Good day and welcome to the Centene Corporation 2017 third quarter financial results conference call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President, Investor Relations and Finance. Please go ahead.

Thank you, Steve, and good morning, everyone. Thank you for joining us on our 2017 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 will host this morning's call, which can 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 US and Canada or in other countries by dialing 412-317-0088. The playback code for both dial-ins is 10111720. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q dated today October 24, 2017, the Form 10-K dated February 21, 2017 and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2017 press release, which is available on our website centene.com under the Investors section. Finally, a reminder that our next investor day will be on Friday, December 15, 2017, as always, in New York City. 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 third quarter 2017 earnings call. During the course of this call, we will discuss our third quarter financial results and provide updates on Centene's markets and products. In addition, we will provide commentary around the ongoing healthcare discussions in Washington, as well as discuss Centene's recently announced acquisition of Fidelis Care. I would like to begin with the healthcare regulatory landscape. After several repeal and replace efforts in Washington failed, we fully recognize the possibility that cost-sharing reductions, CSRs, might not continue to be funded, and as such, planned accordingly. We filed 2018 rates in all our exchange markets, assuming there would be no CSR payments. And they have now been approved in all markets. I would like to note there seems to be a misunderstanding regarding the applications of CSRs. They are not a profit contributor. Instead, they are intended to cover the out-of-pocket healthcare costs for the country's most vulnerable population. The CSR pass-throughs are reconciled annually. And any overage is paid back to CMS. I would like to remind everyone, in 2015, the Supreme Court ruled the ACA's advance premium tax credits legal. These credits cannot be removed via executive order. It is important to note, contrary to the administration's desired impact of reducing insurance premium costs, the de-funding of the CSRs will cause the federal government to spend more money through higher funding of premium tax credit. In fact, the Congressional Budget Office recently estimated that defunding of CSRs would increase federal spending by almost $200 billion over a ten-year period or $20 billion per year. Note the federal government currently spends approximately $7 billion annually on CSR payments. Equally important, we're putting in place a system to track the incremental premiums being charged.…

Thank you, Michael, and good morning. Earlier this morning, we reported strong third-quarter 2017 results, with both top and bottom line growth. Total revenues were $11.9 billion and increased to 10% over the third quarter of 2016 and GAAP diluted EPS was $1.16. Adjusted diluted earnings per share was $1.35 this quarter compared to $1.12 last year, representing 21% year-over-year growth. As a reminder, adjusted diluted earnings per share excludes the amortization of the acquired intangible assets and acquisition-related expenses. Additionally, for the third quarter of 2017, adjusted diluted EPS excludes additional expense of $0.03 per diluted share associated with the Penn Treaty guaranty assessment. During the third quarter, we received updated information from the California Guaranty Association regarding our share of the assessment. Let me provide some of the performance highlights for the quarter. Total revenues grew by $1.1 billion year-over-year, primarily as a result of growth in the health insurance marketplace business, the expansion of the Missouri contract in May of 2017, a full quarter of business expansions in Texas, and the startup of our Nebraska health plan on January 1, 2017. This growth was partially offset by the one-year moratorium of the health insurer fee, lower membership in the commercial business in California as a result of improvement actions taken last year, and lower revenue in Georgia, driven by the addition of a fourth competitor in July 2017. Moving on to HBR, our health benefits ratio was 88% in the third quarter this year compared to 87% in last year's third quarter and 86.3% in the second quarter. The increase year-over-year is primarily driven by new or expanded markets, which initially operate at a higher HBR, an increase in higher acuity membership year-over-year, and a premium rate reduction in our Medicaid expansion business in California effective July…

Thank you. [Operator Instructions] And our first question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. Just wanted to follow up on, I guess, maybe that last point about the revenue guidance, including the pass-through payments for California. I just want to make sure that that number is basically kind of a zero-margin revenue adjustment. Just trying to think if there's a headwind from that from next year.

No, no. It will be in premium tax revenue and premium tax expense in our pass-through line. So, it's a zero.

Okay, great. And then, as far as the commentary around the star ratings, it sounds like you're thinking that basically, one way or another, either through an appeal or through mitigation efforts, you would not expect there to be a stars headwind in 2019. Is that the right way to think about it?

