Good morning and welcome to the Centene Corporation Third Quarter 2016 Financial Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President, Finance and Investor Relations. Please go ahead, sir.

Thank you, Denise, and good morning, everyone. Thank you for joining us on our 2016 third quarter earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer, and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene Corporation, will host this morning's call. The call may also be accessed through our website at centene.com. A replay will be available shortly after the call's completion also at centene.com or by dialing 877-344-7529 in the U.S. and Canada, or in other countries by dialing 412-317-0088. The playback code for both of those dial playbacks is 10093224. 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, which is dated today, October 25, 2016, or the most recent Form 10-K dated February 22, 2016, 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. 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 third quarter 2016 earnings call. During the course of this morning's call, we will discuss our third quarter results and provide update on Centene's markets and products. Additionally, we will bring you up-to-date on the Health Net integration. Let me begin with a few comments on Health Net. As part of our ongoing fair value analysis during the second quarter, we recorded a premium deficiency reserve of approximately $300 million, due to unfavorable performance in some of Health Net's business operations. The PDR covers the period March 24 to December 31 of 2016. We have taken significant actions over the past few months to improve the business operations for 2017 and beyond. These include price increases, plan design changes, and certain market exits. We fully believe we have now dealt with all the factors that contributed to the PDR. During the third quarter, we reduced the $300 million PDR to $285 million, as the outlook of substance abuse claims liability in California has improved. Please note, this had no effect on third quarter earnings. The largest component of the PDR is $110 million related to the California commercial business. We negotiated with the Californian Department of Insurance the necessary benefit changes. On October 3, we submitted our filings to the CDI with the 2017 plan designs and rate adjustments. These substantial benefit design changes allowed us to reduce our original 23% rate increase to 9.9%. Some of the key benefit changes included the first time inclusion of an out-of network deductible for platinum and gold plans of $5000 for an individual and $10,000 for families; a significant increase in the out-of-network maximum out-of-pocket level to $25,000 for an individual and $50,000 for a family; the elimination of non-emerging…

Thank you, Michael, and good morning. This morning I will begin with highlighting the results for the third quarter of 2016 and provide an update on our 2016 full-year guidance. For the third quarter 2016, Centene's membership was 11.4 million members, an increase of 137% between years, driven by the Health Net acquisition. Total revenues were $10.8 billion, an increase of 86% over Q3 of 2015. Diluted earnings per share for the third quarter of 2016 was $0.84 compared to $0.75 last year and adjusted diluted earnings per share for the third quarter of 2016 was $1.11 compared to $0.87 last year. Adjusted diluted earnings per share includes a charge of $0.05 per diluted share associated with the Arizona risk-adjustment program. During the third quarter, we received information from CMS that some of the participants in the Arizona risk-adjustment program were unable to pay the amounts owed to the federal government associated with the 2015 risk-adjustment reconciliation. As a result, the uncollected risk-adjustment amount was pro-rated to all insurers in the market. Accordingly, we recorded a charge of $0.05 per diluted share, recognizing our portion of the risk adjustment that will not be collected, which reduces the $0.19 per diluted share benefit we recorded in the second quarter of 2016. Now, for some more specifics. Total revenues grew year-over-year by $5 billion in the third quarter, primarily as a result of the Health Net acquisition, expansions or new programs in many of our states in 2015 and 2016, and growth in the Health Insurance Marketplace business in 2016. Sequentially, our revenues were slightly lower than the second quarter, due to lower commercial membership, primarily as a result of expected attrition in the Health Insurance Marketplace business and lower membership in the California Medicaid program as a result of annual eligibility…

Thank you, sir. We will now begin the question-and-answer session. And your first question this morning will be from Josh Raskin of Barclays. Please go ahead.

Hi. Thanks. Good morning.

Good morning.

Good morning, Michael. I wanted to start on the 2017 commentary. I think that was really helpful. It just gave us some direction before December. And if I think about the consensus and compare that to the updated guidance excluding the $0.14 of good guidance this year, it implies just around 15% growth, which is exactly in line with what the top-line expectation is. And so I'm curious, your margins are still running below your long-term goals. Is there some sort of conservatism in there? I would have expected, with some of the synergies and it sounds like you're assuming the full $300 million of Health Net comes back, are there some headwinds from a margin perspective or is this just sort of a conservative place to start?

I think at this stage, in our AOP, annual operating plan, process it's a safe place to be. So we're going through the final process. We're looking at start-up costs and the various new products we have, et cetera. And so we really are outside our pattern. I'm not saying much of anything about earnings until the December call. But we felt that with all the things out there, we would give some indication. And then we'll give you a lot of granularity and a lot more color in December, Josh.

