pre-existing conditions. And then, the Democrats, who are opposed to the ACA being repealed and replaced, and instead support certain fixes to the current law.

For the process to move forward, any bill will need a simple majority to pass the House. The bill would then move to the Senate, where the Republican majority is thinner. Additionally, any bill that passes the House will undergo a full Byrd Rule scrub in the Senate.

The Senate parliamentarian will have to determine if any of the House provisionings need to be taken out of the House proposal because they do not affect the budget. If the Senate parliamentarian deems too many of the provisions in the House are in violation of the Byrd Rule, the entire bill could lose its reconciliation status.

In either instances, 60 votes would then be needed to pass the bill. As the House tries to navigate a bill that could reach agreement with a more conservative leaning caucus, the Senate would encounter a different challenge. 20 Republican senators come from states that expanded Medicaid, and 16 Medicaid expansion states have Republican governors.

We are confident any bill that could ultimately pass would increase state's flexibility, would include Medicaid reforms that would moderate from the current House proposal.

And any changes in the Senate in regards to marketplace would only enhance what we believe have been positive development in the House bill; for example, giving states additional funds to make healthcare more affordable for those between 100% and 300% of the federal poverty level.

Whether the ACA remains the law of the land or a repeal and replace bill comes to fruition, Centene is well-positioned. Regarding Medicaid, any changes that give additional flexibility to the states aligns nicely with Centene's local decentralized approach.

As to exchanges, we see nothing at this point to prevent us from proceeding with our 2018 marketplace participation. We believe there is bipartisan support for cost-sharing reductions, CSRs. We were pleased that the administration asked the court to keep the CSR payment litigation on hold this past February.

We are aware that both parties are currently discussing CSRs and their inclusion in the continuing resolution, which needs to be passed by the end of the month. Lastly, Centene has demonstrated our agility and capacity to successfully navigate industry changes to the benefit of our members, customers and shareholders.

I understand it is easy to get caught up in the constant noise. However, I believe that it's time to move past the unfounded headline volatility. In the meantime, it's business as usual for Centene. We will continue to focus on fundamentals as evidenced by our strong first quarter results. Now, on the first quarter financials.

We're pleased to begin 2017 with a very strong first quarter, marked by solid top and bottom line growth and robust operating cash flows. Membership at quarter end was 12.1 million members, representing an increase of over 600,000 beneficiaries compared to the first quarter of 2016.

First quarter revenues increased almost 70% year-over-year to $11.7 billion. This was primarily attributable to the closing of the Health Net acquisition. The first quarter HBR improved 110 basis points year-over-year to 87.6%. This was mainly related to the addition of Health Net as well as growth in Centene's marketplace business.

We reported adjusted first quarter diluted earnings per share of $1.12 compared to $0.74 in the same period last year, representing growth of approximately 51%. A quick comment on medical costs including flu. We saw an uptick in flu during the first quarter. The flu appears to have peaked in early March.

Overall flu costs were higher than last year and at the high end of a normal flu range. Importantly, we continue to see as well as anticipate overall stable medical cost trends consistent with our expectations in the low single-digits. Next, the Health Net integration.

March 24 marks Centene's first full year operating as a combined company with Health Net. Health Net has been successfully integrated from a cultural leadership, human resource and financial assistance standpoint. We are achieving our synergy targets in realizing the benefits of greater scale and product diversity.

The claims systems is in the process of being converted to Centene's. We expect the remaining core platform conversions to be completed over the next 12 to 18 months. I'll remind everyone, it's not how fast but how well. We were pleased with the results of the integration and will focus on the combined business on our earnings call going forward.

Moving on to market and product updates. First, we'll discuss recent Medicaid activity. Nebraska, Q1 marks Centene's first quarter operating under Nebraska's new Medicaid program. The contract is performing in line with our expectations. And at quarter end, we served over 79,000 beneficiaries in the state.

A quick note on Centene's pending Medicaid contract start date. The Missouri Medicaid statewide expansion contract is expected to begin May 1, 2017. The Nevada Medicaid contract is expected to commence on July 1 of 2017. The Pennsylvania Medicaid contract is now anticipated to go live January 1, 2018.

And the Pennsylvania long-term contract is expected to begin January 1, 2018. Next, Medicare. At quarter end, we served over 328,000 Medicare and Dual beneficiaries. Q1 was our first quarter operating Medicare Advantage Plans in Centene's Medicaid states.

On January 1, we launched MA Plans in Texas, Georgia, Mississippi and Florida under our four-star parent rate. As I previously stated, we are applying a test-and-learn approach to our first year of MA operations, similar to Centene's initial launch of our exchange product in 2014.