I think that's – we do anticipate the appeal. I think there are some good reasons to appeal. And at the end, there are ways to mitigate the impact of the finance. And do you want to add to that, Jesse?

No, Kevin. There's certainly some precedent with respect to contract migrations and related activities from other plans. The legacy Health Net organization is experiencing that within California. So, we're familiar with that approach. And I think, by the combination of the appeal process and other mitigation activities, which we can control, we think that this is a manageable risk for 2019.

[indiscernible] launching the new plans in 2018 in the expansion areas will not be impacted in that first year.

Okay, great. And then, just maybe last question, as far the exchanges go, it sounds like you're saying that you do not expect the CSRs to be a headwind at all to 2018 profit targets. Is that right?

That's right. I think we have the premium adjustment tax. And so, they now offset it and we'll have the same plan as the CSRs.

Okay, great. Thank you.

Our next question comes from Sarah James with Piper Jaffray. Please go ahead.

Thank you. I wanted to go a little bit deeper on the exchange performance. So, initially, when you set margins for 2017, it was 150 basis points conservatism or about $0.20 EPS. Then you outperformed about $0.16 in the first half and took the remaining $0.04 out of guidance for conservatism buffers. So, it sounded like you were back to expecting a 5% margin for 2017. Am I thinking about that right? Are you still expecting 5%? And how did 3Q exchange performance compare to those expectations?

Yeah. This is Jeff. First, on the third quarter, you have to realize there's some seasonality in the exchange business. So, the profit is more, I would say, front-end loaded because the design of the products more towards the commercial-type product. And I think your math is correct on the conservatism – original conservatism. So, yeah, I think our expectations for the performance for the year that it's going to be at the high-end of the range.

Got it. And can you walk us through some of the headwinds and tailwinds you expect to impact sequential progression of the fourth quarter MLR? Specifically, I'm thinking about potential for hurricanes or flood-related issues to change seasonal progression or asthma in Texas, the heightened flu season that we've seen in the southern hemisphere, how you guys approached flu expectations this year, and, I guess, if there's any offsets for medical management and or some high acuity contracts that you're making changes and that could be a positive influence in the fourth quarter.

Yeah, I'll start it off. As it relates to floods and hurricanes, tell us when and where they're going to hit and I can – something of a guess and it will still be a guess because look what happened in Florida and elsewhere, minimal impact. Because the flu – we're anticipating normal flu season. And that says that we've booked the necessary expense for what would be a normal flu season. If it is milder or lighter, we'd be in a better position to give you insights on that in the fourth quarter earnings. So, it's kind of business as usual. We see – we have to plan on a normalized fourth quarter without those contingencies. And if they develop, we'll kind of deal with those as we always have at that point in time. I'm not sure how much that helps, but I'm trying.

That's helpful. And just, any good guys on the fourth quarter as we think through MLR – so, you had flagged in the third quarter, pressure on MLR from some of the new high acuity contracts. So, as we think through your medical management process, is there any good guys coming on those new contracts?

Jeff, do you want to…?

Yeah. I will tell you, the medical management process is a continuous process. It's going on all the time. The only thing I would say is that if you kind of look at the seasonality of the business, if you kind of look at last year's HBRs, I think November tends to be a pretty good month for us and it just depends on how the calendar falls. But there is some seasonality to the business between the quarters and that's what I would point to.

Thank you.

Our next question comes from Chris Rigg with Deutsche Bank. Please go ahead.

Good morning. I was just hoping to get a clarification on the way you guys are thinking about the CSR impact. Did I understand you correctly that in states where you're currently in a payable position, all things being equal, even if you're in a payable position at the end of the year, you'll keep that money or is that not what you tried to imply?

No, I think what – you're right. If you look at our filings, we are in a net payable position. And I think what you have to understand is that the regulations provide for an annual reconciliation. So, what we're saying is that in the majority of our states, our payable position as of the end of the third quarter is large enough that we don't really need any CSR payments in those states for the rest of the year. So, only in states where we are projecting a receivable position would we have exposure. And that's what the $0.07 to $0.12 represents.