Okay. Okay. That's fair. Maybe just on Arizona, you've got two of the bigger counties where you are going to be the sole remaining exchange carrier. It sounds like you're expecting that to remain profitable. And I'm curious, just based on the market exits from others, what gives you the comfort? Is there that dramatic a difference in your plan design and rates relative to what others in the market were providing?

Yeah. I think this is a pure HMO. We have the right rates, the right positioning. It's one that has been very successful for us in other markets. And really we exited the PPO in those and the HMO Health Net had was not as well-structured. And so we're confident that it will be profitable. Do you want to add anything, Jesse?

Yeah. Josh, this is Jesse Hunter. So, just a couple of things. One, we will be the sole carrier for Maricopa County on the exchange, but not in Pima County. We'll be one of two in Pima County. So I think it is important to provide a little bit of context for Arizona marketplace just in general. I think the starting point for the whole market was off, right? So, that's what drove a lot of the carrier exits. You had grandmothering of policies. You had a number of other things. So Health Net had that experience. That experience has been fully reflected in our plan for 2017. In addition, we have added new products. Particularly in Maricopa County, we've added a new silver and a new bronze Ambetter product, which is consistent with what we have in the other Centene Ambetter markets. So those are the kinds of things that give us a lot more confidence around kind of leveraging the Centene marketplace experience versus the historical Arizona marketplace experience.

Rone, anything you want to add?

No. Okay.

And I guess just a follow-up real quick. Jesse, do you know what the experience of the exited carriers was? Just sort of thinking about what was the overall loss ratio in that market for those plans that are no longer around, right? What were those members incurring in terms of expense?

I don't know with kind of specificity on that, Josh, but I think that all of the folks that had kind of the more traditional commercial orientation in the Arizona marketplace had kind of equally bad experience.

Okay. Okay.

And we have reflected that, right, in terms of how we're thinking about it and changing the plan design, et cetera, to move more to the focus on subsidized populations and the like that we see elsewhere.

I mean, the issue (34:32) is our network, as we've said, it's highly subsidized, 90%-plus. So it's our normal model, Josh.

Okay. Perfect.

And our next question will come from Scott Fidel of Credit Suisse. Please go ahead. Scott Fidel - Credit Suisse Securities (USA) LLC (Broker): Thanks. First question, just interested if you can give us an update on that Pennsylvania contract that you had won earlier in the year for more of the classic Medicaid RFP and then some of the losing bidders had appealed that. So, just interested where we are in that status and whether you've assumed that contract in the 2016 initial views on revs or whether that – on 2017 or whether that could prove to be upside if you are upheld on that contract win.

Yeah. A couple of things. One, I think the state handled it wisely. There was a court case, and rather an (35:25) appeal, an appeal to drag it out. They say let's do a new RFP, it will be faster. So we expect to hear in the next month or two months, I guess, where that stands. There's no reason to believe we won't continue to prevail because we were the number one in all regions, the scores showed by a wide margin last time. Relative to the second part of your question, the timing – in the second part I lost the...

In the second part, it's not in the number...

It's not in the number. No.

...that we gave you for 2017.

We will not add something until it's been awarded to us and clearly ours. Scott Fidel - Credit Suisse Securities (USA) LLC (Broker): Got it. Okay. Just second question, just on the risk adjustment accruals and just thinking about that nickel hit that you had on the 2015 reconciliation. Just interested in terms of, as you've now updated your risk adjustment assumptions, whether you've built-in some additional conservatism just for the variety of co-op failures that we've seen over the course of this year and that could create a bad guy in terms of potential imbalances between payables and receivables in the risk adjustment program.

Yeah. This is Jeff. I mean, obviously, that's something we are looking at and we have looked at. And ultimately that's – as part of the risk adjustment process is ultimately determining the collectability. So, as we continue to look at that, we'll have to evaluate that as we get closer to the end of the year, specifically for 2016 and where everybody stands.

Yeah. I think, importantly, last time when we had the $0.19, we just added it right in and then didn't try and take any credit for it. It's part of the normal earnings. And just we added the full $0.19 in. And so this really amounts to an adjustment of $0.19 by $0.05 that we didn't get. So it's once again, I think, a very balanced approach. I almost wish we had a separate line, but accounting rules don't allow that. Scott Fidel - Credit Suisse Securities (USA) LLC (Broker): Okay. All right. Thank you.

