Welcome, and thank you for standing by for the Third Quarter 2014 Earnings Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Renie Shapiro.

Good morning, and thank you for joining us today. This is Renie Shapiro Silver, Senior Vice President of Corporate Finance for Magellan Health. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin. They will discuss the financial and operational results of our third quarter ended September 30, 2014. Certain statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown uncertainties and risks, which could cause actual results to differ materially from those discussed. These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2013, and in the current quarter’s Form 10-Q, which will be filed with the SEC on or shortly after today and will be subsequently available on our website. In addition, please note that on this call, we refer to segment profit, adjusted net income and adjusted EPS, which are disclosed and defined in our quarterly report on Form 10-Q. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses, and includes income from unconsolidated subsidiaries but excludes the segment profit or loss from noncontrolling interests held by other parties as well as stock compensation expense. Adjusted net income and adjusted EPS reflects certain adjustments made for acquisitions completed after January 1, 2013, to exclude noncash stock compensation expense resulting from restricted stock purchases by sellers as well as amortization of identified acquisition intangibles. Segment profit, adjusted net income and adjusted EPS referred to in this call may be considered non-GAAP financial measures. Included in the tables with this morning's press release are the reconciliations from these non-GAAP measures to the corresponding GAAP measures. We encourage you to review such reconciliations for an understanding of how they compare to those GAAP measures. I will now turn the call over to our Chairman and CEO, Barry Smith.

Good morning, Renie, and thank you, all, for joining us today. The third quarter of 2014 was a pivotal time for us as we made our vision of becoming a leader in special population health management a reality. Through Magellan Complete Care of Florida, the country's first and only Medicaid specialty plan for individuals with serious mental illness or SMI, we built upon our experience and strength in managing vulnerable populations to create a new model of care, which addresses the whole individual. With respect to our financial milestones, we had a strong quarter and are on track to complete the year with segment profit in the range of $243 million to $258 million. For the third quarter of 2014, we produced adjusted net income of $35.2 million, adjusted EPS of $1.30 and segment profit of $62.2 million. Third quarter net income was $27.1 million, and EPS was $1. For the 9-month year-to-date period, we produced adjusted net income of $73.4 million, adjusted EPS of $2.66 and segment profit of $183.7 million. For the 9-month period, we had an income of $57.8 million and EPS of $2.09. We ended the quarter with $390.8 million of unrestricted cash and investments. Regarding our share repurchase program, we had nearly completed our current $300 million authorization. Through Tuesday, October 21, we repurchased approximately 5.1 million shares in this program for a total cost of $277.7 million at an average price of $54.43. Since our first authorization in July of 2008, we have repurchased approximately 22.5 million shares for a total cost of over $1 billion. As of October 21, we have approximately 27.3 million shares outstanding. This week, our Board of Directors authorized a new share repurchase program of up to $200 million over a 2-year period. This program demonstrates our continued commitment…

Okay. Thanks very much, Barry, and good morning, everyone. Net income and EPS for the third quarter of 2014 were $27.1 million and $1 per share, respectively. This compares to net income of $47.2 million and EPS of $1.70 for the third quarter of 2013. Regarding our non-GAAP measures, adjusted net income for the third quarter of 2014 was $35.2 million, and adjusted EPS was $1.30 per share on a diluted basis. For the third quarter of 2013, adjusted net income was $47.2 million, and adjusted EPS was $1.70 per share. The decrease in adjusted net income between periods was mainly attributable to a higher effective tax rate and higher depreciation and amortization expense in the current year quarter. The difference in tax rates reflects the impact of a lower level of tax contingency reversals in the current year quarter than the prior year quarter, while the increase in depreciation and amortization expense is due to growth and acquisitions. Our segment profit for the third quarter of 2014 was $62.2 million compared to $59.2 million for the third quarter of 2013. This increase is primarily due to stronger results in commercial and pharmacy management, partially offset by terminated contracts and certain favorable onetime adjustments for block bonding in the prior year quarter for public sector. Revenue in the third quarter of 2014 was $923.2 million, which was $49.6 million higher than the third quarter of 2013. This revenue increase resulted primarily from the inclusion of Partners Rx and CDMI revenue in the current year quarter and the impact of new business, same-store growth and rate increases, which were partially offset by the loss of revenues associated with terminated contracts. Regarding the ACA health insurer fee, our full year expense will be approximately $21 million. We currently have agreements with 6…

[Operator Instructions] The first question is from Matthew Borsch from Goldman Sachs.