Great. And then, just a follow-up on one of the prior questions with regard to the fourth quarter, it looks, when we back into it, about flattish to maybe even down a little bit sequentially. And I heard your comments about November. But is the seasonality mostly in the Medicaid business and you do expect the health insurance exchange enrollees to see a spike up in the fourth quarter? Just want to better understand how you think about the MCR in Q4. Thanks.

Yeah. Again, I think I'd point you to last year as far as a relative comparison on the HBR. I think if you look at last year, we did have a lower HBR in the fourth quarter than we did in the third quarter, so there is seasonality there. And that would be business outside of the exchange because the exchange, the fourth quarter is the highest MLR of the year.

Great, thanks a lot.

Our next question comes from Lance Wilkes with Sanford Bernstein. Please go ahead.

A couple of questions on the medical cost trend in pricing. Can you just walk through, for the traditional Medicaid programs, for the higher acuity programs in public exchange, what you're seeing as far as medical cost trend and utilization specifically?

Well, are you specifically talking about what's priced in? There's a big difference in pricing on the Medicaid and LTSS side. Those are primarily priced by the states using historical cost data versus the exchange business, which is more of a premium bid and more prospective. So, there's a differential there. And I would say, consistent with what we've said in the past, it's low single-digit cost trends on the Medicaid side and a little bit higher in the exchange side. It's more of a commercial product.

Got you. And where I was going with it is on the higher acuity side, especially with the newer contracts, are you seeing kind of higher-than-expected utilization relative to, obviously, the premiums and is that consistent with your expectations and how long does it normally take for that utilization to kind of come back into line with maybe a more seasoned book of business?

Yeah, two things just to make clear. And, generally, in the higher acuity business, they are rated at a higher MLR. So, when we talk about the impact on the consolidated MLR, it's really a mix issue, meaning if we have more higher acuity business, it's underwritten into the low 90s versus more exchange business, which is a lot lower in HBR. I would say a lot of the programs that you enter into initially have continuity of care periods, where we are not allowed to effectively apply all of our medical management procedures. Those can range from three months to six months. And then after that, we are able to apply our full tools. But nothing outside of what we have experienced in the past.

I think when you look at it, we've always said we book a higher MLR until you get the actual experience. And then, two, we've always said plan on three, four quarters for normalization. And that's just a general rule that one can follow when looking at it.

And just the last one, what was the impact of the California Medicaid expansion rate reduction relative to the overall change in HBR kind of year-over-year?

So, we mentioned – I think we mentioned – well, year-over-year – I'll just do sequential. From Q2 to Q3, there's 170 basis points. I would say between the risk adjustment recorded in Q2 and the rate decrease in California, that's about half of that, that movement. The rest is really seasonality in the business.

That's great. Thanks so much.

Our next question comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Thanks. Good morning. Just on the – I'm sorry, can you hear me?

Yeah, yeah.

Okay, I'm sorry. On the exchanges, I realize that your member mix has stayed pretty stable at about 9% receiving subsidies. Can you just drill down a little bit into that, in the sense of, do you have any numbers that you can share about what percentage of those are below 250% of the federal poverty level? Or anything like that relative to how much subsidy they're getting?

I don't know that we have that specific available, but we've kind of said it's consistently at the 90% of our population who receive subsidies. It runs the gamut, but it's probably a pretty normalized curve.

I guess what I'm getting at is, I'm wondering – clearly, you've had a pretty targeted approach with targeted – mostly is a byproduct of the way that you build your network, so that it's sort of a near Medicaid population. But is that – is that going to change as you go into 2018 and we have fewer health plan or offerings relative to what Centene's got out there? And then, if it does change, obviously, there's the risk that partially subsidized or unsubsidized members may be heavily skewed to those who need immediate care?

I don't think so, Matt. I think about Maricopa County last year took over the whole county and state pretty consistent. So, we see no sign when you see a change because of the change in the providers available. And so, I think don't so. We've not historically seen any of that and we have no indications at this point.

Sorry. I've just got one more sort of granular question. If you directionally – can you tell us, in Maricopa, did you see then a higher percentage of unsubsidized in that population, if you can measure that, as a result of being the only carrier left in that county?