The next question will come from Chris Rigg of Susquehanna Financial Group. Please go ahead.

Good morning. Just wanted to ask about the Medicare Advantage expansions for next year. Are you guys just estimating you'll have sort of a toe in the water in the three new states, a relatively small amount of membership, or do you think you'll actually gain a foothold within the first year?

Jesse?

Yeah. Chris, this is Jesse. So I think, as we've said at our June Investor Day when we talked about our launch of – it's actually four new MA products in our existing markets, but we talked about this as a proof of concept. So we definitely are taking a kind of softer launch approach for 2017 so we can be in a position to then grow from that base within those four markets in 2018 and forward, but then also entering other markets in MA in 2018. So we'll see kind of a continued progression, but we're looking at our growth in MA as a multi-year strategy.

Yeah. I think, and what we commented at the Investor Day is, it's no different than how we entered the marketplace. You go in it carefully, you prove the concept, and then once you get comfortable with it, you turn up the heat on it. And that's worked well for us. We've always said it's not how fast but how well. And so we're applying that same principle to this product.

Okay. And then, just on the synergies, I get a little turned around sometimes in terms of where things exactly stand for this year versus what we should expect for next year. So is the right amount that's actually going to be realized in sort of earnings this year $50 million to $55 million and the next year you get the residual? And have you seen any upside to the original target at this point? Thanks.

Well, I'll start and then Jeff and others can pick up. We always talked about the $75 million would be the first 12 months of operation. So you have – this year you have roughly 9 months of it. I think, Jeff, it was about $50 million, in that range?

Yeah, that's right.

But why don't you...

Yeah. That's right. I mean, I think if you just kind of take – we said the first 12 months, $75 million; second 12 months, $150 million. And I think if you just take that and assume a March transaction date and shift that out, I mean there is obviously just based on the fiscal year. So, that's what we indicated is that we've executed on all the actions to get to $75 million within the first 12 months and only 9 of those months fall into 2016. So, you're correct, is that that benefit would continue obviously into 2017. And then there's additional synergy capture there as well that we're confident that we can achieve.

Okay. I'll leave it there. Thank you.

The next question will come from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. Just wanted to, I guess, reaffirm. So, when you guys narrowed the guidance range, you lowered the top-end by more than you raised the bottom-end, and that's just related to the $0.05 Arizona charge and then a higher expectation for business start-up costs. Is that the way to think about that?

I think the way I'd think about it is if you just take the old midpoint, lower it by $0.05 and then it's plus or minus $0.05 from there, so to again come up with a $0.10 range.

I was just trying to think why the high-end was lowered by $0.17. Was there anything else kind of driving that beside the charge and the higher business expense cost?

No, it's just the charge.

Okay. And then, you made a comment that you're at the high-end of your margin target for the exchanges this year, but I think the comment for next year was profitable. I mean, is the expectation that next year you'll be just at the midpoint of a target range for exchange profitability? Any comment there?

No. I think...

No. I think – so we haven't given our just kind of full 2017 guidance. So I think we would leave a little bit of the detail for that as we go through. But I would not read into kind of profitability as being kind of deterioration from 2016.

So we see normal – remember, we were talking I think probably as much the Arizona issues where we've turned that around and taken all the corrective steps, as well as California PPO plan.

Okay. And then, I guess, you kind of said a number of dynamics around Health Net for next year, but can you address the PDR? It sounds like the synergy targets are all coming in line. So it sounds like to me your expectation for Health Net for 2017 is pretty much on track to be what you thought it was going to be when you closed the deal. Is that an accurate statement?

Well, I think, we were making all the progress we expected at this point in time, and I am fully confident we will achieve next year and in the out-years what we've expected when we did the deal, yes.

Okay. All right. Great. Thanks.

The next question will come from Michael Newshel of Evercore ISI. Please go ahead.

Thanks. Good morning. Going back to the Health Net PPO and EPO product in California, can you just clarify or frame level of losses that you expect to continue into 2017 here? I know the rate hike and benefit design changes are, obviously, going to significantly reduce it a lot.

Right.

But even in the rate filing itself, you have a projected pre-tax loss of around $40 million. Can you talk about, one, like what are the upside to that $40 million loss from benefit design changes or medical management? And also, does the rate filing itself reflect the $50 million reduction in the PDR related to substance abuse that you announced today?

Jeff, can you start it off?

