Good morning, and welcome to the Centene Corporation Fourth Quarter and Year End Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. Now I would like to turn the conference over to Ed Kroll. Please go ahead.

Thank you, and good morning, everyone. I'm Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene Corporation. Michael Neidorff, Centene's Chairman, Chief Executive Officer; and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call. The call is expected to last approximately 45 minutes and may be accessed through our website at www.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 (412) 317-0088 from other countries with the playback number for both phone numbers 10008192. 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 October 25, 2011, 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. As a reminder, you can find our 2012 earnings release dates on our website in the Investor Relations section, and another reminder that our next Investor Day is June 14, 2012, in New York City. Please mark your calendars. And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's Fourth Quarter and Full Year 2011 Earnings Call. 2011 was a very successful year for Centene. I plan to be relatively brief as I believe the results speak for themselves. We delivered another strong financial performance marked by Premium and Service revenue growth in excess of 20%, and earnings per share growth of 23%, excluding the $0.10 charge related to debt extinguishment cost. We also significantly expanded our geographic footprint in 2011. We commenced operations in 3 new states. On January 1, we began serving ABD and Foster Care recipients in Mississippi. In May, we initiated operations in Illinois, serving ABD lives across 6 counties. And on November 1, we commenced operations in Kentucky, providing services to the state's tenants, CHIP, ABD and Foster Care populations. All 3 new states are transitioning well and performing in line with financial and operational expectations. We had a successful $250 million bond offering with a 5 and 3.25 coupon, which is currently trading at 102% at par. We opened a state-of-the-art data center that will support tripling the size of our business. We continue to hire senior management talent to strengthen the organization at both the health plan and levels corporate. We won 6 out of 6 health plan RFPs that we bid for in 2011. These include new states such as Kentucky, Louisiana as well as contract renewals and expansions to existing states, Texas, Massachusetts and Arizona. We ended the year with 181,000 lives in Kentucky, as a result of that 90-day selection period where members could choose a different plan. We expect first quarter 2012 membership to decline somewhere between 135,000 and 145,000 lives. The decline is a result of our product benefit design, which is driven by our…

Thank you, Michael, and good morning. For the fourth quarter of 2011, Premium and Service revenues were $1.46 billion compared to $1.13 billion in 2010, a 29% increase between years. For the year ended December 31, 2011, Premium and Service revenues were $5.18 billion compared to $4.28 billion in 2010, representing a 20.9% increase between years. The increase in our Premium and Service revenue for the fourth quarter and full year 2011 is due to the startup of operations in new states this year, including Mississippi, Illinois and Kentucky, along with the continued expansion of our Florida business, including the Citrus acquisition, which closed in December 2010, the addition of the Dallas STAR+PLUS area in February 2011, and the expanded long-term care contract in Arizona effective October 1, 2011. As we discussed during our presentation in December, we have reclassified certain costs to be more consistent with the NAIC definition of medical costs. This reclassification had the effect of increasing our fourth quarter health benefits ratio by 190 basis points and lowering our G&A ratio by 180 basis points. Reflecting the new classifications, our consolidated health benefits ratio was 85.9% for the fourth quarter of 2011, compared to 85.0% in the fourth quarter of 2010 and 85.0% in the third quarter of 2011. The 90-basis point increase between years and sequentially primarily reflects the inclusion of 2 months operations for the Kentucky health plan. Consistent with our normal reserving practices for new plans, we have established reserves for Kentucky at a higher rate in the initial period of operations. The full year 2011 health benefits ratio was 85.2%, compared to 85.5% for the full year of 2010. The 30-basis point year-over-year improvement was primarily due to the impact of lower utilization experienced throughout 2011, partially offset by the impact of…

Thank you, Bill.

[Operator Instructions] And our first question comes from Matt Borsch of Goldman Sachs.

My first question is if you can talk at all to the experience that you've seen so far in your new Kentucky market. And maybe related to that, any observations that you can give us on volumes as you ended the year. We're just trying to get a sense on utilization trend coming into 2012. And I guess, a question that would drive that a little bit is if you're seeing any change in the birth rate.

Okay. I'll turn some of this over to Jesse in a moment. But obviously, with one month of operations November. In the second month, it's still under development. I would be -- it'd be difficult to trend that with any accuracy. It would be a guess, Matt, so we'll be careful of that. But Jesse can give you some sense of the membership and how we were managing that.