Well, if there was any, it was negligible. It was not really worthy of comment, Matt.

Okay, okay. Let me just ask one more, if I could, on a different – can you tell us you just directionally what sort headwinds and tailwinds you're expecting at this point going into 2018?

Well, we're going to give guidance on December 18. He will have a good sense of the population mix at that point, much better sense.

Okay, okay.

With the growth we're anticipating and Fidelis coming in, hopefully, in the first quarter as planned, I think you can expect us to just to continue the kind of momentum you've seen from us historically.

Great. All right, thank you.

Thank you.

Our next question comes from Peter Costa with Wells Fargo Securities. Please go ahead.

Hi, thanks. I was hoping you could go back to the MLR question for a minute and talk about the part of the MLR change that was mix related when we look year-over-year. So, there was 100 basis point increase year-over-year. So, how much was mix related versus how much was the rate cut?

Yeah. I'm not going to quantify those two for you, Pete. So, 100 basis points is, on a year-over-year basis – I'm not going to bifurcate, is what I would say.

Okay. And then a second question if you don't mind. Seems like I had nothing on the first one. Can you explain how the Maryland physicians involved contract affected service revenues and cost of services and SG&A in the quarter? And then, if that wasn't part of the change in terms of the lower cost of services, can you explain why cost of services was so much lower this quarter?

Yeah. On the cost of services side, specifically, we saw favorable performance in the fed services contract, behavioral health and also you mentioned the startup of the Maryland contract which – those carry higher operating margins, and also the performance of our home health business. On the federal services side, there was some performance incentives under the current contract, which played out very well, and the performance of the shared savings programs in the home health business were good as well.

So, you wouldn't expect that to continue into the fourth quarter?

I would quite put them on an annual basis, for example. On the home health business, those are really annual reconciliations. So, I would say, in the fourth quarter, probably not to that magnitude, but on an annual basis, I would say it's all inclusive.

Okay, thank.

Thank you.

Our next question comes from Steve Halper with Cantor Fitzgerald. Please go ahead.

So, when you think about the impact of the CSRs, assuming they're not paid next year, is it – and recognizing that you put out rates for your 2018 reflecting potential non-payment, are you able to sort of understand what happens from a demand side? Asked another way, what do you think membership – what do you think the membership trend is for 2018, given the substantial increase in premiums?

Well, I think business as usual. I'll have Jesse add here in a minute, but from the perspective of the end-user, they are going to see the rates, they are going to see the subsidies and there will be no change visible to them. Jesse, do you want to add?

Yes. A couple of things. One, so with respect to our population, in particular, obviously, we already have a targeted subsidized population. We've got a book of million people across the country. So, one of the things we are very focused on is continuity of coverage for those individuals and consistency in our plan design for retention purposes. So, we're very focused on that on a year-over-year basis. So, we think any kind of movement, if you will, on our end will be mitigated based on the combination of those things. But we've done a lot of scenarios, as you would expect, with respect to 2018. I think we're comfortable saying at this point, we view 2018 as a growth year for marketplace and we maintain our ability to operate within our targeted profit margins.

Great. That's very helpful. Thank you.

Thank you.

Our next question comes from Dave Windley with Jeffries. Please go ahead.

Hi, good morning. Thanks for taking my question. I wanted to shift to Fidelis, what low hanging fruit, in light of the fact that you're looking at medical costs specifically for your synergy achievement, where are the low hanging fruit items there and how long should we expect it to take for you to rollout your case management and clinical management programs into Fidelis?

I think when you look at it, it covers the gamut of our TruCare and all the programs into the integration process now. They're analyzing what they can use and establishing priorities for implementing it. And we have to look at the interface with [indiscernible] for those kinds of things you're looking at. And I think we indicated, in the second full year, you'll see low double-digit accretion from it and most of that's medical management. So, it's very successful opportunity.

Okay. And shifting, a follow-up then on a different topic. In California, you've highlighted already a couple of times that you took some rate actions to improve margin in the commercial book. It looks like if I extract the growth in individual from your commercial numbers, it looks like membership is down 116,000 members year-over-year. I guess I'd be curious about your views on the efficacy of the actions that you took. Have they brought margin to your expected level? Is there still upside room going forward? And would you expect there to be still some membership sensitivity there as you take those actions?