Yeah. I think as we look out into 2017, first of all, the rate filing would account for some decreased substance abuse utilization. As far as the $42 million, you're correct, that was in the rate filing, and we are taking and continue to take medical management network initiatives. And at this point in time, we believe we've covered more than half of that, and we're not done, and we think we have continued actions that we can take between now and next year to get us closer to the breakeven point.

And would you expect to reach profitability on this product in 2018?

Yes. Yes, I'm sure we would. I think what's important here is that rate filing was based on the actual assumptions on the historic experience as well which is part of the requirement.

Right.

And so you file that – and we have all the benefit and other changes, some of which is still good in there. So it went from $50 million some to $40 million. But then, there's all the other things we'll do. So we believe, as Jeff just said, we'll get it to breakeven. And we believe based on the population we attract being able to have lower premiums, we need to do better than that. But that's for discussion later in the year as it unfolds.

Great. Thank you.

The next question will be from Peter Costa of Wells Fargo Securities. Please go ahead.

Thanks. Health Net had an agreement with the State of California or a settlement targeting a 3.25% margin with a 50% buffer around that. In 2017, that goes to no adjustment between 1.25% to 3.25% I believe. Can you tell me where is that contract operating today? Is it above 3.25% margin? And then what's your expectation for next year?

Yeah. So, if you look at this, I mean this was disclosed I think in Health Net's 2015 10-K, but I think the settlement account effectively had a surplus of over $300 million or something in that range. And again, as a reminder, the Medicaid expansion business is a component of that settlement agreement. And so, I guess, what I would say is that that number has continued to build over time. And I don't think this settlement agreement is going to have an impact.

So, no change for next year in terms of how it's going to operate.

Yeah. Yeah, no change.

Okay. And then can you tell us – your insurer fee revenues have been less than the expenses for the insurer fee recently. Can you tell us why that's going on? Why is it higher reflecting the gross up?

Well, so just a quick thing. The accounting rules require that if the insurance fee is billed as one premium, it's in premium revenue. So, for example, in Medicare, the insurer fee is actually embedded in premium revenue line. Whereas for Medicaid, it's a separate component of the rate and it's actually billed separately, so it's shown separately. And so, that's just an accounting technicality there.

I see.

Same thing for Marketplace by the way.

All right. And then sort of the last question if you don't mind. What's left to do on the California PPO business? You talk about continuing to focus on – from your commentary, it doesn't seem like that's quite yet to profitability for next year. So what are the things that you can do over the next year to try to improve the profitability of that?

Well, I think you're going to see us putting emphasis on growing it on a very balanced book of business. The previous design I would almost characterize as an inexpensive indemnity-type product. And it was a loss for Health Net in 2015 as well, we knew that. But I think what we look at is we have the right rate structure, the right benefit structure to attract a balanced book of business to drive the utilization in network, which is intended. The out-of-network should be the exception, not the primary use of it. So we've done all those things and I think now just starting to grow it in the right way and market it, and we will return it to the place it deserves to be.

Thanks.

The next question will be from Dave Windley of Jefferies. Please go ahead.

Hi. Thanks for taking my question. I wanted to go back to the California PDR exposure. So I just wanted to understand kind of the two pieces on the substance abuse side. Am I understanding correctly that your exposure there, obviously declined in the update this quarter, but your exposure into 2017 is mitigated or eliminated by your change in certificate of coverage, i.e., you don't have to pay those types of claims going into next year. And then rate and benefit design are what you are using to attack the other $75 million. Is that the right way to think about it or is there a blurrier line?

No. I think when you look at all the products associated with it, the out-of-network coverage, the benefit design they had before without the Medicare Maximum and the other issues where there was a percent of billed charges, basically out-of-network providers could do what they wanted and we are liable at a time for 75% of billed charges till they change their certificate of coverage. So, virtually putting in the changes that I discussed during my formal remarks eliminates the incentives to put people into that product at the same level. And we already see a material drop-off of that taking place. It was a bad design before. The state, everybody recognized it. It's been fully fixed. And there's other steps taking place that I'll let the legal authorities deal with as it relates to it. So, that affects that. It also affects the normal PPO outside the people (49:51), the same principle applies. We now have a product that will have great appeal to people who want to use our in-network and who on similar occasion want to go out of network. I mean they now have an exposure of $25,000 maximum out-of-pocket, which is significantly greater than what it was, but very competitive. So it's really – we now have the right PPO design. And PPOs have always been intended for a in-network use without a network being the exception, before virtually all the utilization was out-of-network. So we believe that that together with the lower rate increase to be more attractive to the balanced book of business. These are things we've done successfully for many years and will turn this around, and it has, and will put us where we want to be.

