Good day everyone and welcome to the Centene Corporation 2018 Second Quarter Earnings 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] And please note that today's event is being recorded. I'd now like to turn the conference over to Ed Kroll, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, William. Thank you, William, and good morning, everyone. Thank you for joining us on our 2018 second 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 Web site 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-ins is 10121638. 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, July 24, 2018, the 10-K -- most recent 10-K we filed on February 20, 2018 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. This call will also refer to certain non-GAAP measures, that’s Generally Accepted Accounting Principles, non-GAAP measures, a reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2018 press release, which is available on our Web site at centene.com under the Investors section. Finally, a reminder that our third quarter earnings results call will be held on Tuesday October 23, at 8:30 Eastern Time, followed by our next Investor Day on Friday, December 14, which as always will be held 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 second quarter 2018 earnings call. During the course of this morning's call, we will discuss our second quarter results and provide updates on Centene's markets and products. We will also discuss the recent Fidelis Care acquisition closing and additionally we will provide commentary around the healthcare legislation -- legislative and regulatory environment. Let me begin with Fidelis. We are very pleased to have closed the acquisition effective July 1. I would like to remind you of the strategic and financial benefits of the transaction. Fidelis is a diversified leader in government sponsored programs across the State of New York. Fidelis takes a local approach to providing high quality affordable healthcare to lower income vulnerable populations. New York is the second largest Medicaid managed care state. With Fidelis our New York's health plan, Centene is now a leader in four of the largest Medicaid managed care states. Fidelis is ranked number one in state sponsored programs in New York. It is the fastest growing New York Medicaid and managed long-term care plan, as well as the second fastest growing New York Medicare Advantage plan. It is the only plan that operate Medicaid CHIP, and managed long-term care plans in all 62 counties in the State. Through the incorporation of our data analytics tools, such as Interpreta and RxAdvance, as well as Case Management and Critical programs, we will be able to further build upon the quality of care and enhance the existing capabilities of Fidelis. We expect the transaction to be immediately accretive to GAAP EPS. We anticipate high single-digit percentage accretion to adjusted EPS in the first 12 months following the close, and low to mid teens percentage accretion to adjusted EPS in the second full-year following the…

Thank you, Michael, and good morning. This morning we reported strong second quarter 2018 results with total revenues of $14.2 billion, an increase of 19% over 2017 and adjusted diluted earnings per share of $1.80, an increase of 13% over last year. Earnings for the quarter were driven by the performance in the 2018 marketplace business, providing a favorable HBR. Additionally, we had higher investment income during the quarter due to the funds associated with the Fidelis acquisition and higher interest rates that was offset by slightly higher tax rate at the result of revisions to our share of the health insurer fee. I will provide more details on this in a minute. Additionally, during the second quarter, we completed the previously announced MHM acquisition and completed the financing transactions for the Fidelis acquisition, which closed July 1. Let me provide some more details for the quarter. Total revenues grew by approximately $2.2 billion year-over-year, primarily as a result of growth in the health insurance marketplace business, the expansion in new programs in many of our states in 2017 and 2018, including the Illinois contract expansion and the Pennsylvania LTSS program. Acquisitions including MHM, CMG and Foundation Care, the return of the health insurer fee for 2018, and as highlighted in our June Investor Day, approximately $500 million of pass-through payments from the State of California received in the second quarter that were recorded in premium tax revenue and premium tax expense. This growth was partially offset by lower revenues in California associated with the removal of the in-home support services program for managed care, which took effect in January of 2018. Moving on to HBR. Our health benefits ratio was 85.7% in the second quarter this year compared to 86.3% in last year's second quarter and 84.3% in the…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be Stephen Valiquette with Barclays. Please go ahead.

Great. Thanks. Good morning. Thanks for taking the questions.

Good morning.

Good morning.

And so we’re getting a few questions around the risk adjustment payments. And I guess as you mentioned, the benefit of $79 million but also last year $48 million and $70 million the year before that, so from my point of view, it doesn’t really seem to be a trend out of the ordinary. I can imagine it would suggest that it was in your guidance, so I’m just -- to me it seems like they’re pretty consistent trend and it has not changed in accounting, but maybe just more color around why people maybe seem to be kind of concerned about that. To me it seems like they’re pretty consistent trend?

Well, I will just give you little more detail, but you got it precisely right. The accounting has been consistent, margins, percentages. This is something we would do in the business for five years now and our accounting group understands it, knows how to book it. And it is in the guidance and Jeff you may want to give a little more color around that?