Yeah, this is Jeff. What I would say is that, yes, they have. Those actions have been effectively, specifically on the small group side. Those actions have been very effective. It's probably operating where we would expect it to operate. On the large group side, there is probably more opportunity for margin expansion. But, really, what we've done is kind of reestablish the baseline of membership and then we're going to try to grow from there. So, I think that's what's most important. And you're right, on a decline, it's not right in the ballpark there.

Okay, great. Thank you. Thanks.

Our next question comes from Christine Arnold with Cowen. Please go ahead.

Hi there. Fidelis, I know that you put in the assumption that CSRs wouldn't be paid out. Can I assume that they bid similarly assuming CSRs wouldn't be paid out? And then also on individual, can give us a sense for the enrollment you might be thinking about next year, given who you've seen leave versus stay? And were you able to build in things in the executive orders, like the skinny short-term plans, the low enrollment time, lower money spent to attract people in? Was that built into your bids? Or was there something surprising that could come from the executive orders that we should be thinking about? Thanks.

I'll handle the first part. On the no CSRs/Fidelis, that is correct. They did have rates that [indiscernible] assuming no CSRs and a lot of questions there. So, on the second piece – what was the – what was your second question right after the CSR?

Talk about individual enrollment next year, given who has paid, who left, recognizing that we don't have access until November 1.

Yeah, we're not going to get into any specific enrollment projections here. So, more of that will come on investor day in December.

And then, on your bid strategy, I understand that you were thinking about CSRs. You rightly built them into bids for worst-case scenario. But what about the short-term plans coming in, potentially skimming healthy risk, the lower open enrollment period, them spending less and all the other stuff they're doing to kind of sabotage the risk pool? Were you able to anticipate that and build all of that in or how do we think about that?

Christine, this is Jesse. I think the executive orders are what capture most of the things that you're talking about there. So, as you look at the specifics there, the starting point is really asking the various kind of relevant agencies to come up with their plans within the next 60 to 90 days. So, there is not a level of specificity in those plans to being effective, certainly for the beginning kind of open enrollment and the beginning of 2018. So, at this point, we're really thinking about those as 2019, in fact.

I think there is three different regulatory agencies involved in establishing [indiscernible]. It has a ways to play out, Christine.

Okay, thank you.

Our next question comes from Josh Raskin with Nephron. Please go ahead.

Good morning, guys.

Good morning.

So, the first question, just taking a step back on all of this is, as you think about 2018 and assuming Fidelis closes early in the year, you're approaching a run rate, let's call it, almost $60 billion in revenues, you'll have the debt-to-CapEx of the deal below 40%. And so, as you think about sort of that change sort of from where you were before Health Net to sort of where you are after Fidelis, what are some of the new advantages that that size brings? And then, what areas of investment are you most excited about, maybe that you haven't been able to do in the past due to size?

I think Health Net, as we had talked about at this time, that gave us the critical mass that we look for to bringing down the debt-to-cap. Debt-to-cap was higher only because of the stock price at that point. So, from a cash flow and everything else standpoint, nothing really changed. [indiscernible] the fourth large state [indiscernible] this is the second largest in the country. And it's growing and they have aligned capabilities. So, we see being in there, it just gives us – it improves the buying leverage in various things that we do. So, it's – I don't know that we have a lot more capabilities than we had before. We have a very strong balance sheet coming out of this. We've always been balance sheet managers. And it puts us in a position when we see some technology companies and others of that nature that we are interested in, we're in a strong position to take the actions that make sense.

Great. Got it, Michael. And then, I get the second question, a little bit related. As you know, Fidelis is one of the larger Medicaid deals we've seen. I guess, not just Medicaid deals, but one of the larger deals we've seen for a little while, at least in terms of revenues, are there other opportunities? As you guys were going through your analysis of the deal, do you think there's other opportunities of similar size? And then, I'm curious in what's the seller's motivation now. Why do you think a seller would be interested today?