Also similar to our exchange approach, we will be focusing on providing high quality affordable MA products to low income beneficiaries. We will be applying the insights we gain this year with respect to network, plan design and benefits to Centene's 2018 MA Plans. Overall, we expect our Medicare Advantage business to be profitable in 2017.

Now on to Health Insurance Marketplaces. At March 31, we served approximately 1.2 million exchange members. This represents year-over-year growth of over 500,000 beneficiaries, slightly ahead of our expectations. Please note, approximately 80% of our 2016 exchange members renewed their plans for 2017.

It is also important to note the key demographics of these members, including age, gender, financial assistance and metal tier are consistent with our experience over the past three years. Over 90% of our exchange members are subsidy eligible and over 90% are enrolled in silver tier plans.

This includes Maricopa County, Arizona, where Centene is the sole exchange provider. This highlights Centene's continued success in attracting and maintaining our targeted customer segment through effective sales, marketing and member engagement activities. We continue to closely monitor claims utilization patterns.

Thus far, in 2017, we have seen no evidence of unanticipated utilization levels. This, along with the higher than expected membership, allowed us to recognize $0.04 of the $0.20 of conservatism that we included in our initial annual guidance.

As it is still early in the year, we continue to feel it is prudent to include the extra level of conservatism in our guidance related to the business. Jeff will provide further details on this in his prepared remarks. Shifting gears to the rate outlook.

We continue to expect 2017 composite Medicaid rate adjustments of zero to 1%, consistent with the past few years. Separately, CMS recently issued the final 2018 Medicare Advantage rates. They are slightly better than the preliminary rates released earlier this year.

In summary, our strong first quarter financial results set the stage for us to maintain our positive momentum throughout the remainder of 2017. We continue to realize the full benefits of the Health Net acquisition, including those products new to Centene which will drive future growth and greater scale in 2017 and beyond.

We are optimistic about our future and ability to extend Centene's leadership position in government sponsored healthcare. As a reminder, our Investor Day is on June 16 in New York City. We look forward to seeing you then. We thank you for your continued interest in Centene. Jeff will now provide further details on our first quarter financial results..

Thank you, Michael, and good morning. Earlier this morning, we reported strong first quarter 2017 results. Total revenues were $11.7 billion, an increase of 69% over the first quarter 2016 and GAAP diluted earnings per share were $0.79. Adjusted diluted earnings per share were $1.12 compared to $0.74 last year.

As highlighted in our press release issued this morning, adjusted diluted earnings per share for the first quarter excludes the following items. Amortization of acquired intangible assets, the acquisition costs associated with the Health Net transaction, and the Penn Treaty guaranty association assessment expense of $0.17 per diluted share.

In March 2017, a state court issued final liquidation orders with respect to the long-term care insurer Penn Treaty Network America Insurance Company and its subsidiary.

Under state guaranty association laws, certain insurance companies can be assessed for obligations to policyholders of insolvent insurance companies that write the same or similar lines of business.

A small portion of our healthcare insurance, primarily associated with the legacy Health Net business, is written under life and health insurance licenses versus HMO licenses.

As a result and in accordance with the liquidation order, we recorded a pre-tax charge of $47 million during the first quarter, representing our estimated share of the guaranty association assessments as selling, general and administrative costs. I would like to note that this represents an undiscounted amount as the timing and payment is uncertain.

Now to provide more details in the quarter.

Total revenues grew by $4.8 billion year-over-year, primarily as a result of the Health Net acquisition which closed on March 24, 2016, growth in the health insurance marketplace business, the start up of our Nebraska health plan on January 1, 2017; and the start up of the Texas STAR Kids Program in November 2016.

Sequentially, while premium and service revenues increased, total revenues for the first quarter were lower than the fourth quarter of 2016. The decrease in total revenues was driven by the health insurer fee moratorium which suspended the health insurers' provider fee for the 2017 calendar year.

Additionally, the fourth quarter of last year benefited from $500 million of additional revenue associated with pass-through payments from the state of California and $195 million of additional revenue associated with the minimum MLR amendments in California.

These sequential total revenue decreases were partially offset by the growth previously mentioned. Moving on to HBR. Our health benefits ratio was 87.6% in the first quarter this year compared to 88.7% in last year's first quarter and 84.8% in the fourth quarter.

The decrease year-over-year is driven by the acquisition of Health Net which operates at a lower HBR due to a higher mix of commercial business and growth in the Health Insurance Marketplace business in 2017.

Sequentially, the 280-basis point increase from the fourth quarter is primarily the effect of the additional revenue due to the retroactive change in the minimum MLR calculation under California's Medicaid expansion program recorded in the fourth quarter of 2016.

HBR also increased sequentially due to an increase in flu-related costs over the fourth quarter. The Health Insurance Marketplace business continues to perform well. We ended the first quarter with approximately 1.2 million members which is above our initial expectations.