Great. And so, Michael, the change in the certificate of coverage, the impact of that is already reflected in your reduction of the exposure from $50 million to $35 million. Is that what you're referencing?

Yeah. Yes, I think what you're going to see is you're going to see – I mean, obviously, the new certificate is not into effect until January 1. There were some changes they made effective earlier than that where they could. But so we're starting to see where there's less people being transferred into, they know they can no longer bill 75% of billed charges. And I mean, there were instances where lab tests were thousands of dollars that we pay $8 for.

Right. Okay. Shifting to Medicare, if I could briefly, curious of your reaction to the slightly modest decline in Star scores for the Medicare book of business. What are your plans to boost those back up? And then, maybe more broadly, your plans to begin to build track record in your new markets to have them be able to maintain a bonus level Star score?

Yeah. I will turn it over to Jesse in a minute. I want to remind you that there were seven Star scores that remained constant. There were seven that improved. There was one that lost half a star because of the benefit change in the Part D drug and it was in Oregon, one of the smaller markets. So there was not a dramatic shift as some notes may have indicated. And Jesse, do you want to pick it up and talk about the program?

Yeah. I would highlight a couple of things. One, in terms of the implications, I think some of the math that was referenced in a few of the notes that we saw included the dual members, D-SNP members in terms of the percentage of members that applied in various kind of Star levels. So I think there's a little bit of mixing and matching with respect to that. But, as Michael referenced, we did improve our Star scores in a number of our plans, including our D-SNP plans, which are widely recognized to be more challenging to increase the Star scores. So we've demonstrated that we can do that. So we have a number of programs, not the least of which is provider engagement and how we're working with our providers in all of these markets. And remember, when we're launching these new programs, as we referenced, in Georgia, Texas, Florida, Mississippi, those are markets where we have longstanding provider relationships. So that will be a center-point in terms of not only our kind of growth strategy, but also our stars and quality improvement strategies going forward.

Great. Thanks.

And I want to just respond to second part of your question in terms of the new markets that the team that achieved these four and greater stars are the same team at Health Net that's working with us on the new markets. And we have every reason to believe they'll use the same processing approach to it that will achieve the high star levels.

Great. Thank you.

Your next question will come from A. J. Rice of UBS. Please go ahead.

Thanks. Hello, everybody. I appreciate the comments about 2017 and the fact that the disputed contract in Pennsylvania is not in there for revenues. I know at one point you were looking at absorbing some costs associated with that this year, and that was part of the $0.30 I think or so of expansion costs. Can you comment on whether you've absorbed that this year? Is that going to be in next year's numbers or has that been delayed largely till next year? And I know you have the LTSS contract rolling out. Do you think the overall expansion number for next year will be more or less than the $0.30 you've incurred this year?

Well, I would say, at this point in time Michael mentioned, we're in the process of finalizing our AOP. And specifically, with the timing of some of these awards, and obviously that's one of the moving parts, so I'm not going to comment specifically on what we expect for 2017 on that front. But I will tell you that what we said today is that the costs for this year are actually higher in the fourth quarter. So, yes, you're right. The change in that award status has reduced the level of costs associated with that, but then on the other side we do expect a significant growth in our Marketplace business in 2017. And we have seen an increase in start-up costs of that in the fourth quarter.

Okay. All right. Then maybe a quick point on the PDR. So it now stands at $285 million. Tell us how that evolved – can you just give me some help on thinking about how that evolves over time? Do you expect, since it relates to 2016, to run that down to $0 by the end of the year? Will some of that carry over in case there's negative development from 2016 next year that you'll be able to offset against? And how should we think about how that plays out over the next period of time?

That will run down by the end of the year. Now, specifically, just on the substance abuse, I mean ultimately some of those end up in IBNR and, from a cash perspective, they get paid next year. But the $285 million will run down to $0 by the end of this year.

Okay. And do you think there is – well, there be any that gets carried over in case there is negative development on any of these items for next year?

Well, the piece that will get carried over would be in IBNR, right? It would be in our medical...

Yeah...

Yeah. It'd be in our medical claims payable. Right.

Okay. And then just a last quick question on – you mentioned on the synergies, on track and pleased with that. I know one aspect of the longer-term synergies you were evaluating was your pharmacy benefit status, both Health Net having one way they were approaching and you doing it with your own internal PBM. Is there any update on where that all stands at this point and your thinking on that?

Yeah. I'll start that there's a blend that where – we still have our PBM very active and we're using some of the things that Health Net was doing. And Jesse can give a little more color and granularity on it.