Well, I think you have to look at – I think there is a couple of things. One – I'm not going to go into [indiscernible] that's competitive. You understand that. But I think what you're going to see in sellers is that you need the critical mass that we've now achieved as a minimum to be able to afford the investments in technology. We're spending hundreds of millions of dollars to get the kind of medical management and technology systems that we need. So, that's a motivation. The Fidelis one, the church saw an opportunity to monetize this asset and still put it into a foundation and be able to continue the charity work and the things that they'd like to. So, I think it was a – they also realized, as we've talked throughout, the efficiencies we're going to get from the medical management that they also were confronting huge investments and probably, in some cases, beyond what a company even with $10 billion in revenue can do at this point in time. So, it goes back to when we did the Health Net. We talked about the need to have critical mass to be able to build on.

Got you. Okay. Thanks, Michael.

Thank you.

Our next question comes from Mike Newshel with Evercore ISI. Please go ahead.

Thanks. Good morning. So, how are you thinking about the risk from expiration of CHIP funding? Do you think any of your states could actually move to restrict enrollment if the reauthorization slips further to, like, year-end or later or do you think there's enough unspent funds or other stopgap measures to last until Congress finally actually passes that?

Well, I think – I'll take the glass is half full. I think that's just going to be an additional motivation for Congress to act. The CHIP has been successful and I'm not sure anybody really wants to sort of now taking funding away from disadvantaged youth. We're talking about vulnerable populations, of vulnerable youth. So, I'd say that I think the need to restore the CHIP funding will give them vehicles to look at the total impact they're having on the – that Congress would take a total look at the impact they're having on vulnerable populations. So, I see it as giving us some upside.

Got it. Can you actually break out how many CHIP lives you have out of that kind of CHIP category?

Do you have that handy? 400,000.

400,000?

200,000.

200,000. All right, great. Great, got it. Thank you very much.

Our next question comes from Zack Sopcak with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for the question. I just wanted to follow up on the additional $0.04 business expansion costs. And just clarify, is the bigger issue with that the shortened open enrollment period or just the lack of dollars being spent by the federal government? And then, should we think about, is that a one-time type expense to be prepared for this or is there something where if we continue with a lack of funding, shortened season could bring on additional expenses in future years?

I think when we saw – we anticipated what happened there. You have to think about – we knew that we could do direct enrollment. So, you start to put together the program and the training, if you will, to take those calls. We started doing the direct marketing, all the things one does when one is building a business. So, we have been doing ongoing evaluations of general satisfaction. We know it's high and Jesse might add to some of the [indiscernible] we have a strong business. We want to protect it and we believe we're going to grow it through these kinds of activities. We might give a sense of what we're doing and how we're [indiscernible] that incremental funding to offset some of the government spending that got cut back.

Right. So, we – obviously, we're ramping up our investment in the fourth quarter. So, I think it's a combination of the two things that you had referenced – the shortened open enrollment period, all of which is in 2017 for 2018, as well as the reduced funding. So, we're obviously taking a very targeted approach. And we've seen very high engagement from our marketplace members on our Ambetter products. So, that's something that we really try to take advantage of throughout the course of the year. So, this is not something we're just initiating now. We've had a number of campaigns on all fronts. So, TV, print, direct kind of engagement, digital, all the things that you would anticipate. And we had good kind of predation with respect to what we did last year. So, what we're doing is we're already leveraging that success and expanding it with a focus on our population and we expect similarly positive results for next year.

Okay, great. That's helpful. Thank you.

Our next question comes from Gary Taylor with J.P. Morgan. Please go ahead.

Hi, good morning. I just had a couple. I'm not sure I caught quite, Michael, the complete discussion about the star ratings. Maybe in particular, what is your outlook for potentially cross walking that to another star rating, given the success Humana and others have had in mitigating rating pressure with [indiscernible].

I think that's one of the techniques one will use [indiscernible]. The first course of action, of course, is the appeal. I think there's a good [indiscernible]. Add to that, then you start looking at the cross walking and [indiscernible] done to mitigate the impact of it. It's kind of a standard procedure when we do.

Okay. Just wanted to make sure you weren't ruling that out.

