Juan José Orellana - SVP of Investor Relations & Marketing Mario Molina - Chairman, Chief Executive Officer John Molina - Chief Financial Officer Joseph White - Chief Accounting Officer Terry Bayer - Chief Operating Officer.

Sarah James - Wedbush Securities Chris Carter - Credit Suisse Josh Raskin - Barclays Mike Meesha - JPMorgan Kevin Fischbeck - Bank of America Brian Wright - Sterne Agee Chris Rigg - Susquehanna Financial Group Ana Gupte - Leerink Partners Tom Carroll - Stifel Peter Costa - Wells Fargo Securities David Windley - Jefferies.

Ladies and gentlemen, thank you for standing by. And welcome to the Molina Healthcare Fourth Quarter and Year-End 2014 Earnings Conference Call. 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 call is being recorded, Monday, February 9, 2015. I would now like to turn the conference over to Juan José Orellana, SVP of Investor Relations. Please go ahead, sir..

Thank you, Ash. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2014. The company issued its release reporting these results today after the market closed. And the release is now posted for viewing on our company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. [Operator Instructions].

As a reminder, given that our Investor Day presentation will take place this coming Thursday, where we will discuss the company’s outlook for 2015. Today we will only be taking questions related to our earnings release.

Our comments today will contain forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report, our Form 10-Q quarterly reports and our Form 8-K current reports.

These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of February 9, 2015, and we disclaim any obligation to update such statements except as required by securities laws.

This call is being recorded, and a 30-day replay of the conference call will be available at our company's website, molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina..

Thank you, Juan José. Hello, everyone and thanks for joining our discussion. I have just a few comments today, but I’ll turn the call over to John who will delve into our financials in greater detail. I’m pleased to report that 2014 was a year of continued success in delivering on our strategic objectives.

When compared with 2013, our revenue grew by almost 50%, our enrollment increased 36%. We expanded our geographic footprint to new markets in South Carolina and Florida. And we achieved greater economies of scale as evidenced by the consistent decline in our administrative cost ratio throughout the year.

Two years ago, at our Winner Investor Day, we shared with investors our plan to nearly double the size of the company by the end of 2015. Our milestones, for the quarter and the year confirmed that we have made considerable progress towards that end but more importantly that our goal is now clearly within our reach.

Last month I had the opportunity to meet with many of our investors at the JPMorgan Healthcare Conference in San Francisco, to talk about the company and our strategy. As I shared in my presentation, the revenue and enrollment momentum that we generated throughout 2014 has carried forward into the first quarter of 2015.

In January alone, our enrollment grew by nearly 200,000 members led by new marketplace and Medicaid expansion lives. While the actual enrollment gains in our dual-eligible plans have been overshadowed by the gains in our marketplace and Medicaid expansion plans.

Let me remind everyone that the revenue impact of one dual-eligible member is comparable to adding almost five Medicaid expansion members or 10 traditional TANF members.

The continued addition of members with dual and long-term services and supports benefits shifts our focus towards more chronic, home-health and long-term care services for these members, and away from nor episodic and acute medical conditions we have seen in our TANF members.

Several years ago, I introduced a chart that nicely illustrated the market segmentation of our business in the form of a pyramid. Today I want to remind all of you that this chart is still applicable as much today as when it was first presented.

While our mothers and children continue to form the foundation of our membership base, we have continued to move towards a more complex care by adding more elderly and disabled members that now include the duals and long-term care beneficiaries.

The implementation of our duals and standalone long-term care contracts will allow us to continue to evolve our model of care for members with chronic medical conditions. While at the same time, refining our operational processes for the duals contracts in Michigan and Texas.

As in aside, our duals contract in South Carolina became operational this month with voluntary enrollment. As I discussed last month during the conference, we continue to expect 2015 to look a lot like 2014. In 2014, we experienced rapid membership and revenue growth requiring the assimilation of new members across all lines of business.

And we expect much or the same this year. While this growth may come with the usual set of growing pains, as we have seen in 2014, it adds tremendous opportunity for us to greatly expand our business. Harnessing this unprecedented growth is a key area of focus for us in the near future.