As we have stated previously, the metal tiers enrolled, demographics and profiles of our members are consistent with prior years and our expectations. We continue to be prudent and conservative with respect to our expectations of our marketplace margins.

However, the performance of the 2017 Marketplace business in the first quarter contributed approximately $0.04 per diluted share of the $0.20 per diluted share conservatism we originally included in our annual guidance. This was driven by higher than expected membership and utilization that was consistent with our historical experience.

We continue to monitor claims experience and membership behavior. And as it is early in the year, we believe it is appropriate to maintain the remaining conservatism.

Our selling, general and administrative expense ratio was 9.3% in Q1 this year, excluding the Health Net merger cost and the Penn Treaty assessment, compared to 8.3% last year and 9.9% in the fourth quarter of 2016, also excluding the Health Net merger cost.

The increase in the ratio as compared to the prior year is primarily due to the acquisition of Health Net which operates at a higher SG&A ratio due to the higher mix of commercial and Medicare business.

The decrease in the ratio from the fourth quarter of 2016 is due to a higher level of seasonal costs related to the open enrollment period for the Health Insurance Marketplace business and a charitable contribution to our foundation recorded in the fourth quarter of last year.

Excluding Health Net merger costs, business expansion cost of $0.05 were incurred in the first quarter of 2017. Interest expense was $62 million in the first quarter compared to $33 million in the first quarter of 2016 and $75 million in the fourth quarter of 2016.

The increase year-over-year is due to the financing associated with the Health Net transaction. Sequentially, the decrease is due to the costs incurred for the early redemption of the Centene and legacy Health Net senior notes in the fourth quarter of 2016. Our effective income tax rate was 39.7% in the first quarter of 2017.

The lower tax rate compared to the prior year and quarter is due to the one year moratorium on the health insurer fee. Now on to the balance sheet. Cash and investments totaled almost $10.3 billion at quarter end, including $306 million held by unregulated subsidiaries.

Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level. Debt on March 31 was $4.6 billion, including $100 million of borrowings on our revolving credit facility. Our debt-to-capital ratio was 43%, excluding our non-recourse mortgage note compared to 43.7% at last year end.

We continue to focus on leverage reduction and have reduced our debt-to-capital ratio, excluding our non-recourse mortgage note, by approximately 130 basis points since the Health Net acquisition. Our medical claims liabilities totaled $4.3 billion at March 31 and represents 41 days in claims payable compared to 42 days last quarter.

Cash flow from operations was $1.2 billion in the first quarter. Operating cash flows for the first quarter benefited from increased medical claims liabilities due to market expansions in Nebraska and growth in the Marketplace business and payments received from Medicare in March 31 that related to April services. Turning to guidance.

Our updated full year 2017 guidance numbers are as follows.

Total revenues between $46 billion and $46.8 billion, HBR ratio of 87% to 87.5%, and SG&A expense ratio of 9.1% to 9.6%, adjusted SG&A expense ratio of 9% to 9.5%, GAAP EPS of $3.74 to $4.15, adjusted diluted EPS of $4.50 to $4.90, effective tax rate between 39% and 41%, and diluted shares outstanding between 176.9 million and 177.9 million.

We have updated our SG&A expense ratio and our GAAP diluted EPS to reflect the effect of the Penn Treaty assessment expense. For GAAP diluted earnings per share, the assessment expense was partially offset by an increase for the first quarter performance and a narrowing of the guidance range.

We have increased our adjusted diluted earnings per share guidance range for the year by $0.07 at the midpoint and narrowed the range to $0.40, reflecting the results from the first quarter. As previously discussed, we estimate that the 2017 Marketplace business contributed $0.04 to the $0.20 of conservatism we included in our 2017 annual guidance.

As a result, we continue to maintain $0.16 of conservatism in our annual GAAP and adjusted diluted earnings per share guidance for the 2017 Marketplace margins. Additionally, our earnings are expected to be more heavily weighted to the first three quarters of the year due to the following changes.

First, the delay of the start date of the Pennsylvania contract from the second quarter of 2017 to January 1, 2018. The shifting of the start date pushes the start up costs into the fourth quarter compared to our previous guidance.

Second, the shortening of the open enrollment period for the Marketplace business which compresses all the open enrollment costs into fourth quarter.

And third, our subsidiary, Alabama Healthcare Advantage, ended its agreement as a capital contributor that would've allowed for the company to move forward with this relationship with the five regional care RCOs in Alabama which was previously scheduled to contribute margin and go live in October 2017.

Business expansion costs are still expected to be between $0.25 to $0.30 per diluted share. In summary, we were pleased with the first quarter results and the operating momentum heading into the remainder of the year.