Yes, Matt, it's Jesse Hunter. So Michael referenced the membership and the discipline that we had both in entering the market we've maintained and both with respect to benefit design network, et cetera. So we are anticipating a reduction in the membership volumes as we go into the Q1 in a more normalized level after membership choice, et cetera. I think with respect to the broad utilization, as Michael said, we're not in a position now to have enough data and development to answer that in a meaningful way just yet. But we are booking still at the higher levels, approaching 100%, that type of thing, Matt. So it could be very conservative.

And what about just your most recent look at utilization trend broadly across your market, and maybe related to that the birthrate? Have you seen anything that gives you an indicator of whether it's running about the same higher or lower?

Yes. I will comment. As I said in my script, we see it lower. We see it returning to normal. I will ask Mary to comment in a minute. But -- so things like the flu season when you have very cold winters, we find the flu season is reduced. So there's still a risk that the flu could pick up in this first quarter because we have this unusually warm weather and circumstances that can contribute to that. But with that, I'll ask Mary to...

Good morning. And really -- our medical trends, as Michael said, have really been generally flat and stable. As far as the birthrate, obviously, it's something that we continue to watch closely. We have seen some very slight decrease trends if you look quarter-to-quarter and year-over-year. But really, really nothing that has been a major issue.

And our next question comes from Josh Raskin of Barclays.

Just a quick clarification on Kentucky. You guys said MBR was up 90 basis points year-over-year. Most of that was Kentucky. I assumed something just south of $100 million of revenues for those 2 months, and it trended at like 90%, I get about 30 basis points. So were there other states, or were you guys being even more conservative with Kentucky to start?

Bill, do you want to comment?

I think as it relates particularly just to the fourth quarter, we see almost the entire increase in the HBR attributable to Kentucky. So I'm not sure about your math, but that's what our math is. I think that other than Kentucky, we saw a fairly steady utilization in Q4 compared to the prior 3 quarters. Nothing really changed there dramatically. And so the delta in our mind has been in Kentucky.

I think, Josh, the size of the market that came in would be -- having been an unmanaged market. We're trying to bring an abundance of conservatism to the couple of months as we will in Q1 of this year. We want to be very cautious and be conservative, and we're managing through it and believe we have a team in place that will help normalize the medical loss ratio over the next few quarters.

In fact, with $95 million of Kentucky revenues and a 90% MLR, would that be close to the ballpark for the fourth quarter?

Well, the revenue, Bill, what do we put roughly?

The revenue is probably a little higher, and the HBR is probably a little higher.

Yes, I think -- as I think I've said in conferences and things, I anticipate it will be close to the 100% level in Kentucky.

Okay. Got it right there. And then the second question more broadly speaking, you guys have certainly hired a lot of people. I think your headcount is up 25% year-over-year. You're adding obviously significantly to the top line. I'm just curious, in terms of needs for capital, your RBC, obviously, ratios are still very strong. As you think about some of these RFPs and activities, are you thinking about capital needs? And if so, do you have a preference of debt versus equity or converts?

I think one -- Bill will explain that we don't see any short-term needs with capital relative to the growth. And obviously, we'll always look at the cost of capital, and would debt be where it is. I wondered if you'll consider that. Bill?

We've been looking, as part of our 2012 guidance in planning, and we knew obviously with the expansions that were occurring in a lot of our markets plus some of the additional RFPs that are out there, we've taken a pretty good look at that. And based on our current assessment, we believe that we're well within our boundaries of our $350 million revolver, which was unused at 12/31 this year end. And we have the appropriate levels of capital that we need to fund the growth for the foreseeable future, particularly into 2012 and into 2013 with the opportunities that we're pursuing. So at this point in time, we think what we have will suffice.

And that could include some M&A activities we find something appropriate as well within those numbers.

And our next question comes from Tom Carroll of Stifel, Nicolaus.

I have a question on Washington State. It sounds like you don't have any enhanced clarity on it at this point in time. But let me ask it this way, is it possible that Centene has allocated a block of business in Washington that is too small causing you perhaps not to sign the contract?

Jesse, I mean, we don't see -- do you want to comment?