We’re very excited about the growth that we have seen this past year and with our successes in lowering the percentage of revenue spent on administrative cost. Staying true to the mission of our company and their values has allowed us to navigate through this exciting time.

And we are looking forward to 2015 and to what the future holds for the company. I would now like to turn the call over to John..

Thank you, Mario and hello everyone. Although we did not meet our earnings expectations in 2014, we, did good on many of our commitments to revenue growth and a greater administrative efficiency.

When we see you in New York on Thursday, we will talk more about how our work in 2014 has set the stage for continued growth and improved profitability in the future. Right now though, I want to focus on 2014. Today we reported full year earnings at $1.30 per diluted share on a GAAP basis, or $3.43 per diluted share on an adjusted basis.

This represents an improvement of more than 35% on a GAAP basis from our earnings of $0.96 per diluted share reported for 2013. We reported $3.13 per diluted share on an adjusted basis for the full year of 2013. Total revenues for the year grew by almost 50% compared with 2013, reaching a record of almost $10 billion.

Putting this in perspective, we had more revenue in the first three quarters of 2014 than we had during all of 2013. Five of our health plans now generate over $1 billion in premiums. And two health plans California and New Mexico doubled their revenue in 2014 alone.

This revenue growth was driven primarily by two key factors, significant increases in enrollment and higher premium revenue for many of our members.

The higher premiums per member resulted from our continued transition from a company operating an acute care business to un-serving members with complex care needs that include behavioral healthcare and long-term services and supports. Members with more complex-needs bring with them a higher per-member per-month premium.

2014 enrollment grew to 2.6 million members, an increase of almost 700,000 members over year-end 2013. Membership growth was strong across all lines of business but was driven by Medicaid expansion and the membership added in South Carolina, Illinois and our Acquisition of First Coast Advantage in Florida.

Per-member per-month premium grew by nearly 20% over the prior year, and was primarily a result of new Long-Term Services and Supports or LTSS benefits, now included in our managed care programs in California, Florida, Illinois, New Mexico and Ohio.

As we promised back in February of 2014, we were able to deliver significant improvements in administrative efficiency throughout the year. General and administrative expenses as a percentage of revenue declined to 7.3% for the fourth quarter of 2014, from 11% for the same period in 2013.

For the full year ending December 31, 2014, we experienced an administrative expense ratio was 7.9% versus 10.1% in the same period for 2013. To remind you, the 10-basis point drop in our administrative expense ratio equates to an expense reduction of approximately $10 million or about $0.12 per diluted share directly to the bottom line.

As we discussed last year, we devoted significant resources to infrastructure and human capital investments that were necessary to fuel our anticipated growth. As our new growth business came online during the year, we were able to finally realize the benefits of those investments.

Our greatest financial challenge in 2014 was reflected in the increase in our medical care ratio over 2013. While we were pleased that our medical care ratio actually dropped slightly in the fourth quarter of 2014 when compared to the third quarter of 2014, our medical care ratio for the full year of 2014 was, 240 basis points higher than in 2013.

We attribute the year-over-year increase in MCR to four factors. First, a significant amount of our revenue is now coming in from programs that cover long-term services and supports.

As we’ve discussed in the past, the percentage profit margins for members receiving LTSS benefits are generally lower than those associated with our traditional membership, but the dollar margins are significantly higher.

Second, increases to our base premiums in recent years have not kept pace with medical cost trends, as states it had to balance the need for rate increases with an increasing number of individuals who are eligible for government programs.

Third, a lack of coordination in the design of profit caps and medical cost floors and some of our contracts have resulted in counter-productive outcomes.

And the fourth factor is the inevitable time-lag between the initiation of care coordination and the care management efforts for our members with complex-needs and the realization of financial benefits from those efforts to reduce margins in 2014.

In San Francisco last month, we talked about how we continue to be affected by delays and reimbursement for the health insurer fee in a few remaining states.

We’ve also previously discussed that during the fourth quarter, the New Mexico and Texas Medicaid agencies agree to full reimbursement resulting in the recognition of $30 million in the fourth quarter. We have summarized the still unrecognized health insurer fee revenue for 2014 in the earnings release.