We continue to maintain a conservative expectation associated with the margins in the Marketplace business, pending further experience in the second quarter. That concludes my remarks. And, operator, you may now open the line for questions..

Thank you. Today's first question comes from Josh Raskin of Barclays. Please go ahead..

Thanks. Good morning..

Good morning..

Good morning, Michael. First, just quick one on health insurance exchanges. It sounds like that's clearly running in line. A little bit of a good guy on the guidance, et cetera, so all positive.

What's holding you back on the remaining $0.16? Have you just not seen enough claims information? Or what's the information you guys are waiting for now sort of end of April that's going to change going forward?.

I think you hit it. We have one, two months of claims data. It's performing as we expected. It seemed prudent and reasonable to let out the $0.04 but also to hold the $0.16 until we get another quarter's experience. And then we can let more out as appropriate.

But there's no reason to expect any negativities, just once again, an abundance of conservatism.

Jeff?.

Yeah, Josh, a couple of things. We haven't seen anything in the performance of the membership, the demographics that would indicate that it's performing or will perform any different than it has over the last several years. But one thing to mention is that on the risk adjustment side, we don't have any data from the data aggregators.

So, really, I would say the $0.04, I would characterize a lot of that as a result of membership and underlining claims data. And I would take a pause, I guess, on the risk adjustment because we're waiting for more – or actually any data from the data aggregators that will come in the second quarter..

Okay, okay. Got you. So, by second quarter, you should have a pretty good sense. You won't have the government data but you'll have the consulting data. So I guess we'll know at that point..

Yeah, we'll have two things. Number one, we'll have the final results for 2016. And as you heard Michael indicate that over 80% of our membership reenrolled with us this year. So that will be a confirming piece of information.

And then the second piece is that we'll have the actual data for 2017 using 2017 claims experience from the data aggregators in the second quarter as well..

Okay. And then just second question, RFP pipeline, just curious if there's anything material that we should be keeping our eye on through the rest of the year. And then it sounds like North Carolina is probably a 2018 event but maybe any specific commentary on the timing there..

I think they're still working through the legislative aspects of that and the regulatory things, so it's too early to speculate. I think 2018 is a fair assumption. And we'll continue to work through these other opportunities we see coming. But we'll comment on them as the states release them..

Perfect. Okay. Thanks.

And ladies and gentlemen, our next question comes from Sarah James of Piper Jaffray. Please go ahead..

Thank you. Just a quick clarification here on the guidance.

For the exchanges, if you're able to recognize the full $0.20 cushion, does that put you in line with last year's margin profile? Or would that leave you doing a little bit better than last year?.

I think what we said when we originally came out with the $0.20 of conservatism was that our 2016 book of business was running towards the top end of our margin expectation range which is between 3% to 5% and that the $0.20 really pulled down that expectation by 1.5% at the pre-tax line.

So I would say it's close to the top end of our margin guidance range. But still a little early to tell how it shakes out for the year as far as is it above last year or not..

Got it. And there's been a lot of discussion here (30:20)....

Sarah, if I may, I just want to add, I think everything we're seeing says it's still a very good business..

Right. Yes, Centene seems to be outperforming everyone else in the industry on that front. And there's been a lot of discussion in the industry around the challenges capturing encounter data for risk scores, for new health insurance exchange members because you can't use the script field yet to prove out risk scores until 2018.

Can you give us an idea of how Centene is doing on capturing risk scores for new members? And how do you think about the impact in 2018 on either margins or how accurate your risk scores will be once you're able to use that script data?.

You got that, Jesse?.

Sure. Yeah, Sarah, without getting too far into the details on some of those, I think the best indicator so far is how do we use the information that we have to make our estimates around risk adjustment and related estimates over the course of time.

And I think we've demonstrated that we've done a good job with respect to that and it's been a slight positive since we've gone through our actual versus estimates on encounter. So I think any additional information will just be more beneficial in the future..

Thank you..

And our next question today comes from Chris Rigg of Deutsche Bank. Please go ahead..

Good morning. Apologize for any background noise. Just was hoping for clarification on the comments you guys made about the 1.2 million insurance exchange members. You said 80%, I believe, renewed plans.

Is that – do you guys know, was it 80% of everyone or just 80% of part of that pool? I'm just trying to get a better sense for who's actually (32:09) guys..

We said we increased 500,000 this year. So, go back to the membership of last year, 80% of the people we covered last year in 2016 re-upped with us this year..

Okay, great. And then on the SG&A ratio, for the quarter, you're kind of near the midpoint of your adjusted guidance for the year and then you sort of talked about the fourth quarter related issues.