Yes. I think just generally, Tom, we're not -- we're in discussions with the state right now. So I think it's premature for us to provide a lot of comment. But I think it's unlikely that we would be in a situation where there's membership that would be insufficient for Centene.

Obviously, I mean, I think the insight we have into it says it's clearly -- there'll be sufficient membership for us to not just have a good anchor but continue to grow from.

Just remind us what is the critical mass of membership for premium, or however you want to define it for Centene in your market?

Yes, you can't say into a market. It's going to vary from market to market. If you take the whole state of Texas, it's different then if you look at the state of Washington where the geographic centers are seriously -- Jesse, anything you want to add?

Yes, I think as Michael said, it's not any one thing. But obviously, a number of members is one variable. The categories of members, I think, it's the types of products, if you will, it's particularly important. So you look at the market like Washington where you've got the TANF and CHIP populations. You've got the ABD, SSI population and you've got a hybrid population. I think, that adds additional scale and diversity opportunities that we would take into consideration.

All right. Just one last follow-up related to Josh's question on capital needs. So RBC at 350% plus. In your view in giving your state footprint, how easy or not easy is it to maybe move some of that around as you see new opportunities in markets that are coming up in front of you?

Well, over the years, we have been able to take dividends out of certain operations that particularly are more mature. And we obviously have the need to add capital in new states or in expansion states like in Texas. So all of our dividends are subject to regulatory approval, and we go through those processes and we regularly attempt to make sure that we've got the capital efficiently deployed. And as we said when we've looked at the outlook for 2012 and the capital contributions that are needed to fund our new growth, we feel fairly confident between the case that we generate from our operations and the availability on our revolver that we're in -- we have plenty of the capacity at this point in time.

I think when you look at our bond offering and things, we've structured the company to -- in a very, very responsible and emphasized way to provide for free cash flow. And I mean, that's part of anticipating in management business.

Our next question comes from Charles Boorady of Credit Suisse.

First question on utilization. You mentioned that you expect it to rebound to normal levels in 2012 or at least as we expect in your guidance. I'm wondering if you can quantify for us in terms of how much higher utilization you would expect in 2012 versus 2011 based on the guidance that you have.

I think if you look at our guidance number for HBR, it's 87% to 88%. That is reflective of new markets that we've entered, which where we have higher -- or unusually have higher rates. So that would include markets like Kentucky, Louisiana and the Texas expansion. So obviously, it's to count that increase between years as a combination of reserving a higher rate from some of these new markets plus unexpected uptick in utilization. We have not bifurcated that between those 2 pieces, but all of those factors are built in.

And when you say you expect utilization to rebound to normal levels in 2012, how many basis points higher is that then the utilization you saw on 2011?

Again, we haven't really quantified that. It's built into our guidance number that we've given for the 2012 guidance of 87% to 88%.

Okay, got it. Maybe another way to put it is if utilization does not rebound to normal levels, what's the sensitivity to your earnings to that in 2012?

Obviously, we would expect that if we have favorable trends in HBR that will manifest itself better in earnings and what you got included, but we'll wait till that occurs.

Okay. Let me just switch obviously to Kentucky because I'm not sure I quite caught your comments on that. Are there -- am I right, there's about 40,000 lives fewer in Kentucky that you're walking away from? So is it 140,000 instead of 180,000? Or did I get that wrong?

Yes. That's close.

And the reason for that, was it more cost structure related or the premiums weren't going to be sufficient?

Jesse?

No, I think, I mean, the premiums were consistent with what we had bid originally. I mean, part of our entry into the market was to be, as Michael talked about, the total low-cost producer. And that we had certain assumptions that we made with respect to benefit design and network costs, unit costs, components, and taking all those things into consideration. And we maintained discipline with respect to that strategy. And so what we've seen is you've got -- in a lot of markets, Kentucky included, you've got a member choice period. So during that member choice period, we saw some shift of membership away from the Kentucky Spirit plan, which resulted in what Michael said this was 135,000 to 145,000 expected normalized membership level.

Okay. So this is a member choice move as opposed to a Centene move that caused that reduction?

Well, it's a combination.

No, I mean, think that's right. We said our -- the product design and network composition and all those things in place is consistent with how we bid the contract.