The net amount outstanding from the California, Michigan and Utah Medicaid agencies is approximately $20 million. In other words, had we been able to recognize this revenue in 2014, our EPS would have been higher by $0.26. Finally, I want to highlight our cash position as of December 31, 2014.

The company had cash in investments of around $2.6 billion including approximately $200 million at the parent level. Most importantly cash flow from operations increased significantly to over $1 billion for the year ending December 31, 2014. We will be hosting our Investor Day Conference in New York City this Thursday, February 12 at 12:30 p.m.

Eastern Time. At that presentation we will be discussing the company’s outlook and strategy for 2015. We look forward to seeing you there or encourage that you listen the other webcast. Since we will be discussing 2015 outlook in New York on Thursday, as Juan José said, we will not be taking calls or questions on this subject matter today.

This concludes our prepared remarks. Operator, we are now ready to take questions..

Thank you. [Operator Instructions]. And our first question comes from the line of Sarah James with Wedbush Securities. You may proceed with your question..

Thank you. I was hoping that you could break out some of the out-of-period items in the quarter. It looked like there was about $0.21 of health insurer fee that was the out-of-period benefit and the $0.10 Texas bonus headwind. But I wasn’t sure if there was unusual flu activity. SG&A came in about 20 basis points better than guidance.

I wasn’t sure if that’s just out-of-period revenue or if there is some sustainable improvement there? And then, last, if there was anything going on in Florida related FCA Acquisition like a reserve belt? Thank you..

Hi Sarah, it’s Joe speaking. As with any quarter we have and I could discuss with you four hours, a whole pile of one-time out-of-period adjustments favorable and unfavorable. I think really other than the pick-up from the ACA health insurer fee in Texas and New Mexico, I would say that the pluses and minuses kind of evened out this quarter.

Texas quality revenue continues to remain a headwind. And I think we spoke about that. There is about $19 million or $20 million of that potentially still left on the table that we might be able to realize in 2015, if we get information from the state. And that information indicates we’ve earned the quality revenue.

Again, there is a lot of step back and forth, New Mexico for example is a state. It’s a state with considerable activity this quarter and this year in terms of retroactive enrollment, adjustments to reserves.

I’d say the same thing about Florida in the second half of the year as a result of revenue increases that are going to come in retro to September 1, 2014 that we were able to recognize. So, you’ve seen some out-of-period stuff reflected in those states. And I think it’s meaningful.

But in general, I think you can just look at it in terms of the health insurer fees being the one item..

Yes, Sarah, this is John. This is why we always caution everyone against trying to take a quarter and extrapolate future run rates. That’s why we rather look at a longer period of time, one or two years as opposed to one or two quarters..

Got it. Thank you guys..

Our next question comes from the line of Chris Carter with Credit Suisse. You may proceed with your question..

Thanks, good afternoon. Just wondering if you could give us an update on New Mexico, I know the LTSS members are running access of 100% MLR there last quarter, just curious how that book is tracking this quarter..

It’s Joe speaking again, Chris. I don’t think we’ve seen anything drastically changed about New Mexico. Obviously we’ll talk about that more on Thursday at Investor Day. I would say though that despite what the recorded numbers are showing you, I don’t think there has been deterioration in New Mexico or Florida this quarter.

And there is like just a huge amount of retroactivity with membership and other issues in New Mexico. So, I think what we said last quarter it pretty much stands..

Got it.

And then, just maybe some more commentary on Washington, did you guys get a rate increase there or anything on the ABD book?.

Chris, we’re going to be talking about all the 2015 rates on Thursday..

Okay, all right. Thank you..

Our next question comes from the line of Josh Raskin with Barclays. You may proceed with your question..

Hi, thanks. First question, just on Texas, I think in the press release you talked about the $25.5 million that wasn’t recorded and you said $20 million was lack of information I guess to substantiate the payment.

So, what’s the other $5.5 million?.

Josh, its Joe again. The other $5.5 million is essentially revenue we don’t think we’re going to be able to recognize related to 2014..

Okay.

So you have visibility on that but you just don’t think you hit the matrix or whatever they changed often, and that’s sort of, so that’s normally there?.

Correct..