So can you just give us a better sense for how we should expect that to trend during the second and third quarter? Or do you think you're actually, at this point, given what you've seen in Q1, trending towards the midpoint or towards the high end for 2017?.

I would say that there's nothing unusual about the second and third quarter that would cause that ratio to be substantially different than the first quarter. What I'm mentioning is that in the fourth quarter, because of now the size of our commercial business, we will have a higher SG&A ratio.

So I think if you think about Q2 and 3 relatively consistent with Q1. And then Q4, quite a bit higher because of the open enrollment costs, et cetera, on the commercial business. And I would say similar to what we experienced in last Q4, right, because we had those same costs in the fourth quarter last year..

Okay, great. And then just one quick one on Medicare Advantage. I guess given – you only have three or four months under your belt in the de novo states.

I guess how should we think about that business growth wise heading into next year? Should we think of that as sort of, okay, you got your toe in the water, you're doing okay, and we should expect a more rapid acceleration of membership in (33:52) any color as to how we should think about organic state (33:56) next year?.

I think I'm most comfortable saying we can talk about it when we give our annual guidance. We'll continue to work through, evaluate it. We're looking at entering new states.

And I've commented at some Investor Days and other meetings where while if we've filed for 11 states, it doesn't mean we'll necessarily enter all 11 because we're going to balance the cost of entry so as to maintain the margins while entering new states, so there's a lot of work being done right now.

So it's probably too early to get too directional..

Great. Thanks a lot..

And our next question today comes from Tom Carroll, Stifel. Please go ahead..

Hey there, good morning. Yes, so two questions..

Good morning..

First, Jeff, I just want to follow up on your comment about the quarterly earnings projection as it goes out this year. So I guess my initial thought was 4Q was going to be a little more difficult this year. But then it seems like maybe walk back a little bit and suggested that the quarterly progression this year is going to be similar to last year.

So could you put a finer point on that? I mean, is last year a good source to look at in terms of when EPS is going to come in across the quarters?.

No, no, I think what I'm saying is compared to what we previously kind of indicated first half, second half on the guidance range is that we would now expect the fourth quarter to actually be a little bit lower than what we previously anticipated because of those three items that I mentioned.

And effectively, that shifts back into Q2 and Q3, if you will..

Okay, great. Thank you for that clarification and then another bigger picture question on the Dual eligibles. A larger peer company of yours suggested what I would call a newfound interest in the Duals. I wonder if you could tell us a bit about your Dual business.

Things such as like the average per member per month you have and maybe where the MLR is running relative to your consolidated business.

And as it relates to the pipeline which has a good bit of higher acuity business out there, is Centene looking to really increase its focus on Dual opportunities?.

I think I'll start off and Jeff and others can jump in here. But I've never depended on the Duals for our growth and I've said that from the beginning. It's something we're in and something we do well.

But until the fundamentals of how people dis-enroll and the nursing home issues when things get resolved, I don't see it being a stable and as predictable as other businesses we have. So we go ahead in that context. But we're still very interested there. And we're going to continue to pursue it.

And we're also going to try and pursue some appropriate regulatory changes to help make it more effective.

Jeff, anything that you want to add?.

Yeah, yeah, I mean, obviously, it hasn't been a material book of business for us. But it's running relatively well, I would say, in the low 90%s HBR. And I think the premiums, and I'm just doing this off the top of my head. I think the premiums are roughly a couple thousand dollars PMPM, per member per month, that is..

So you have a higher MLR and as a percent of lower G&A, so....

That's right..

Great. Thank you..

And our next question today comes from Scott Fidel of Credit Suisse. Please go ahead..

Hi, good morning. This is Dana Nentin in for Scott. Thanks for taking the call.

Just given the earlier receipt of some of the April capitation payments in March, can you talk about your expectations for 2Q cash flow? And whether there's any change in your overall outlook for cash flow in 2017?.

Yeah, I – what I'll say is that wasn't the largest single driver. I mean it was a little over $100 million, something like that, of additional cash it received for April service dates.

What's really driving the cash flow in the first quarter is the growth in the Marketplace business and the growth in our – are just base business, specifically Nebraska.

If you think about – we get our premium payments or collect our premium payments in the first month, and on average based on our days and claims payable, we pay those payments out in 42 days. So there's really a cash flow benefit in periods of growth. And so long-term, when you normalize for that, we would expect to be in 1.5, 2 times net earnings.

But obviously, for this year, just because of the growth specifically in the marketplace, Nebraska will probably be above that range..

Okay. Great. Thank you..

And our next question today comes from AJ Rice with UBS. Please go ahead..

Thanks. Hello, everybody. One technical question and then maybe a broader one. The – I guess when you're reporting enrollment for Medicare, you're including that with the Dual eligibles. When I look at the movement last year, you were pretty steady in the enrollment and then first quarter you actually stepped down a little bit.