Yeah. I mean, I think the starting point here, A. J., is that one of our kind of core philosophies is serving the whole person. Obviously, pharmacy is part of that. So Centene is committed to the pharmacy business. I think that's an important starting point. And as we look at our PBM, there's a number of things that we have developed that we think are core competencies, which includes benefit design, formulary management, clinical programs, analytics, mail order, specialty, et cetera. There's all of those things that are very much kind of embedded in kind of the Centene pharmacy management model. We've also – and we'll be launching where we're kind of rebranding is our external approach with Envolve Pharmacy Solutions. Some of you may have seen a release that went out recently where we're going to be working with Mercer on some opportunities from an external perspective. But all of that said, Michael referenced the hybrid approach, so we have entered into an arrangement with CVS/caremark to really leverage some of the scale, particularly from a network perspective, and certain back-office functions for pharmas.

And does that increase your thinking on the synergies, or is that sort of in line with what you had originally thought on the synergies?

In line.

It's in line with what we had originally thought on the synergies.

Okay. All right. Thanks a lot.

The next question will come from Ralph Giacobbe of Citi. Please go ahead.

Thanks. Good morning.

Morning.

Just want to go back to the exchanges and your position for next year, just given market exits from peers. Any concerns around network adequacy? And then do you have any sort of enrollment caps in place at this point? And then, just want to clarify, I think in your prepared you talked about Arizona your expectation of $500 million of incremental revenue I think just from the exchange, which I think is about 140,000 lives back-of-the-envelope. So we're talking about a 25% increase in the exchange enrollment just from Arizona. So I guess help sort of corroborate against (59:05) those numbers? And then, just in terms of how we think about capital in terms of all the new lives coming on next year? Thanks.

Jeff, do you want to start on the capital piece?

Yeah. So I can handle the last question first, which is on capital. I mean, obviously, Centene's been a very high growth company over the last five years. We've put over billions of dollars into capital at our subsidiaries. And we would expect, obviously, with this growth that we would have to contribute capital to fund the growth as well. However, I will tell you that, on a percentage basis, we've had years where we had 50% growth. On a percentage basis, that growth is smaller in compared to the organization in total. So the capital requirements, a lot of those can be funded with free cash flow.

I just want to add and others can add to it. But as it relates to the growth, we are expecting a significant growth and we'll give you a lot of granularity on that in December at our Investor Day. But importantly, some people I know are worried about, well, are you going to pick up some of the individuals who are high-cost out of other plans? We think, one, we have our network. If our network is of interest to them, that's fine because it's a well-managed network. Secondly, we are a net payer of a lot of money, $300 million or so. So there's a safety net there within that amount, which approaches what some others said they have lost. So, as we look at the exchanges going forward, we see ourselves at a very strong position to effectively grow it and still maintain the margins that we've become used to having on it. Anything want to add anybody else?

Just specifically on your question, Ralph, around the network, just to further Michael's point, we are very focused on kind of network adequacy for the expected growth. But our orientation there is really we think we're fine in terms of facility-based network. So our focus really is on physician services, particularly primary care.

Okay. And then no enrollment caps, I guess?

No.

No.

Okay. And then, just on the Medicaid expansion states, federal funding goes down a little bit in 2017, I think 95%. So, just wondering your communication with states, how they may or may not be approaching that? You said composite rate increase overall was sort of flat to up slightly as has been consistent over the last few years. But any other pushback there in terms of states wanting to kind of fill that gap and any pressure for you all there? Thanks.

We constantly talk to states about it. Rates have to be actuarially sound (61:56) and they are very much aware of that. And you always have that one or two states that it's a little more discussions required to get there. But we're comfortable that we're saving them levels of medical expense that we remind them you don't want to kill the golden goose. And I think that's still apprised (62:22) in 99% of our states.

Okay. Thank you.

The next question will come from Christine Arnold of Cowen. Please go ahead. Christine Arnold - Cowen & Co. LLC: Hi there. I think you referenced about...

Hi. Christine Arnold - Cowen & Co. LLC: Hi there. I think you referenced about $70 million in Medicare losses that you expected to incur this year. What's your outlook for that going into 2017? Do you expect to eliminate those losses with your recent filings and changes in plan design? How do I think about those Medicare Advantage losses?