And then, what about timing for the ACA reimbursement from California, have they given you a timeline as to when they will reviewing this and do they have any rationale for why they are one of the only states that doesn’t believe that this should part of rates?.

Josh, we’re going to talk more about that on Thursday. But California is making progress albeit slow. So there is a light at the end of the tunnel and there is another train coming our way..

Okay.

It’s not something where you feel like you need to start taking legal action or anything like that?.

No. This is Mario. My understanding is that they have submitted something to CMS and they’re waiting approval..

Okay, got you. And then, just last question, I know we don’t want to talk about a specific quarter and extrapolating and I know you’re not going to give guidance for ’15, but that’s our job. So, I have to ask.

The 2014 number, as you guys think about it, how would you break-out the one-time items? Obviously we know the ACAP and we know the tax performance fees. And I guess we can determine whether or not we think taxes, is run rate or not. But I know Joe just mentioned some retroactivity in the quarter.

So, I’m just trying to figure about if you think about what is like the run rate, so getting about 2015 but where do we start in 2014 as sort of a baseline of what you think you’ve earned on a run rate basis?.

It’s Joe speaking. I think it’s, I mean, all-in Josh, I would kind of look to, I would kind of look to what we reported for the full year. That’s all-in, that I think says what our year is pretty well once you smooth everything out I wouldn’t look to a quarter. But I think the full year rate of 89.5% is, that’s our run rate for 2014..

So, this is Mario, I just want to kind of reemphasize what Joe said. This has been a lumpy year because of a lot of timing issues, things like the ACAPs and so forth. New programs coming in, some rate adjustments here and there, retroactive membership, it’s been added to the plan.

So, it’s very difficult to do much with the quarter but I think that to Joe’s point, look at the year-end results. And that gives you a pretty fair picture, smooth out of what the year look like..

Yes, and I was looking more at the EPS number. So, I was thinking about like $1.30 and then Texas, is $0.33 and the un-reimbursed health insurance fee is $0.26.

So, after adjusting for those, do you think that that’s relatively reflective of what you think Molina’s underlying earnings are?.

I would say Josh that’s reflective of what 2014 underlying earnings are. We’re going to speak more to 2015 on Thursday..

Yes, I mean, clearly there are some things like the ACAP reimbursement that hurt us this year that was really outside of our control. If you look at the medical care ratio, it’s about what we thought I was going to come in at when we gave guidance last year..

Okay, all right. Perfect, thanks guys..

Our next question comes from the line of Justin Lake with JPMorgan. You may proceed with your question..

Good evening, this is Mike Meesha in for Justin.

Did the fourth quarter include any one-time transaction costs from the First Coast Advantage Acquisition? And also can you break down sharing the transaction details or expected accretion from the deal?.

It’s Joe speaking. As far as transaction cost, they were pretty minimal..

And how about any transaction details or accretion?.

We brought over 63,000 members in the Jacksonville area, it was an asset purchase in terms of the revenue accretion and it’s probably it’s not material at this point..

Okay.

And does the deal have any sort of skewing effect on the elevated MLR in for the quarter or was that really not much of the factor?.

It’s Joe speaking. If you look at the Florida standalone results for the quarter, yes. Because when we do, when acquisition of that especially in December, the way we book reserves it’s going to be a factor and pushing up the fourth quarter Florida MLR but not consolidated..

And do you have a sense of where the Florida MLR would have been current x the transaction?.

I can’t speak to that but I would just say that given everything that’s happened in Florida this quarter back in New York in September, I said Florida was probably going to run in the low 90s, and I’m standing by that prediction..

Okay, great. Thank you..

Our next question comes from the line of Kevin Fischbeck with Bank of America. You may proceed with your question..

Okay, great. Thanks. I guess, just going back to the Texas if for a second, I guess you didn’t book $5.5 million. How do we think about that number, is that a number where you say well, the number was $32 million annually.

Then you always only collect 90% of it or 80% of it or is that a number that you think you should be consistently getting 100% over what that has been historically?.

This is John. It changes every year because the State of Texas changes, the T for P metrics. So, this year, on the metrics that we got visibility on, we think that we’re not going to achieve 100% compliance. So we think that’s going to result in $5 million get-back. In 2015 it may be different depending on what the measures are on our performance..