Yes, I'm sorry if I missed this, but can you just go over the factors that drove the sequential decrease in the Commercial segment revenues?

In terms of year-over-year, Matt?

Well, relative to the prior quarter.

Yes, the big -- included in the prior quarter, the biggest item was a previously announced termination that we had in that segment that was effective at the end of second quarter.

Right. Okay. Okay. Got it. And can you tell us what you think the timing is on -- I think you said 2015, you expect for the full year for MMC to be profitable. Can you give us any sense on when you're projecting that? Is that in the first half or the second half?

Honestly, Matt, in terms of the calendarization of it, it's a little bit early for me to give you kind of a precise turning point. But I would say is, obviously, with Florida and AlphaCare being the big drivers on a few things, one, we do expect MLR improvement, as I mentioned, in Florida pretty much on a sustained basis over the next several months as we really are able to ramp up fully our care management initiatives. And then secondly, with AlphaCare, I think we noted in the script, we really expect that business to get to scale at some point in 2015, and there, as of now, the states plans are to go live 1/1/15 with the FIDA program, this is the dual-eligible demonstration program with auto-enrollment happening in April. So a lot is going to be based on do those dates [indiscernible] and is the timing of scaling that operation according to plan. But what I would say is I'd expect, certainly, first quarter to be an improvement over what we're seeing over the balance of this year and then sequential improvement as we get into the second and third quarter next year.

And, Matt, just to add to that to underscore the importance of the timing of the FIDA program in New York, I don't know what's happening on 4 1 [ph]. The revenues PMPM go from $4,000 just for the Medicaid with an additional $2,000 with the bio-clinical program for Medicare. So $6,000 PMPM. So it has a material impact when that goes live in New York.

The next question is from Dave Styblo from Jefferies.

Can you -- leave off with John's comments at the end of the prepared remarks, but about putting into context what solid segment earnings growth is for next year. I know you guys will elaborate on that in December, but that's still a pretty open-ended statement. So I'm hoping you can give us a little bit more color. Perhaps are we talking something that's going to be in the double digits range or something less than that?

Yes. At this point, Dave, again, we're not -- we haven't completed the plan. So I can't give you kind of a precise number. But I would say, again, that we do expect the growth to be material next year. And we've talked about some of the drivers. I think you can sense that, especially with the turnaround in MCC that we do believe that it will be meaningful. But beyond that, at this stage, again, we're giving the directional commentary now. We will, in mid-December, give you much more specificity on the numbers.

Okay. And then turning back over to the Florida SMIs. I know it's still really early in the process, but I'm wondering if you can maybe help drill down on a couple of different cohorts that rolled on, specifically maybe that first cohort in July. Is there any more detail that you have on them? Are they trending to 100%? Or would they be -- is there activity you're able to already perform with them in terms of care management and help them to start to pull that down already? Or just more granularity on that would be helpful.

Yes, yes. Unfortunately, David, I mean, we'd all love to have a lot more data at this point, but the reality is for a large portion of the claims, we still are really dealing with a combination of leading indicators and underwriting assumptions. So it's very hard yet for us to have enough data even to break down the cohorts as you're describing. But to give you some sense, pharmacy data, we've got very complete claims. So we have a good sense for it, and that's right in line with our expectations. The plus side is on outpatient. We really have very little because things aren't preauthorized and pay claims now really are only about 1/4 of what our current accrual is. Now on inpatient, we do have preauthorization data. But even the process of having complete preauthorization data as we're ramping up takes a little bit of time. There's a lag in working with providers and getting things into our system. So even with the July cohort, only being a couple of months old, the actual data is so incomplete that we're still dealing with the best information we have and is available but still dealing with things on an estimated basis. So I hesitate to have soft precision at this point. But as we get into the next quarter, into next year, we should have much better data and be able to break some of those things down for you.