Yeah. That's exactly right. The $70 million was in reference to the premium deficiency reserve, and so those are losses when the premium deficiency reserve for Medicare is looked at an aggregate across all Medicare products. And so that $70 million was the PDR that we booked and, yes, we do expect it to be profitable based on those items you mentioned. Christine Arnold - Cowen & Co. LLC: And what is exactly – profitable?

Say that again. You cut out. Christine Arnold - Cowen & Co. LLC: I'm sorry. What exactly you're doing to make that profitable?

Well, I think that's some of the things I discussed, how we did plan design, rate adjustments, a whole series of things.

Yeah. I would just add Christine, this is Jesse, that when we went through the bid process in 2016, we took into account a number of different factors, including network, including plan design benefits and the like, which resulted in a profitable bid for 2017. In addition to that, we have obviously ongoing medical management and network initiatives to continue to enhance our financial performance going forward. Christine Arnold - Cowen & Co. LLC: Great. Thank you.

The next question will come from Justin Lake of Wolfe Research. Please go ahead.

Thanks. Good morning.

Good morning.

A couple of questions. The first on the ACA-compliant business, the individual business. Can you give us some color in terms of where you sit right now in terms of where you think your 2016 premium is going to shake out? And it sounds like you're rightly expecting a fairly significant increase in membership from premiums here for next year. Any kind of ballpark directionality you can help us with in terms of how much premium increase you think you're going to get for next year?

I think that's a better question for – you're talking about 2017, what it's going to look like in 2017?

Well, just first the baseline of how much premium you have in this business this year and then, just directionally, do you think it's going to be up 30%, 50%, 10%...?

Are you talking about the market – are we talking about the marketplace?

Yes, the marketplace. Exactly.

Okay. Jeff, please.

Yeah. So you're just talking about the look forward into 2017. I mean, we're not going to give the specifics on 2017. I mean, obviously, we're beginning the open enrollment process, right, at this current point in time. So we're not going to give any specific colors I guess on 2017. But what I did say was that we do have additional costs in the fourth quarter because we do expect significant growth obviously from this year. And then obviously we've commented specifically about Arizona and what we expect there, right? And that was the $500 million that Michael mentioned.

Okay. Can you tell us what your premium is this year on in the exchanges?

Well, the total premium on exchange...

A little over $1 billion this year.

Okay. Great. And then, just any other color on this California Medicaid expansion MLR floor would be helpful. For instance, is there any expectation – was there any impact in the third quarter or expected in the full-year guidance? And just some background on this like how significant can it be?

Yeah. So, a quick thing. There was nothing in the third quarter associated with this. So this is where the state is effectively changing the MLR definition to be consistent with the federal regulations. And the biggest change is really excluding federal and state taxes. We are working through the calculations with the state at this time. So we haven't sized the total amount. Obviously, the MLR began back in January 2014 at the inception of the Medicaid expansion program. This has been in process for some time. So a piece of this was included and has been included in our guidance, and it's within our guidance range for this year and that will come in the fourth quarter.

And I think the part associated with 2016 is in the guidance.

Yes.

Any prior period, as is our practice, we'll treat it as a one-time.

That's right. Only the piece associated with 2016 was included in our guidance. So there will be a piece that will be retroactive. And again, I think all those reconciliation periods are open. And we haven't seen the draft calculations from the state at this point in time. So we're kind of waiting for that.

Any way to size the impact for 2016 or in the fourth quarter from this that you've already incurred or that you expect during the fourth quarter?

Well, I mean I can give you this, I mean we have included a piece in our guidance. I can tell you that was roughly about $0.09, so that we have in the fourth quarter associated with this. That's our best estimate at this point in time. But I would hesitate to size the total magnitude. It's a positive obviously for the company, but I'd hesitate to size the magnitude of that. And this will be – it's cash. It's a cash-positive as well, because if you recall, we have a liability back to the state of over $0.5 billion associated with this minimum MLR program.

Got it.

That's been accrued.

That's been accrued, yes. So what would happen is it would reduce that amount that we owe and, of course, we already have that cash on our balance sheet today.

Got it. So the full-year 2016 benefit is $0.09.

That's right.

Perfect. Thanks, guys.

And that's estimated and that's still...

That's estimated. Again, like I said, we haven't seen the draft calculation. So we still have to work through that with the state.

Thanks a lot.

The next question will be from Matt Borsch of Goldman Sachs. Please go ahead. Matthew Borsch - Goldman Sachs & Co.: Oh, thanks for squeezing me in. Just can you talk about the group commercial business that you have from Health Net? How was the renewal process then and what are your expectations just directionally, I'm not looking for guidance, but directionally in terms of account wins or account losses on the group commercial side going into next year?