But I guess, do you have like a 2013 number?.

Yes, actually there was, I want to say in 2013, there was $4 million or $5 million we were unable to recognize too. So in that regard, it’s been consistent..

Okay. And I guess, I appreciate the fact that from quarter-to-quarter a lot of moving pieces and you’ve grown so much that it’s difficult to kind of look at things on a quarterly basis.

But I guess, just qualitatively as we think about the quarter, there are some books of business that you just brought online this quarter, some books of business that you had for a couple of quarters now.

As you guys think about that normal progression of a company bringing out a lot of revenue, is there any book whether it’s duals or long-term care or whatever is performing not the way you would have thought in a good or bad, is there any clarity you can give around how you feel like qualitatively the progression is coming in? And then if you can kind of break it out between your Medicaid expansion versus core TANF versus duals versus long-term care, that would be helpful?.

Kevin that is a great question and we actually have a slide on that. We’ll be talking about that on Thursday..

Okay, all right. I guess so I look for that. Perfect. Thanks..

Our next question comes from the line of Brian Wright with Sterne Agee. You may proceed with your question..

Thanks.

It seems like since there were some retro membership assigned in both Florida and New Mexico, did I hear that correctly?.

Brian much more in New Mexico, New Mexico has been having retro revenue - I’m sorry retro enrollment additions all year..

And that’s completely separate from your negotiations with regard to the separate minimum MLR by products in New Mexico?.

As far as I know yes, I think it’s just a matter of the state. And everybody in New Mexico has been working hard to get members on so they can get care. And that rolled out during the year and some people were enrolled retro..

I apologize, but did you give us the dollar amount of the negative impact for the byproduct MLRs in certain states like New Mexico?.

Say that again Brian..

Wanted to just know, kind of how much the results were hurt in ’14 by kind of byproduct MLRs in states like New Mexico and sort of like a consolidated minimum MLR?.

Okay. Well, Brian let me speak to, yes, we have a line on our balance sheet for the amount payable back to the states about $527,000 is payable back to the states for various issues. About $390,000 or $400,000 of that relates to Washington, California and New Mexico combined..

Let me clarify Brian, that was $570 million not $570,000..

Okay, thank you. And then if I can just sneak one last one in here.

Way back in ’05 you guys took a run at Georgia, just any updated thoughts?.

So, our understanding that the RFP was released today. And so anytime an RFP is released we evaluate whether we want to proceed..

You have people in the state currently?.

What do you mean by people Brian? You mean, do we have staff there? No..

Okay, all right. Thank you. That’s all I’ve got. Thanks..

Sure..

Our next question comes from the line of Chris Rigg with Susquehanna Financial Group. You may proceed with your question..

Okay. Well, thanks. I just wanted to come back to Florida quickly here on the MLR. I heard a comment about the acquisition but I guess, I believe you got a rate increase on the long-term care side. I could be wrong.

But assuming you did, did things Joe still shape up as you, when you talked about the MLR last fall, did you assume the rate increase in the context of your comments?.

Yes, that’s correct Chris. And there was a rate increase in Florida, back in September ’01 just as a result of timing of communication of that and signing of the paperwork and everything. We weren’t able to recognize any of that increase in 2014. So that’s one reason of why the fourth quarter had such a high MLR.

So, there is a definitive delay and revenue recognition in Florida that’s hurting the quarter..

Okay, all right.

So then I guess, how much would, can you give us a sense for how much the rate increase would have impacted results?.

I don’t have that specifically Chris but I think if we have APU combine that with the impact of the way we book the acquisition, you definitely push down below 95%..

Okay. And then I guess….

I think we’re going nothing below 90s there with all the said and done..

Okay. And then I guess, just on the flip side, California continues to track pretty well here. Any sense for how we should think about sort of, I know this is kind of a 2015 question but just sense about trends going forward, how the state is looking at the rates there? How you feel about rates in California generally? Thanks..

I think California is a real good illustration that we can carry on to places like Florida and New Mexico and Washington. California recognized that it has under-priced specifically the ABD population. And over a period of about two to three years they raised that rate. And as we grew the business, grew profitably.