And, Dave, Barry here. Just to add to Jon's good comments here. On the pharmacy piece, again, as Jon mentioned, the costs are pretty much in line with what we anticipated. We know that others had, had some challenges with the pharmaceutical piece. This is something we do very well. We have been running the states of PDL already. We're very familiar with the formulary, and we have great expertise in the pharmacy. That's important in these populations because they have sometimes at least half to 2x the drug spend. So having that expertise is critical for us, and thus far, it's worked out well for us.

Sure, okay. If I could squeeze one more in on your commercial margins there. Even if I back out the favorable development, it still looks like it's north of 20% and, again, higher than what I think you guys would even think about for a long-term range. What else is going on in there that's driving elevated margin performance?

Yes, in Commercial -- I mean, just into the prior period development, Dave, we also had some other onetime items, including customer settlements. If you were to look at the MLR sort of on a true operating basis, kind of backing out the onetimers, we'd be in the low 70s this quarter. So still a very, very good quarter. But the recorded MLR of around 65% is lower than what that true run rate is. So think about it sort of in the low 70s as being the normal run rate that we're seeing this quarter, which, again, is still quite good.

The next question is from Carl McDonald from Citigroup.

I was hoping that you could give us a year-to-date total for how much you think the out-of-period items have added to EBITDA.

On a year-to-date basis -- honestly, Carl, I don't have the year-to-date number at my fingertips. But you're -- it's not a really big number. I mean, it's probably in the range of $15 million-ish on a year-to-date basis, most of that in this quarter.

Okay. Great. And then on the Florida business, you mentioned loss ratio getting better over the next few months and next few quarters. Any sense for what's incorporated into the guidance, sort of how much of an improvement are you anticipating?

Well, if you think about -- when we talk about guidance, you talk about for the balance of the year, Carl?

Yes, exactly.

Yes. Well, again, our expectation is that we ramp up, especially on inpatient where we can have the biggest impact on the precertification and managing length of stay. We expect that there is the opportunity for sequential improvement each quarter. Having said that, we're not banking in our guidance on any material improvement from third to fourth quarter.

Got it. Okay. And then just the last question I had was you mentioned the Florida revenue being roughly 5% lower than I think you'd talked about last quarter. So was there a commensurate offset to the medical expense?

Carl, when you talk of the 5% lower...

So I think, last quarter, you talked about the per member per month being about $1,050 a month, and it sounded like this quarter was going to be closer to [indiscernible].

I think we gave a range of like between $10,000 and $15,000 last quarter. And we just sharpened it knowing what the risk adjustors were and getting the actual data from the states to $12,000. So it really wasn't, in our view, a meaningful change. It was just being a little bit more precise.

The next question is from Ana Gupte from Leerink Partners.

Just again following up on the Florida medical loss ratio and maybe asking the question a different way. On the $0.70 per dollar that you've been talking about, is that $0.70 on the medical dollar for behavioral health than pharmacy? And in your booking -- I know it's all estimated at this point, the 100% loss ratio, how does that compare with what the fee-for-service population was observing?

Thanks, Ana. On the 70%, I think what we've said historically is that for the SMI population within Magellan prior to building out the physical mess of networks, we internally could manage $0.70 of every dollar. That's been a real advantage, of course, because we work with this population, the BH side. We have unique and particular expertise in the pharmaceutical world. And so that's what we were saying historically. As it worked out to be that, obviously, in our experience with Florida. Jon, on the...