Okay, great. And I would say we're not disappointed. Let me very clear that the design and everything that we've done we believe is consistent with where we would want to be.

[Operator Instructions] Our next question comes from Melissa McGinnis of Morgan Stanley.

Going back to Kentucky a little bit. I'm looking at your segment level MLR results, it actually looks like you saw a meaningful year-over-year improvements in the TANF and ABD MLR, and that was offset by a 790-basis point deterioration in the specialty MLR. I guess, I'm just having a little trouble footing those segment trends with your commentary that the new Kentucky health plan MLR drove the increase in the consolidated metric. Can you help me understand the other moving parts?

Bill?

Sure. I think that the -- when you look at it year-over-year and quarter-over-quarter, the weighting that's given to those individual components can totally -- the mix change can totally be different. So when you look in our detail, we've shown for the fourth quarter over the fourth quarter, we're down slightly in Medicaid, and we're down slightly in ABD. But overall, this had a trend up during the year because we gave the numbers through 3 quarters. We were doing -- there's more favorable operation. We've added significant ABD population in 2011 with Illinois, Mississippi and now Kentucky. And so all of those both being in initial period of operations and the experience resulted in the higher mix change. So from our standpoint, some of that stuff starts to even out over time. For example, Mississippi has now been in there for 12 months. Illinois has been in there for at least 6 months by the end of the year. So we expect that to be returning to, say, normalcy for 2012. But Kentucky in the fourth quarter, we certainly reserved at a higher level than the average of our book of business. And that rate is we expect to continue into the first quarter. So again, when we did the analysis or most of the rest of the book, our book of business evens out and continues at the lower levels that we've experienced during the first 3 quarters, but Kentucky is booking nearly 100% certainly adds in -- results in a 90-basis point increase.

Okay, great. And then just another thing, if you look at your roll forward table, it looks like you actually saw a pretty nice step-up in prior year redundancies from the end of Q3 to Q4. And I know it's a bit tough given that you do rolling 12 month. But can you provide any color on what if any of that represents net development that may have rolled through to health segment MLR?

I think what we're showing in the medical claims roll forward is, at this point, the reserves at December 31, 2010, how they developed over the 12-month period ended December 31, '11. For that, it was a $65 million favorable development. I think if we looked at the prior years, which would have been 12/31/'09 that we reported last year, it was about $68 million of favorable development. So we believe that year-over-year, our development has been relatively stable, and it is obviously never going to be perfect because we're estimating what the ultimate reserve amount will end up being. And we also collect in some recoveries from the coordination of benefits and other things like that to come in after the fact that we have to estimate. So we really don't think there's been much impact as a result of changes in the amount of prior period development. If you recall at the end of the third quarter, it was a little lower at the end of the third quarter than some normal years. But again, that would have been the reserve levels for 9/30/2010 that were being analyzed at that point in time.

I think what's important and the reason I think it's more meaningful to look today and say that at the end of the year last year, we had reserved at a consistent way and maintained that consistency. So all during the year, if we try to talk about reserves this quarter versus earlier, there's still a lot of estimating in there. Today is at the end of the full 12 months gives you a good deal on a rolling 12 that says, yes, they've been consistent. They've been conservative. They've been relatively accurate.

Our next question comes from Chris Rigg of Susquehanna.

Just wanted to follow up on the first quarter comments and the $0.10 to $0.12 start-up cost headwind. Is that the all-in headwind that you guys expect for the quarter? Or does that not reflect conservative reserving in Louisiana and Texas?

The $0.10 to $0.12 we talked about is really just at the G&A line level, which includes the cost to build networks, hire the people prior to starting operations and train them. And so particularly with Louisiana live on February 1, Texas March 1, we've got a large amount of those expenditures that are coming in at Q1, which with the revenue starts February 1 and March 1. And then we are planning to start spend money in Washington also I would add.

Okay. I know you guys don't normally give guidance on a quarterly basis, but is it possible to sort of given the number of moving parts and a significant number of lines coming out in the quarter, give us sort of sense for the type of sequential trend we should expect on that market?