So, again I think that over the next several years when we’re working with other states on the base rates because the lack of rate increases over a period of time can squeeze margins..

This is Mario. I just want to put in the plug for medical management as well. I mean it’s not simply a passive issue about getting your rate increase. The management team in California did a good job as well of trying to improve the performance of the plan they deserve credit too..

That’s the difference between the doctor and the lawyer in the line of business..

There you go. Thanks a lot..

[Operator Instructions]. And our next question comes from the line of Ana Gupte with Leerink Partners. You may proceed with your question..

Yes, thanks. Good evening. The first question I had was on G&A outlook as you point out. It’s extremely sensitive and much of the bottom line.

In terms of the fourth quarter and in business expansion costs and other things for ’15, was that in any way more front-loaded? So as you’re thinking about 2015, is there likely to be more improvement going forward?.

Ana, you said the word outlook. So, we’re going to get into all of the admin. Remember, we’re going to be bringing on in Puerto Rico and some other of the duals contracts in 2015. So, we’ll go through the whole admin discussion on Thursday..

Okay.

Anything at all on whether or not you had ’15 cost, what was the magnitude of the ’15 cost in the fourth quarter?.

I’m sorry Ana, we didn’t hear that, any magnitude of what?.

Anything you can comment on as far as just how much of the business expansion cost might have been booked upfront?.

I mean, I would say in general they weren’t substantial. When we were in New York, we expected G&A back in January, we said G&A would run about 7.5% on the fourth quarter it’s a hair below that. But year-to-date we’re right basically where we said we’d be.

I wouldn’t, we continue to make good progress on the G&A front but I don’t think there is something, there is huge upside out there beyond what we’ve already talked to you about..

Okay, thanks. Thanks Joe.

On flu and Hep-C, did you say anything about that if you did in your prepared remarks, I’m sorry, but what was the experience in the fourth quarter and as the flu season peaking?.

Sure. So, on the flu season, I think it’s been a moderate increase from last year so 2014 a little bit higher than 2013 but not a lot. And on Hepatitis C, as you know we have been able to reach accommodation with many of our states on some sort of reimbursement mechanism, so that’s mitigated a lot of the risk that we face on the Hepatitis C front.

And the current Hepatitis C utilizations included in our numbers for the quarter..

Okay, thanks.

One last one on, based on claims payables, is where you are right now something that you see as your normalized levels of where you need to be?.

It’s Joe speaking. I would think that over time that DCP number is going to come down. Right now obviously we still have a lot of business, it’s starting. Any claims that we’re associated with the Florida acquisition, very few of those were paid in December because we just started.

So I think, I think over time you’ll see us work our inventories down which will in-turn reduce the days and claims payable as a byproduct of that. I don’t know when that’s going to happen because we got some growth in front of us next year. But I think in general, as we look out over a couple of years that number will come down..

Thanks so much, I appreciate it..

Our next question comes from the line of Tom Carroll with Stifel. You may proceed with your question..

Hi guys, good evening. So I want to come back a couple of things, I want to come back to Josh’s question on run rate and put a final point on it. Joe, you mentioned $1.30 was a good number, but if we add back the $0.26 for the ACA impact, $0.33 for the Texas quality impact, we get to $1.89.

Is that a reasonable number to think about in terms of us now thinking about next year?.

Yes. My thoughts were more on the MCR level. I think we’ve laid it out Tom. I think if you add back in the health insurer fee and a good chunk of the Texas quality revenue that’s where you get. I would just caution everybody that we’re going to be talking again about 2015 on Thursday. So things can change in the course of the year..

So, that considering the $1.89 just for conversation purposes now, and looking out at the consensus numbers that are out there of around $2.51, it implies like 33% growth. And I would think a company like yours seeing all kinds of growth would be fairly comfortable with that number.

Would you feel uncomfortable putting percentage?.

Tom, Tom, Tom, nice try. But that’s you’re asking us to confirm something that we’re going to talk about on Thursday..

All right. What are the things? So let’s go to the Texas quality payment again. There has been some dialogue around this now for a while so I apologize. But relative to the $20 million that you highlight that lacks information.

Is that run-out data that you need from the state in order to evaluate the framework? And I guess what, is your gut feeling in terms of that coming into the company either in first quarter or second quarter of this year?.