Yeah. Frankly, I will not spent a lot of time on it. Well, that's part of the AOP process, which we're going through now. And Rone, anything you can comment on that?

Well, we are going through the December 1, January 1 is the large period for renewals in the group business. The large group business has been a good performer, relatively stable and we're continuing to see that this year. The small group business has been a business that we've been looking to improve the margins and we have been increasing the rates for that. We're going to see that reflected to some extent in terms of membership in the fourth quarter here, but that's part of the strategy to get the business back on track to address some of the PDR issues and margin issues for 2017. Matthew Borsch - Goldman Sachs & Co.: In your view on the small group business, does that suffer from some of the same issues that not necessarily you had, but broadly the ACA businesses had with adverse risk selection?

Are you talking about the small group? Yeah. What we did is... Matthew Borsch - Goldman Sachs & Co.: Yeah.

Yeah. I think I know, Matt. Good question. The same benefit design changes we did for the individual, we also implemented for the small group. So we will expect to... Matthew Borsch - Goldman Sachs & Co.: All right.

Okay. So they'll be well in line. And, once again, now that we have this right and the benefits right, it puts you in a position to effectively grow that business. And after I think in the past, they were chasing more volume than we would... Matthew Borsch - Goldman Sachs & Co.: Yeah.

...we want to make sure it's profitable and then we'll grow it. Matthew Borsch - Goldman Sachs & Co.: Okay. All right. Thank you.

Thank you.

The next question will be from Ana Gupte of Leerink. Please go ahead.

Yeah. Hi. Thanks. Good morning. The first question I have is I'm assuming follow-up on a question that was asked before. So you have the top-line growth, I think when you exclude the issues on the PDR, it's somewhere in the mid-teens. In terms of the margins, as you're mix-shifting into ABD and long-term care populations and when you look at the overlay of the new set of Medicaid regulation, have you had an opportunity to now study that? And do you get some cross-subsidization as you go forward? So is that in essence better preserving your margin profile going forward, this slight mix-shifting?

Well, at this early in the process – as I said, we're in the final stages of the annual operating plan. It would be too early to try and give too much indication. We've tried to give you the sense of that it was moving ahead with that. And what the consensus was, it's fair to say it would be within our range. But before I get too granular, and I want to finish the process because I don't want to say something today that is not confirmed again in December. So, kind of bear with us for the short period of time. But we're looking forward to 2017. I think it's going to be a good year for us now that we've corrected all the issues in California. We're starting to launch the Medicare. And there's a lot of things that are left, there are some RFPs still pending. So I'm looking forward to it.

Okay. No, I was actually – less for 2017 guidance and more just some clarity from you on the reg, which I at least tried asking other companies as well. And I'm assuming since it came out in July, you had some more color on it, if you're able to share at all.

I think, at this point, let's talk more about it, and I know you won't forget it and you asked the question, you could ask it in December in person.

Okay. Sounds good. One more question then. On the risk adjusters, again, I'm not looking for any kind of color on margins for next year. Just there was a pretty big change as it seems like from CMS, after some of the more commercially-oriented plans had issues with their risk profile and adverse selection. And it looked like it was a little bit about prescription drug, but there were some other changes around spreading risk better across all plans. Did you all have any input? And how does the managed Medicaid industry that's participating in exchanges, are you advocating one way or the other and are you happy with what was out there? I believe the comments were due on the 6th of October, right?

Yeah. I think our government regulatory people, we spoke with them, and they've put in the comments. And it's still an going discussion with CMS. And they are now open to discussing with us because of the successes we're having is one of the most successful, fastest-growing exchange products, they are very interested in talking to us and...

Okay. One last question – sorry, one last one. On your strategies for Medicare Advantage as you're expanding into new states, will that be more tied to your desire to win long-term care contracts or opportunities there or is it broader than that? And will you be just looking for MA business regardless of the Medicaid positioning that you have in the state and what is it looking like for 2017?

Well, I think just generally and in terms of the strategy it would be kind of the broader version, if you will, of MA. So we would be looking, as we said, very consistently we'd be looking to support the lower income kind of subset of the Medicare Advantage-eligible population. So, that will have some other kind of implications as we think about some of the other state-based products, but our orientation around that is broader.

Great. Thanks for fitting me in.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Michael Neidorff for his closing remarks.

Well, just I want to thank you. We look forward to seeing you at our Investor Day and we look forward to the balance of this quarter. Have a good day.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for participating in today's presentation. You may now disconnect your lines.