I'm just trying to understand can you give us some color on actually what your enrollment looks like on Medicare's MA stand-alone?.

Yeah, the stand-alones about 250,000 members, something like that, sorry, 280, 000 members..

Okay, okay..

Stand-alone..

That's great. And then more broadly, on – going back to the exchanges, I appreciate all the questions about – the comments about Washington. It seems like there's a lot of focus on the idea of the cost sharing subsidies and whether they'll maintain those or not.

Do you guys want to weigh in with your thoughts about that? Is that a deal breaker for you? And moving forward on the exchanges, what kind of premium increases will you need if they were to go away. And I will ask you about Maricopa County where you're the only HICS provider versus your other – the rest of your book.

Do you see any difference in the profile of members in Maricopa versus the profile that you get in the other places where you have multiple competitors..

I'm sorry that I was interrupting. I'll start with Maricopa. I see the same profile basically. There's no difference in that profile from our other members. We knew that going into it, looking at the – what was there.

Two, as it relates to the CSRs and what's happening in Washington if anything, my – somebody has a speaker on – with a lot of background, okay. I think what the big issue is, it has a long way to play out and we're convinced there's bipartisan support for the CSRs. So nobody wants to take this population and put them on the street.

Effectively, doing away with the CSRs would eliminate the affordability of the product we make. I don't think it's going to happen..

Okay. Great. Thanks a lot..

And our next question today comes from Michael Newshel of Evercore ISI. Please go ahead..

Thanks, guys. Good morning. I've got a quick follow-up on exchanges.

How much risk adjustment are you guys booking as a percentage of premiums? And is that similar to what you did last year or is it more conservative?.

Yeah, I'll just give you the dollars. In the first quarter, for the 2017 Marketplace business, we recorded over $300 million of risk adjustment as a payable. And we expect for the year that will be over $1 billion. And if you recall last year, we had about $425 million recorded at the end of the year..

Got it.

So like – so roughly speaking, in terms of percentage of premiums pretty similar compared to the growth of exchange membership?.

Yeah, that's correct..

Yes..

Got it. And then just another quick follow-up on the Health Net plans subject to the PDR last year, specifically on the California PPO product.

Is that tracking towards breakeven? And are you seeing the lower out of network charges and behavior changes that you expected it (42:46)?.

I'll take that. As we said earlier, we don't see any PDRs this year on that business. And we have a – we see it performing as expected. And from a medical loss, from the membership, every aspect of it. The changes we put in place are achieving what we expected..

Okay. Thanks very much. I appreciate it..

And ladies and gentlemen, our next question comes from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead..

Hey, thanks. I just want to go back to the comment that you made, Michael, about exchange participation for 2018 I think you said that there's nothing at this point that makes you want to rethink that because of patients.

Are saying that you kind of expect to be in a similar number of counties and states next year or is there a plan to move that up over time?.

I think we wait – as it moves along, we always look at adding. And I think what's important is that – what I was trying to convey, Kevin, is that, like last year, I said it's business as usual. And I believe that's going to really prove out to be the right thing. And I'm saying the same thing that we have the agility, the ability to adjust.

And so as things unfold, I see nothing out there that's going to change it to where we would not participate. If something changes, we'll adapt to do or what we have to do as we historically have. So but if we are evaluating other markets to expanding, yes..

Okay. And then as far as MA goes, obviously, it's an area of growth for you guys over the next several years.

I guess, year-over-year, the MA membership was down I believe, can you talk was going on there?.

Well, I think Jesse will talk about..

Yeah, I think, Kevin, this is Jesse Hunter. So a couple of things.

The biggest kind of single item on the MA front we've talked about this a bit before was the group retiree business associated with some companies that are based in the West Coast so kind of legacy Health Net customers if you will that were kind of expanding their footprint more broadly.

So that was kind of the most impactful on kind of in the category of membership attrition. And I think as we've talked before, as we expand our footprint and have more geography and more focus around organic growth opportunities, you'll see that trend changed starting in 2018..

Okay. Great. Thanks..

And our next question today comes from Christine Arnold of Cowen. Please go ahead..

Hi, there. One question on the Medicaid and one of the public exchanges. First on the public exchanges, can you give us a sense for how your per member per month profitability progressed in 2016? So I'd imagine first quarter was a profitable. But how much deterioration do you usually see. And I'm trying to put that $0.04 in the context of the $0.20.

And then with respect to Medicaid expansion dollars, if we don't get a health care bill, are we safe? Or could they try to make you to pay for in a tax bill.

Michael, how are you thinking about that?.

In terms of Medicare expansion?.

Yeah..