You probably know this by now. We don't rule anything out [indiscernible].

Yes. I appreciate that. Just wanted to clarify. And then a last quick one for Jeff. When we think about the marketplace plans, generally, I think we'd be expecting MLRs north of 100 for 4Q and that's just the seasonality in those plans. Can you give us a ballpark on 3Q? Are exchanges still making money in the 3Q? Are we moving closer to break even and then moving to that seasonal loss in the fourth quarter?

Yeah. They are still making. I think your – you mentioned the 100%. It's not that high in the fourth quarter. But I would say that the bulk of the profitability is made in the first three quarters. Absolutely.

And is the – I know your enrollment almost has doubled year-over-year. But is the actual MLR in the exchange business – third quarter of 2017 versus third quarter of 2016, is that similar, materially higher or lower?

I think they're relatively similar. They may be a little bit higher in this quarter, but not much. Year-over-year, that is.

Right. Thank you.

Our next question comes from Justin Lake with Wolfe Research. Please go ahead.

Thanks. Good morning. Just want to come back on a couple of things. First, the MLR implied in the fourth quarter. Just some back-of-the-envelope math, I'm getting to about 86.5% give or take in terms of kind of the implied EPS in terms of what you'd have to do on MLR. Is that a ballpark [indiscernible]?

Well, obviously, you are backing into it. So, you're relatively close. To get to the full year, where we are at full year –

Yes.

There's only one quarter to go, right? So…

Okay. So, that declines by about 150 bps sequentially. And I'm just thinking about the drivers there. I know it declined a little bit sequentially last year, but there was a benefit last year I think from California true-up on Medicaid expansion. And this year, instead, you're dealing with a pretty large rate cut. And then, in addition, you're much bigger in the expansion side, which I think is perhaps higher sequential MLRs. So, that would be a headwind. So, I'm just thinking about, what are the offsets to those two kind of points that I mentioned there, that will drive that kind of sequential decline?

I think it's going to be normal seasonality in the business. I mentioned before that November is usually – I think I've said this historically. November is usually one of the best months of the year for the Medicaid business, which continues to be the majority of our business. So, usually, June and November are two very good months in the Medicaid side for the year. Those are the two best months.

Okay, great. And then, on the specialty side, just anything else you can kind of parse out in terms of – it was just an incredibly strong quarter from a gross profit perspective at least. What should we think about for the contribution to that specialty business in Q4 as well?

I think I had mentioned a little bit earlier that I wouldn't expect the fourth quarter to be as profitable as the third because some of these programs, specifically in the home health business, those are reconciled and announced annually, roughly at the same time in the third quarter. So, I think on annual basis, it's much more in line with our expectations. So, I guess, that would be my thoughts.

Yeah. I guess I was just looking for a little more specificity in terms of – is it still closer to the Q3 performance or closer to Q1, Q2 performance?

I would say that it's probably closer to the annual performance, if you look at the full year. Yeah, I think the fourth quarter is going to more in line with what you would expect on a full year basis.

Got it. And just lastly, on CSRs, clearly, from your 10-K disclosure and your discussion today, you think the – that you'll be able to reconcile through the end of the year on that payable, on the CSRs. Can you just tell us, has the government made that very clear that the reconciliation will be as of 12/31 or is that just your working assumption?

I think that's the federal law. So, if you actually read the Code of Federal Regulations around these programs – this isn't just CSRs by the way. It's risk adjustment. It was all of the 3R programs. Those regulations establish a specific criteria and that's what we're basing that conclusion on.

Got it. Thanks for all the color, guys.

Thank you.

Our next question comes from Michael Baker with Raymond James. Please go ahead.

Yeah, thanks a lot. Just wanted to get your perspective on the Massachusetts waiver, particularly as it related to their request for more active formulary management in Medicaid. As you speak with other states, is this something being closely watched, so that if the government does agree to it, there will be others that will join in? Are people taking more of a wait-and-see approach? Just trying to get a general sense on that particular dynamic.

In the context I've put out there, I haven't seen where – and if you guys are looking at Massachusetts as an example for that type of thing, it's an unusual market. There's more doctors in Massachusetts almost than there are patients. So, it's a very unusual market and I see no indication where they are going to be a trendsetter on that.