Yes, yes. Just on and I agree with your comments and I guess our view is to Michael's point, it's been consistent. We’ve been doing this program for five years. There's I think more stability. You have to go back to last year and remember that we had added conservatism to our guidance last year for the exchange because it was post-election. So fast forward to where we are today, there's more stability in the program and we have a track record and certainly a history of having development on this estimate just like we have on IBNR and any other estimate that we have in the business.

Okay. That’s helpful. Thanks.

And our next questioner today will be Steve Tanal with Goldman Sachs. Please go ahead.

Hi, guys. Just -- I guess, following up on that, just a broader question on the exchanges in '19 that -- with respect to the risk adjustment program as well as the mandate going away, how is that affecting your approach, if at all, what you expect to see on the exchanges in terms of market share and shifts or competition? Any comments there would be helpful.

Kevin, you want to comment on that?

Sure. Hi, good morning. We remained very bullish about the exchange business both for ourselves and also the stability of the market. So we're expecting ongoing growth in our business. We think it remains very, very stable and we're very enthusiastic about open enrollment coming up.

Yes, remember the past couple of years, we retained 80% of the previous year's enrollees, which I think speaks for itself.

Perfect. And I guess just a separate question, just to the deals that were done in the quarter, MHM services and community medical group, I would be curious if you could break out regarding the quarter, I guess, that would just be -- it would be helpful to know what kind of revenue and earnings to expect from those two companies going forward?

Jeff?

Yes, we didn't give any specific revenue earnings guidance on those. Just a couple things I can tell you on where those revenues show up. For CMG, there's some risk-based revenue there, so that shows up in our premium revenue. MHM is going to be in the service line.

Okay. That’s helpful. Thank you guys.

And our next questioner today will be Josh Raskin with Nephron Research. Please go ahead.

Thanks. First question just around the timing of Texas Star Plus. It sounds like there's a resubmission that you guys have been asked to give 30 days as of a week ago or so. So is that a full resubmission? You got to resubmit responses to the entire RFP, or is that just going to be responding to the updates? Just trying to get a better sense of the timing.

Chris, I will ask you to respond to that.

Thanks, Michael. Josh, as far as we know the RFP was reissued late yesterday. We do, as you mentioned, have 30 days. It's due on August 22 and as far as I know it is a full resubmission of the RFP at this point in time. And they have moved the projected implementation date from 1/1/20 to 6/1/20 as well. So …

Okay. Sounds pretty. I mean, it sounds like a full blown RFP resubmission in 30 days sounds tough. So, I guess, I was also surprised to hear that.

Well, I think one has to be prepared to deal with those kinds of issues and we’re.

Right, right. I guess, you guys are in good shape. You’ve already submitted, so really probably have most of the answers. The second question, I'm just curious around a more clinic-based model for Centene, and what the benefits would be to have more sort of brick-and-mortar type centers, even if they were leased or partnered or whatever, and how that would impact the Medicaid business, specifically. And then, I guess, if there's other commentary around the exchanges or MA for clinic-based model that would be helpful as well.

Yes, I think I’ve commented on Investor Days and other conferences that we're not out there buying all the practices we can and all the clinics that we can. We said that the group in -- we brought in Florida, CMG, is scalable if we needed. And it will service well to be able to move into underserved areas, where there's not a -- an adequacy of physician. Pick a county in Texas is somewhere with more rule. This gives us that opportunity to open up a clinic and they can do it efficiently and quickly and protect our membership in that concept. And they have a very efficient operation, they operate with highest of quality, low MLRs. And so we saw that as an opportunity to have an asset that we can apply were needed versus just simply saying it's a national strategy. They serve all the government services Medicaid, Medicare and the exchanges.

Okay. So Michael, you would say you don't really need broad-based clinic help across all of your markets and some sort of retail strategy isn't what you're looking for in there.

We are not trying to buy clinics and have clinics in every market. We are focused where they're needed or where there's a group of physicians that are now going to work with it. We have the capability to go ahead and protect the access that our membership needs.

Perfect. All right. Thanks.

Thank you.

And our next questioner today will be Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Hi. Great, thanks. So just wanted to go back to the risk adjusters for a second. So you're saying that you’re -- the way you’re accruing for is the way that you’ve always been accruing for it, but if this loss was to go, I guess, be upheld and your thought is the risk adjusted methodology would change in a way that would essentially be favorable to you to about $100 million to last year. Is that the way to think about it?