I think until they revoke the – adjust it, repair it to whatever action they take. I'm trying to think of the right words, repeal and replace is what I was trying to think of. Until they repeal and replace, I think it's going to be business as usual on the Medicaid expansion. There's one state, I think, that's been talking about pulling back on it.

And that could happen here from time-to-time. I know there were several states with Republican governors that would like nothing better than expand it. And we regret that their legislation is never had.

So I'm not thinking about making a whole lot of changes as 20 Republican senators that come from states that have expanded Medicaid, as I said in my script. And so I think that is a long way to play out. I see it, it may make – it could move into the exchange product and just what the subsidies are.

There's various alternatives being talked about, but nothing that would leave these people without effective insurance..

Okay.

And then what about the progression of losses on individual in 2016 per member per month? Can you give us a sense of that, so I can put the $0.04 in context with the $0.20?.

Yeah, I think it's – well, I mean the first point is, I think, it's hard to put the $0.04 in context with the $0.20 using the quarter progression because for what we said earlier, was that we're really still waiting on information on the risk adjustment, right.

And we just said that the risk adjustment payment is going to be – could be in excess of $1 billion for the year. So I'm not sure that those 2 would relate. But as a traditional commercial business, the majority or more of the earnings will be in the first half of the year..

Okay. Thank you..

Today's next question comes from Gary Taylor of JPMorgan. Please go ahead..

Hi, good morning..

Morning..

Hi. I have a conceptual question and then I want to shift gears and ask a question about Illinois.

My conceptual question is, Michael, when you think about the number of states that are requesting Medicaid waivers to either view work requirements or implement premiums or Wisconsin recently also proposing drug testing, do you have enough experience in states like Indiana that have done waivers to have a viewpoint on how those sorts of requirements would impact enrollment as well as mix and margins?.

Well, it really has – if I take Indiana where we played an important role in the implementation, and Chris, you can jump in here and add to it. We saw no ill effects from it. We did well and we were supportive and if anything, the business build and became very constructive.

Chris?.

I would agree with you, Michael. One of the things that we saw, Gary, was the fact that, actually, when you started to look at some of the data and such that the health outcomes actually improved, actually more than we had anticipated that they might, and that we looked at it as a real good program for the beneficiaries.

We didn't really see anything negative as far as bringing on the requirements that the state brought in (49:47) program..

And I'd add we're very decentralized in our approach to these things. So we can adapt to what any particular state wants relatively easy from a systems standpoint and what have you..

Okay. Thank you. And then my second is just on Illinois with the potential re-bid there for 2018, but also the consolidation of contract in MCOs that the state is proposing by as much as half. I guess maybe just two part question.

First is, how do you feel you're positioned in Illinois? How confident that Centene emerges as one of the remaining health plans? And part two, do you expect an outright rate reduction for 2018?.

So I think there's a two-part answer to that. One, I think we're well positioned. Secondly, do we want to continue to go forward in Illinois? And that's going to be a function of what the rates are and the profitability of it.

So, as we see what the rate bands are and we go through the actual assessment, we're going to make a business decision as to whether or not to pursue Illinois. We have a strong network. We have statewide a lot of places where others have pulled out recently. They're asking us to contract with them.

So I think this thing has to play out over the next two, three weeks. And I'll focus on and Jeff will and Steve and the whole financial team, Chris, on the actuarial studies that say is it going to be profitable..

Okay. Fair enough. Thank you..

And our next question today comes from Ana Gupte of Leerink Partners. Please go ahead..

Yeah, hi, thanks for taking the questions. Just wondering if you know broadly the loss ratio that you have, if you can give us some color by segment, Medicare, legacy Health Net, and more broadly in the new markets. And then, where you ended up in exchanges.

Is it still in the mid-80s, and then where are you on Medicaid as far as the expansion population and then the more complex populations? And any directional sense there?.

Yes. I want to clarify one thing. We're not going to talk about legacy Health Net anymore. Health Net is now a California plan and going forward, it's just one of our states. And they understood it's fully integrated and all the systems are integrated.

So, to look at what legacy is versus now is something that, culturally, we're not doing and thinking about as a company. But the others (52:50), Jeff, you can jump in..

Yeah, I'll talk about the biggest books of business that we have, so I'll break it down into Medicaid and commercial. I think what you'll see for the first quarter is – and I think you would traditionally see this every year, which is a little bit higher Medicaid HBR really driven by flu.

And then, you'll see a lower commercial HBR, really, just because that's the way the commercial product performs with deductibles, copays, et cetera, et cetera. So I think for the first quarter, we definitely experienced that. I think that was in line with our expectations..

Okay. And then going forward, just directionally, when you think about how this will all play out going into 2018, just up or down, I know you're not guiding or anything here.