Yes, on the second thing, and this is not overly precise, Ana, but I would say in general, again, we would -- we'd be planning long term to have the MLR closer to 90% than 100%. I'd say in very round numbers, 100% probably assumes about our management capabilities being at about half of what they'll ultimately be. So if you think of fee-for-service population, we'd probably be maybe 10% higher than where we are now. But ultimately, we see still good opportunity. Part of it is just timing. We spent a lot of time really implementing the program. The enrollment working with providers, and now we're at the point again where we really feel we have the ability to ramp up our management capabilities and have kind of the impact going forward.

Ana, one additional comment is that the [indiscernible] provision for continuity of care for those individuals who are already in a health -- in an inpatient setting, for example, in a care plan, and there's a specific time for an enrollee that we maintain that care plan, after which we can implement our care plan and plan our management process. So that also has an impact as these enrollees have been layering in month after month. We'll be able to manage those more appropriately going forward.

So what I'm hearing you say is that it's 10% higher for fee-for-service. You're expecting a 90% loss ratio over time. So currently, what you have booked in the 100% then, does that bake in all the savings from pharmacy, which you have distinctive capabilities you're seeing relative to fee-for-service? And if so, then is your estimate conservative at this point, do you think, on the remaining 30% or so that you're booking for inpatient based on pre-ops, and you don't have visibility into outpatient?

Yes, just a couple of comments on that. One, on the pharmacy, I think we're managing the pharmacy well now. I wouldn't say there's no further opportunities. I think as we -- especially as we integrate the pharmacy and the medical data, I think there's additional opportunities that we'll find and are looking to find over the upcoming months. In terms of the broader opportunity, again, we see most of the opportunity initially at least being on the inpatient side, and that's really what we mainly considered as we talked about moving the program forward and improving the results as we expect we would over time. Again, long term, I think there's additional opportunities, Ana. So for example, impacting readmission rates, improving the overall health of the population because we know this SMI population has been underserved by the current care models, and we've got a very specific model of care to address it. But some of those things are longer term. And therefore, we haven't banked on those in our initial projection.

One final one if I could squeeze in on Sovaldi. Is the Florida quick payment, does that matter to you at all? And then broadly speaking, what have you been observing in 3Q? And as the all oral is going live, what are your expectations for your businesses broadly commercial and otherwise?

Well, as it relates to Sovaldi, we've seen a pretty significant year-over-year from third quarter of last year to third quarter of this year. For example, there's been about a 250% increase in our commercial PBM business. Total hep C PMPM spend from the Q3 of $0.31 to Q3 2014 of $1.10. And you might have mentioned or heard in the CBS research report that came off recently, they talk about these big increases, but they also expect to see a peak in hep C as new agents come out, and you kind of see a peak of use of Sovaldi. Now you may be aware, I'm sure you are, that Harvoni has been recently approved by the FDA. This is a combo drug. The Sovaldi regimen for a 12-week period costs $84,000. The Harvoni regimen, it's a combo drug. So the pegylated interferon isn't required -- some of the injectables that typically are used in combo with Sovaldi to mitigate some of the flu-like symptoms with the use of Sovaldi. These are -- this is a combined -- a combo drug. It's also taken orally. So the patients still take a pill once a day. But the cost increase, again, is 94 5. So dependent upon the regimen use for Sovaldi going to Harvoni, it can be a cost saver or it could cost more. It's hard to know. But it's certainly more on an ongoing basis, at least initially, for the drug itself. So we see this increase is happening, but we do see kind of a slowing down in the most recent quarter of the spend for these medications, and so -- for the hep C category in total. So we would expect to see that happen as new therapeutic alternative are introduced over the next couple of quarters. And then in some cases, people are kind of holding off for these new medications, which are more cost-effective in terms of the management, the medical management of these medications. So we would expect to see Sovaldi to kind of peak out. Harvoni, we think will do well because it's a pill oral form, and that'll be very popular. But we also think the introduction of therapeutic alternatives will really cause a lot of price pressure on these alternatives going forward. So we hope to see through next year moderation of the cost for hep C treatment.