So, Tom, this is Mario. This is a very complex calculation. And it depends not only on our performance but our performance relative to our peers. So even if we know how we’re doing on some of these measures, it’s very difficult for us to be able to recognize the revenue because we don’t know where we stand in relation to everyone else.

That’s one of the problems with these new measures that Texas has come up with. If you look at some of the measures we had from 2013, we did not settle that until December of 2014. So, it could take a while before we get clarity on the Texas performance measure that’s still outstanding..

Right, I appreciate that.

But you must have, you have some comfort around the $5 million right, in not being able to capture that?.

The $5 million is really more related to HETA [ph] scores which are pretty easy to calculate..

Okay. So, I guess what’s your comfort level around the $20 million is that, it sounds like there is some risk there still to it.

Is it do you feel like you’re going to get 80% of it?.

I think it’s difficult for us to say at this point..

Okay..

I think potentially we’re going to pick up some of it, but I can’t tell you how much..

If we had insight into that we’d record the revenue or tell you can, we would have recorded the revenue. So right now, we just know enough..

And then, one last one, the tax rate in the quarter seemed a little lower than was implied through the guidance discussions we had all through 2014.

Is that the case you think and if it was why do you have a lower number?.

We’re just going to be talking about tax rates in New York on Thursday but not to steal this thunder. But in general, remember with a large non-deductible, expenses we have, to the extent pre-tax income increases, you’re going to have a decrease in your effective tax rate which is what happened this quarter..

Okay, all right, thank you..

So, you are correct. It would be a little lower than some, it would be lower than some people might have expected..

All right, good deal. Thanks. Thursday..

Thursday..

Our next question comes from the line of Peter Costa with Wells Fargo Securities. You may proceed with your question..

Thanks. And looking at your Texas quality payments for the quarter, they actually went down from the third quarter. You’re expecting to see more coming in from next year.

Can you explain to us why they went down from one quarter to the next?.

It’s Joe speaking. First of all we’re not saying anything about what we expect to receive or not receive what we expect to earn next quarter.

All we’re saying is that of the $25 million of Texas quality revenue related to 2014, $20 million of that was not recognized because we do not yet have the appropriate metrics from the state to assess our compliance.

As far as the actual number, the amount recognized in fourth quarter dropping, that’s because we realized that $5 million was not going to be recognized as a result of some hiatus measures we didn’t hit.

So, again I just want to emphasize, we don’t have visibility right now right now into how that $20 million is going to play out in terms of whether we’d be able to recognize it or not. Right now it’s unrecognized. And we’ll recognize it if we indeed earn the revenue..

So the revenues would have been higher if you hadn’t made the decision that $5.5 million wouldn’t be recognized, is that a fair statement?.

That’s correct, that’s correct..

Okay. And then, can you talk about Hep-C a little bit more in detail.

How many states have carved out specifically vacillating you from utilization of Hepatitis C drugs, so not necessarily included into your rates but created some kind of a car value, there are kick payment or something like that?.

Off the top of my head, I can’t tell you that. But I know that most of our States’ grafts almost all of them have done something to mitigate the Hepatitis C and starting a variety of different mechanisms. So it’s kind of, it’s very complicated. But we do have a fair amount of protection on mitigation, not entirely.

And clearly we don’t have that for the Medicare business on the Part B side. But there are other issues with Medicare Part B. So, I’m feeling pretty good about it now, much better than I did this time last year when we thought this was potentially a budget buster for us, having said that, it’s still a big issue for the states.

And whether they are reimbursing us or paying for fee-for-service, this is something that’s going to put a drag on state Medicaid budgets in the future..

Okay. And then, in your prepared comments, you said 2015 would be a lot like 2014 but then you said it was a year where they’re setting you up for growth and improve profitability in the future.

Did you imply improved profitability in 2015? And if you did, off of what level, off the run-rate you guys were talking about or off of the reported numbers?.

So again, when we get into guidance on Thursday, what you’re going to see is that 2014 and 2015 are going to be very similar. And this is another year of growth for us, picked up a lot of members in January and February through the marketplace. And we continue to see growth in Medicaid. We have the Puerto Rico contract coming in.