Yes, you're right. We only do it quarter-to-quarter. But I mean, at various conferences I've said that we -- year-over-year, flat would be good, recognizing the new business, recognizing the start up costs. And the other thing I want people to continue to think about is what I said earlier, just kind of a hen so to speak that while we're sitting here and it's -- in the second week of February, let's not presume that there won't be some pickup in the flu season. As we have tended to look over the years that it's really cold. You know how the environment where people are out and flu growth. So we're also anticipating somewhat that there could be a little pickup there as well in the last few weeks of February or early March. So that's about as much as I think we can safely say without getting into a specific Q1 guidance.

Sure. Can you remind us how are you going to treat the new Texas lives? As if you are entering a new state, or will your reserve policy be slightly different for the new business coming online?

Well, we're going to be very conservative on that. Specifically, we need the new virgin areas. And we have to go out of there in that fashion. So it's not a small inconsequential add either as we look at.

Yes. I think it's important to understand that for Texas, there's a number of moving parts and additions that will occur. One is pharmacy, which is added in which is very substantial that is not as much subject to estimation because we know those real dollar costs on a real-time basis. We're carving in inpatient, which is again something that we use inventory method to estimate for purposes of reserving our reserving. And then you've got the new service areas. And the new service areas are the ones where we tend to be conservative in recording the higher reserve levels because we're still trying to make sure we've got a good handle on what the true run rate will be for the level of HBR.

And the next question comes from Scott Fidel of Deutsche Bank.

I wanted to just follow up on Kentucky. And I was wondering if you were able to do any analysis on the 40,000 or so levers, as compared to the 140,000 stayers in terms of their demographic or acuity profile. Just wondering whether you think that you lost some of the higher utilizer or potentially more favorable members relative to the ones you're staying.

I've got to let Jesse add to it. But I think, Scott, if you think about how short a period of time we've had those members, if you try and come into any rational conclusion, it would be difficult.

Yes, I agree. I think it's -- obviously we're working through that process now as we go through our predictive modeling and risk core analysis, all those things. But ultimately, we won't have great visibility on that until we see the claims development over time.

I think when you think about our -- it's going to be interesting over the next 3, 4 quarters whatever, we look at our benefit design there versus the membership we retained, it will probably be some for us going forward in new markets. So there are some real benefits to this the way we've done this.

I guess one way to other put it is if there was any kind of geographic dynamics or urban versus rural with which membership left, and how do you think about that, or is it just simply too hard to tell.

It's really hard to tell. It's mixed across the area. And you have to get into what are the specialties of a particular hospital or group of doctors you have or don't have. I think you really have to wait, look at the larger numbers. So we still have 140,000 lives in the second, third quarter, fourth quarter. Let's see what the benefit design we have who finds it of interest.

Okay. And then just a follow-up question just on specialty cost ratio. I think that popped around 900 basis points sequentially and was up significantly year-over-year. Any particular product lines that affected that, or any new business that you entered into that you're assuming higher cost on just assuming what's driving the lower margin in the specialty business during the fourth quarter?

I think the primary item there is our individual health business. We did have an uptick in the fourth quarter in our HBR in that line, and that's really the primary cause of that increase.

Was that due to MLR accruals? Or did you see higher utilization in that line of business?

That's a smaller book of business for us. But it's generally a low higher utilization plus as you know, the deductibles are used up early in the year. So by the time it's at the end of the year, there's more heavier utilization as people try to get that in before the end of the year.

Okay. And then just one last question just going back to the duals opportunity. And do some of the health plans out there, including one of the larger Medicare MCOs that was discussing their thoughts on the duals yesterday, and we're talking about interest in potentially partnering with Medicaid MCOs if they don't have the TANF platforms in particular states. And just interested in your view on whether you would find it interesting to partner with Medicare MCOs and approach this jointly or whether you think the opportunity is better just doing this on your own.

Yes. I think when we have -- we built the capability to do it, I mean, what we're very sensitive to is the systems the predictive models, the real time because that's where we've been successful with the SSI and have been. So we have the capabilities to do it. And what you're going to do. We've historically always talked about what we've done rather than try and trade on futures. And so I think historically, we've seen we had the capability. We've commented that the ABD, the related-type products, the long-term care, all that, we've had significant growth in. In 2011, we have a demonstrated capability in it. And who we would work with or not work with on various products, let's wait and see. I mean, we don't say no until we have the information to evaluate it. So let's talk about what we've done. I'm not trying to be coy, but that's just always been our mentality. It's so easy to say, oh, let me do this in '13, '14. Well, let's talk about the growth we're seeing right now.