The next question is from Scott Fidel from Deutsche Bank.

First question, just interested if you have any thoughts around the timing of when the Texas behavioral contract would be announced. I know that was expected to be announced a number of months ago, and then it's been, I guess, sort of all quiet on that front for a while.

Yes. I think that the Texas contract -- I think there are several contracts outstanding, and that the Texas contract is actually out already, and we did not win that contract, the incumbent won. In fact, these are typically up, but most state contracts, the incumbent maintain the business. And I just -- I think it's a good example of the fact that these contracts can be quite sticky, and there's a real benefit to being the incumbent. And so in this particular case in Texas, we did not win that, but the incumbent did. What happens typically is that when there's a real change in the combination of both behavioral and physical medicine and there's a real change in the model, there's a greater opportunity for us. But again, in Texas, we didn't win that contract.

Okay. Then just a follow-up just on the Commercial business. And just the margins there in the segment profit did come in quite a bit above what we were expecting. You mentioned some of the onetime items. Just wondering, though, also just how much impact on the margins horizon going offline in the third quarter did it have. Was that operating at pretty much a sort of average MLR for the Commercial segment? Or was there a mix shift impact from that large contract going offline?

Yes, Scott, I mean, it's a hard question to answer because any one contract bounces around a lot from quarter-to-quarter. But I wouldn't say that, overall, that, that meaningfully lifted the segment other than the fact that, obviously, it alters the mix a little bit between risk and ASO, if you're looking at percentage margins. But aside from that, I wouldn't view that as a huge driver.

Okay. And then just kind of have one last question just on Specialty Solutions, and saw the margin improved their sequentially. If you could just talk about that. There -- was that better cost? Or was that the impact of new business coming online? Or were there out-of-period items that benefited Specialty Solutions?

Yes, I think there's a little bit of favorable development. But the bigger issue was -- and we talked about this last quarter. Last quarter, we had a little bit of a seasonally higher quarter. And I think, as I mentioned in the last call when asked, that my expectation was really more consistent with what we were seeing year-to-date through second quarter, which was between 80% and 81%. That's essentially what we ran this quarter. So I would really look at the sequential as just being some noise and really look at year-to-date as being representative of how that business is running.

The next question is from Josh Raskin from Barclays.

This is Mary Shang in for Josh today. I'm just curious, you said solid segment -- you said you had solid segment profit growth for 2015. Does that mean you'll be within your long-term target of 15% growth for segment profit?

Not necessarily. I mean, in our long-term targets, what we really said there is that that's, long term, over a 3- to 5-year period. If you think specifically about 2015, there's a couple of things that will temper the growth versus where we ultimately think we'll be, and that really relates primarily to the termination of the Maricopa contract, which happened at the end of the first quarter this year. But we sort of lose a quarter of that as we go into next year on an annualized basis. So if you adjust for that, you're probably up in the range. But again, we'll give a lot more details in December.

Okay. Great. And also what is the aggregate of onetime items in 2014 segment profit?

For year-to-date, again, we're talking of round numbers, about $15 million favorable.

Okay. Great. And one more quick question. Were the tax contingency reversals this quarter in prior guidance?

No. No, we don't project contingency reversals because we obviously don't know they're going to happen until the statute of limitation goes by. So we don't generally project those, especially the larger ones that we've seen over the last 2 years in the federal side. Now in terms of our -- in terms of the tax contingency, the one thing I do want to point out is with the reversal we had this year, there really isn't much remaining on the federal contingency. So while we've had some benefit over the last couple of years in the tax rate, we shouldn't see anything near that magnitude as we go forward.

I'd like to turn the call back over to Mr. Barry Smith.

Well, thanks, everybody, for joining us today. We look forward to speaking with you in December when we provide complete details of our 2015 guidance. Take care.