And we have some duals contracts that are rolling in so, again, another year of a lot of growth in revenue and membership..

All right, I understand that.

But just regarding the improved profitability in the future, what future are we referring to, after 2015 or 2015?.

That’s 2015, right..

Okay, got it. Thanks much..

Our next question comes from the line of David Windley with Jefferies. You may proceed with your question..

Hi, good evening, thank you.

You’ve addressed for several of the other higher MLR states in your report tonight, overlapped with the state that you mentioned about LTSS and then in case of Washington ABD, do you feel like you have the appropriate programs and resources deployed in states to be able to continue to attack and work down medical cost and MLR? Or are there still investments that need to be made in those states to get there? I suppose the flip side of that question would be, how much of it is rate and how much of it is your execution?.

This is Terry Bayer, I’ll respond to that. First keep in mind that this is the first time that the full long-term services and supports benefit both from a community base and long-term care facility is coming into managed care. And like any new program, it takes time to really develop and execute on the program.

No different, there is a unit cost element but more importantly we’re focused on the coordination programs. One of the benefits of the duals and the Medicaid and Medicare dollars coming together is that by managing the long-term services and supports, we expect to see benefit back on the Medicare side. Remember that the LTSS is a Medicaid benefit.

So, this will not be in place on day one, it takes time to build relationships with the facilities, to get everybody assessed, to get the care plans in place and get it executed before [ph]. But we are really looking at the whole set of services, both the Medicaid and Medicare side..

So, let me just also add to what Terry said, this is Mario. We have been doing Medicare D-SNPs now for nine years. We have experienced with many of these benefits in places like California, Texas and Florida. So, I think we’re very well positioned to deal with these issues going forward. And I think that we do have the appropriate staff and experience.

I think our experience with the D-SNPs has been invaluable and will really help us as we try to combine the Medicaid long-term services with the Medicare program of these combined contracts. So I think I’m pretty confident that we can do this and I think that we’re really well positioned for it..

Thank you.

So, follow-on question there, what are you seeing in terms of Medicare opt-out in the duals, is that leveled off, I mean what messaging actions are you taking around that?.

Well, we told everyone at the beginning of the year that we thought it was going to run about 50%. And it’s been doing that, of course it varies a little bit from one geographic region to another. It depends on things like networks.

Remember if you’ve got a dual eligible beneficiary who is seeing five or six specialists, all you need is the one specialist to say I’m not in the network, don’t stay in that health plan. So, that’s I think part of what contributes to this, part of its network.

The other thing is frankly, the way these things are rolled out, there is a lot of confusion for the beneficiaries. And some of these people dis-enroll before they even find out what the program is all about.

I think that to the extent that we have a longer voluntary enrollment period and more of an ability to explain to the members the benefits of the program, as we’ve done with the D-SNPs in the past, people will sign-up, I think they will see it’s beneficial to them.

But it’s going to take a while and I think some of the people that are opting out now may come around and rejoin us in the future because we will still be responsible for their long-term care services..

Thank you for the answers..

The final question is a follow-up question from the line of Chris Rigg with Susquehanna Financial Group. Please proceed with your question..

Great, thanks for letting me hop back on here. I just wanted to come back Mario, I could have misheard you.

But did you say that you just recognized some quality moneys in Texas from 2013 in the fourth quarter of ’14?.

It’s Joe speaking that’s correct. The amounts were fairly small. But I think there was $300,000 or $400,000 it just got cleaned up in late 2014 related to 2013. I think Mario’s point was there is an extraordinary. There can be an extraordinary tail on the determination of these metrics.

They’re extraordinarily complex in their calculation and require time for them to develop. So while it’s not, that specific item wasn’t financially significant. It does indicate again the tail we have on some of this revenue which really far sees what we even have on claims liability..

All right, great. I just wanted to make sure that it wasn’t something material in the quarter..

Yes..

Thanks a lot..

Yes..

And there are no further questions at this time. I will now turn the conference back to you..

So, it probably doesn’t need to be said but we’re looking forward to seeing you all on Thursday where we’re going to provide guidance and talk about our strategy and outlook for 2015. See you then..