Sure. But it sounds like with your bias be that, you've spent the time to build out all the infrastructure to approach the duals internally. So I guess, returns-wise the opportunity be more significant just doing this on your own or essentially if there's markets that partner with us?

We have the capability to do it on our own. I mean, very strong capability. If there's some particular market we're working with others, I'm not going to say no. But we have to look at it market-by-market. But we're not dependent on somebody anymore than we are on the individual and the hybrid because we have that capability and sold it, which is why we did it to do individual plans, to do the copayments, to do the deductibles, all the system thing that we have learned a lot of this historically. You don't develop very quickly internally, which is why we did the acquisition. We need to see where things we're going. So we have the capabilities. But so we're not dependent and hoping to be able to cut a deal with somebody else. But if it made sense to do so in a particular market, we would.

[Operator Instructions] Our next question comes from Peter Costa of Wells Fargo Securities.

On the Specialty Services MLR, was that all external related? Or did you have a similar issue on the internal MLR, the internal business there?

The individual health business is all external, and so it's all external.

So you did not see the rise for the internal side as well?

No. The internal side, I mean, it's internal the normal fluctuations from coming to common, but overall consistent utilization in HBR levels.

The Louisiana membership you're expecting to gain on February 1, is there a change period on that business, the way there is in the Kentucky business? Or will that come on by the way and stay with you?

So we've got 2 components year for each. There are 3 phases of the implementation. This is a staged rollout. So Phase I for GSA was February 1, and we have corresponding rollouts in 2-month increments, so those will be upcoming. But in each of those individual sessions, there is a member choice period.

And then, the last question on the Ohio pharmacy carve-ins, it looked like they had a fairly big impact on days claims payable. Can you sort of help us size the impact to that overall carve-ins in terms of your revenues and expenses and your margins as well?

Well, we don't really get into the specifics. I mean, it was carved in October 1, so it was in for the full fourth quarter. And obviously, as a contributor both for revenue and earnings. And nothing there that was previously in. So it was carved out around and carved back in. And nothing that you want to comment on I think in terms of any lower level of specificity.

Our next question comes from Scott Green of Bank of America Merrill Lynch.

First, Bill, at investor day, you suggested that 2012 guidance assumed underlying 3% cost trends, but net cost trend of around 0 after medical management initiatives and contracting. Can you tell us how much of those 300 basis points has been achieved to date?

Again, I think that's our number for the year. And at this point in time, there's nothing really that's changed that we give a different number. I think what we've said is we expect the rates to be relatively flat. I think we said plus or minus 1% as you go through market-by-market. And then we do think it's incumbent upon us to do our medical management initiatives to attempt to reduce the level of increases as a result of the work that we do in the management activities. Particularly, we'll see that in the new markets that are going from unmanaged care to managed care. And we'll benefit from the results of our efforts. So at this point, I would say is the same as what we talked about in December.

Okay. But is there a way to say that we've accomplished have of that so far based on the contracts you've already re-signed? We have perfect visibility into half of that, or could you venture some estimate?

I think with respect to unit cost and contracting cost, we're on schedule to do the things that we've thought we were going to do. I think with respect to medical management initiatives, that's always -- you have 11 months to go right now into the year. So it's hard to say we've had a percentage of success with respect to those efforts. But they all are ongoing, and we believe those are part of our regular programs.

Okay. And then second question, not sure I missed this or not, but on the DCP roll forward there was a 0.7 increase related to the timing of claims payments. And given your commentary over the last year about faster claim cycle times, lowering DCPs over time, I was just curious if that was in a unique issue or if that is some reversal of any trend you've experienced over the last year.

I think that's more of a factor that we had for 2 4-day weekends around the end of the year, 1 over Christmas and 1 over New Year. So there was just less throughput at that point in time that we'd have at a normal quarter end. So I think the DCP was a little higher than we would have normally expected to be, say, at the end of Q1 or Q2 because of the holiday schedule.

Okay, all right. That's helpful. And last topic on Kentucky. In your July press release, when you won the contract, you said that we expect 180,000 members. So it appears that something might have changed versus your original expectations. So I was just curious if something has changed since you won the award versus your membership expectations or if all along, you expected to have some member attrition.