And how should we think about normalized loss ratios? Do you see improvement here? Will it be flat on a net basis?.

Yeah, I'm not going to comment about 2018 HBRs. I mean, I think we're comfortable where our guidance range on the HBR is today. And really what's going to drive the HBR on a going-forward basis is the mix of products that we have..

Exactly, we're going to – it's actually an evolving mix..

Okay. Great. Thank you..

Thank you..

And our next question today comes from Justin Lake of Wolfe Research. Please go ahead..

Hi. This is Steve Baxter on for Justin. Thanks for the questions. Can you talk about what you're seeing as far as rates go in the Medicaid expansion population? Our general understanding across the industry is that rates have normalized here some, putting pressure on results a bit in 2017.

I guess, first, can you talk about what you're seeing in 2017 and what your guidance includes in terms of potential rate adjustments that have not yet been announced? And do you expect any incremental pressure here as you move into the second half of the year that we would need to think about annualizing for 2018?.

Yeah. I think – well, take the first one at the top. I think in our rate range guidance of 0% to 1%, that's all encompassing, right, for the total business, so that would include Medicaid expansion. And so, in general, if you take it at the aggregate level, we're still anticipating between 0%, to between 0% and 1% rate increase for the year.

We have, over time – the Medicaid expansion has been around quite a long time. So, a lot of states have already normalized margins. So, what I would say is any adjustment on Medicaid expansion is already included in our aggregate 0% to 1% composite rate expectation..

Okay.

So, your margins you'd characterize as being pretty comparable from 2016 to 2017 for that business?.

Yeah. Now, what I will tell you, I mean, just one thing to note is if you recall last year, we did talk about the California Medicaid expansion was like an 11% decrease, but it had no effect because there was a minimum MLR rebate.

So, to some extent, you have to take those programs in combination, but yes, I would say consistent is – on a net basis, consistent is true..

Okay. That's fair. Yeah, I guess, it just begs the question when you're talking about an 11% rate decrease on having an impact on your actual results. It seems to imply you're still further at the top and what the caveat on the range there. So, that was, I guess, the basis for that question.

Do you think California is in a good place now and is it going to continue reasonably going forward?.

Well, I mean, I will just state what I said before, I think in aggregate, it's in our 0% to 1% and that's consistent with the last three years. I mean, we've had between 0% and 1% for the last three years..

Okay. So, following up on the question about the Health Net PDR issues from last year, appreciate the comment that it's running in line with your expectation for this year.

I guess how does that fit relative to what you'd hope for longer term for these businesses, because I'd assume that you still might be looking for some improvement there over a longer period of time?.

Well, I think what we've done is we looked at it, and I think the next issue is growing that business. And we're putting the time and energy in working with the state to take the actions that we'll grow. That's the single biggest issue. We scaled it. The mix of the recipients is appropriate. There's a good balanced mix of recipients.

The in-patient cost is down. So, every aspect of it is delivering as we expected and the issue now is growth..

Okay. And one just last question, numbers wise. Membership for ABD and Long Term Care was up about 40,000 sequentially. My impression was that Nebraska was mostly a low-acuity population, but maybe I'm mistaken there. I was just wondering if you could help us understand what was driving that sequential increase..

Oh, you're talking sequential, right?.

Yeah, sequential. Yeah..

Yeah. Nebraska does have ABD and SSIN and LTC or – yeah, yeah. Yeah, it's in....

(57:47).

ABD, excuse me..

Perfect. Okay. Thank you..

Thank you..

And ladies and gentlemen, our final question today comes from David Windley of Jefferies. Please go ahead..

Hi. Good morning. Just a quick couple of revenue follow-ups. Your first quarter run rate, first quarter annualized looks to be higher than your guidance, which you reaffirmed.

Is the, say, attrition, for lack of a better word, is that exchange attrition anticipation or perhaps share of wallet issues in Georgia? Or are you just kind of running conservatively on the guidance? Thanks..

I would say, well, there is exchange – sorry, there's a lot of feedback here. There is exchange attrition in the number. Additionally, there were a small amount of pass-through payments in the first quarter. I mean, as you're aware, those are very lumpy.

But in general, I would say exchange attrition is – the first quarter will be higher because of the – that's the maximum amount of members we have in exchange business..

Okay. And then, a small number but the service revenue number was down a little bit.

Anything going on there?.

Nothing unusual. I think they're from comparing Q4 to Q1, there was a lower amount of volume in the VA business with respect to the appointments that we take there for the health care coverage, but nothing outside of our expectations..

Okay. Thank you..

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Neidorff for any closing remarks..

Well, I just want to thank everybody, and we look forward to seeing you on June 16 at our Investor Day in New York. And we also look forward to the second quarter earnings call. Have a good quarter..

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..