Thanks for the update.

Our next question comes from Ana Gupte with Leerink Partners. Please go ahead.

Yeah, thanks. Good morning. So, following again on the exchange margins, I think I'm estimating you're at the upper end of your 4% to 6% range. And then I go back to the true-up that happened in July, I think it came out roughly $200 million better than expected. And I'm just trying to get a sense for – as you're monitoring this on a go-forward basis, have you any data points from weekly for this year and then for 2018? Is the methodology likely to change? Or as you think about the interface with the potential defunding of CSRs and possibly mix shifting of healthier folks to more barebones plans with this executive order, how predictable do you think the risk adjusters are for the rest of 2017 and, to the extent, they're contributing a fairly big percentage of your margin for exchanges this year, into 2018?

Yeah. I can handle the risk adjuster comment. We've had a very consistent methodology here on risk adjustment, which has proven to be very accurate. So, we consistently use that methodology and use information from the data aggregators on that. So, I think – I don't see any difference going forward.

I think the only other thing that I would –

Yeah, sorry.

Just real quick, you had mentioned the potential impact of any short-term plans and the like and impact on the risk pool. So, I think, as we said before, we still need a lot more information with respect to what those are and when they would be effective before we can comment on any potential impact.

Okay, thanks. The second question was about Fidelis. And you're doing really well on improving margins. But as you think about the top line growth, where do you see the growth coming from and is this likely to be in line with your aspiration of low double-digit cross Medicaid expansion, which is leveling off now? Exchanges where there is potentially [indiscernible] that's the biggest driver. FIDA has been a weak program and you have LTSS. And then I think in Medicaid, they saw downgrade well on the rating from Star, 4 to 3.5.

[indiscernible] we'll give guidance on the growth December [indiscernible]. A little bit of guidance on [indiscernible] because that can create the wrong image. And we saw the situation in Fidelis there and [indiscernible] as well.

Yeah. I would just go back to, I think, what we mentioned on the call when we announced the Fidelis transaction is that we believe that was in line with our double-digit growth percentage on a going forward basis, and we believe that that was not going to change that.

And will you be appealing the decision, you and Fidelis on the star rating? Am I correct? I think that's what we observed. There was a downgrading for them in addition to Health Net.

Our understanding is that they do not intend to appeal that, but similar to our situation, and every organization who is in the MA business, continual focus on improving kind of the fundamentals around star 4.

Okay. Thanks for squeezing me in.

Thank you.

Our next question is a follow-up from Lance Wilkes with Sanford Bernstein. Please go ahead.

Could you just give an update on the RFP pipeline? And in particular, what portion of it is higher acuity? And then, in general, how is the size of that looking and are states behaving as they had in the past given all the uncertainty with federal regulation?

I think there's a – as you know, there is a robust pipeline coming up with Texas, Florida, large states that we typically have done well in [indiscernible] we're now continuing to do generally well. And [indiscernible] I think – I've not seen any indication where they are changing their approach to things. [indiscernible] that's when they need us more than ever because we're saving them a lot of money with higher outcomes. So, I don't see any material change there. You may have one [indiscernible] takes one action, but there will be a counteracting – and that's the benefit of having 28 states, soon 29 with Fidelis there. And [indiscernible] offset it. We've been tending to look at it across our whole book of business and we're comfortable with what the opportunities are there.

And are you seeing more states that are looking at putting higher acuity populations out to RFP or initiating…?

I would say they're very encouraging. That's where we're talking to them all the time, trying to encourage them to do that. We have the systems and capabilities to manage that and that's where we've been the most good. So, we will be pushing at it every level. And it varies on – particularly around governor or Medicaid director, what their attitudes have been. So, I would say there's probably – for 2020, they'd want to include the higher acuity.

Okay, thank you so much.

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

I just want to thank you for your continued interest in Centene. We're pleased with this quarter. And as I emphasized, we have the momentum going into the fourth quarter, going into 2018. And look forward to seeing at our investor day. We'll give you a lot more information with how we see the future. So, thank you. And have a good day.

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