Yes, obviously, when we put our initial estimates together that was based on an equal distribution of the membership across the competitors in the selected regions. And so that was where we had expected at that point in time. But what we've seen is some differences with respect to the things that Michael talked about, the benefit design, network comparison things, along those lines, which has resulted in the membership estimate that we're currently contemplating.

Yes, I mean, Scott, what I want to clear is the thing you want to be very clear is where we would like to be on that membership at this point in time, in relation to the benefit design and that's what we put together, and I think it's going to give us some very significant learning over the next 3, 4 quarters, which will benefit greatly as we move forward in the new markets.

Okay. And does your analysis suggest that the attrition is just due to broadly a leaner benefit design versus peers? Or are you seeing any types of members, TANF or ABD or what have you leave to other plans?

Yes. I think as we said before, Scott, it's early, so we don't have perfect information to go through those things, but I think that's -- we would expect that to be a component of it, yes.

Our next question comes from Carl McDonald of Citigroup.

How much of an earnings cushion does it give you with a loss of membership in Kentucky? So I'm assuming for the fourth quarter if you're booking to 100% loss ratio, your combined ratio is probably 108 or 110. Losing that membership in Kentucky would be something in the vicinity of $150 million. So does that free up basically $15 million in earnings, offset by a little bit of fixed cost deleveraging? Is that the right way to think about that?

I'm not sure I follow your math, Carl. But in general, we were booking in the fourth quarter for the 2 months of operation. We booked that at a higher HBR in 98% to 100% range, let's say, not at 108% or 110% or whatever we were quoting.

Right. But including the SG&A component, your combined ratio would have been 108% or 110%, so if you...

We also get benefits from some of the other specialty services that we provide in Kentucky too. So there's some offsetting impacts there. So as the membership fell off into -- in the January, February, I don't think we expect to have much of an impact on earnings at the end of the day, certainly not with the level you expressed.

Yes, the only thing I would add is it's in our guidance. Our membership expectation for Kentucky is what's built into our guidance.

Yes, all right. I guess, I'm just a little confused because I'm not sure you would have known about the lower membership back in mid-December when you originally gave the guidance.

I think we had some insight as to where it was going in December when we -- that's why we constantly say it's in the guidance.

We're well aware of our strategies and what the impact might be on the option period that the members had and where that might go, and so it's been in our guidance all along.

Okay. Just I thought you guided 180 back in mid-December but -- second question...

That was the end of the -- that was December's guidance. December's membership was in our guidance number.

Okay. And a separate question, if you could just talk about the environment in Louisiana, particularly around the member selection. It seems like the 2 non-risk plans have been picking up a disproportionate amount of the membership that's actually chosen the plan. I'm just wondering if you have a sense of why that's happening.

Yes. I think, Carl, it's just the revenue side. New information obviously as we're going through the first rollout. I think, it's not again perfect information with respect to member choice. We're doing -- we're conducting some of our work in terms of talking to our members about the ones that shows and why. So there are variables and differences between the programs, not the least of which is. We've got options between kind of a full managed care program and a managed care light program. There can be differences with respect to the provider community and their appetite for one program versus the other. But I would say when we look at where things are right now and where we are in line with our expectations from a membership perspective for the first rollout in Louisiana.

And there's a follow-up from Tom Carroll of Stifel, Nicolaus.

Bill, you mentioned that one of your states had about $150 million holdback that's going to be paid in second quarter. Would you suggest that, that might be a trend across all your markets? I think if we think back to the old days, that's what states used to do to manage difficult fiscal times.

I don't know if I would call it a trend. There's really one state who's managing their own fiscal issues. And they've indicated that they're going to not make some things in Q1 but expect to fully catch up in Q2. Obviously, we'll have to see how that works out. But we've not seen anything from other states along those lines.

I think, Tom, we've said previously at various meetings that state revenues have been increasing, putting all the settings we've done out there. So I don't think there's any basis to say one state makes a trending with one swallow makes a spring.

No, I'm not suggesting that. I'm just saying, looking for some more insight from you guys.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Neidorff for any closing remarks.

Thank you, and I thank you all for joining us. And we'll see you at the end of Q1. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.