Yes, yes. We quantify 2017. It's really what we’ve quantified and then who knows how the ultimate resolutions going to come out, but I think what we’ve quantified is the difference between using the statewide average and carrier specific premiums on the 2017 benefit year. And That was the $100 million pre-tax that I gave you.

And your point is that 2017 you were probably a little bit more conservative just because of all the uncertainty there, so if you were to think about 2018 or 2019 run rate number might be a little bit less than that $100 million?

No, no. What I'm saying is if you look at 2017, the $79 million that’s disclosed in our 10-Q, I think it was $48 million in the prior year. And you take that as a percentage of the year-end balance, it's roughly 10%. So it's very consistent year-to-year. And we are using that same methodology for 2018 and the business has actually grown.

Okay. All right. That's helpful. And then, I guess, I wasn’t clear if you respond to this in your commentary on the exchanges, if you did, I apologize, but with the risk adjusted methodology, I guess, payments being withheld, does that change at all how you're submitting your rates for next year? And how you think about next year, is there anything in the conversation with the states about kind of a dual submission process with risk adjusters about risk adjuster's old methodology, new methodology?

Kevin?

Hi, it's Kevin. No, it's not. We’re very confident that we will be able to maintain as of the carriers are. The rate timeline submission deadline, we are tracking to that. And so we feel comfortable with it.

Okay, all right. Great. Thanks.

And our next questioner today will be Lance Wilkes with Sanford Bernstein. Please go ahead.

Good morning.

Good morning.

Two questions for you, kind of DC policy related. One of them is, as you think -- as you’re hearing about drug policy and drug pricing policy, be interested in your thoughts as to what the implications might be to the Medicaid -- to your Medicaid business and the public exchange business of a range of approaches that might include elimination of rebates or shift to, like a fixed discount model? And the second question was kind of the -- just trying to understand if you thought there were any policy responses to risk adjustment or corrections there as opposed to just an appeal on the court case.

Yes. I think there's two of them. On your first question with our RxAdvance, we're moving ahead with our Rx program, which we believe will be proven to be much more efficient and its all predicated on what the pricing is, if they come up with a program without to rebates. We have the capability to deal with that very efficiently and effectively. And we are becoming a large enough supplier of pharmaceutical products and purchaser of them that we will be able to buy in quality -- quantity very effectively and efficiently and put that together with RXAdvance and I think we will be in a very strong position versus just a traditional PBM where -- so that part I think will work very well. We also as it relates to the risk adjusters, we have the stated policy that we're comfortable where it is, we believe it will advocate for maintaining as it is, and not look for any short-term benefit for ourselves, but saying this is a matter of public policy. It's been working. Let's leave it alone.

Got you. That’s helpful. And just to be clear on the rebates aspect of it, I would think that from -- the businesses you’re in, which are more fully ensured businesses. If there was a conversion to sort of the net pricing business model as opposed to the current rebate model that you would be relatively indifferent, but I wasn't certain if that's exactly how it would work on the Medicaid and on the public exchange side. Is that a that a fair way to think of your exposure?

I think it is. I think with the system capability we have, we can be indifferent to it, because we can very quickly adjust to whatever methodology they’re using. So we are very comfortable with either one and had plan for it, recognizing this could easily happen.

Great. Okay, thank you.

The next questioner today will be David Windley with Jefferies. Please go ahead.

Hi, there. It's Dave Styblo in for Windley. First question is just a little bit more about the exchange outlook for next year. We've seen a number of new entrants to the market and some of those -- in some of the areas that are in your footprint. Just curious to get a sense of how much of your footprint you have visibility on for new competitors? And in terms of pricing, I think the market has become a little bit more aggressive this year and perhaps that’s just because their MLR -- they’re reaching their MLR for it. Curious if you had any comments about what you're seeing broadly across the landscape?

Yes, I will start off and ask Kevin comment. I have always thought it was a positive thing to have competition. And I learned a long time ago as in consumer package goods, when there's one in the market, it's incumbent on them to grow the category in the market. When there is two or three, you end up with more noise in the market, more awareness of it and that one company trying to build a category. So I welcome the competition. We've demonstrated that that we can deal with competition effectively and continue to grow and really the other -- we tend to use these opportunities with just capabilities versus theirs. Ah you want to add, Kevin?

Just completely agree with what Michael said. We welcome the competition. We think that it's an example of the ongoing growth and stability of the marketplace. As you guys are probably aware, we have expansion plans going into next year, both in adding new states as well as expanding an existing states. So, again, we think the increased new entrants is a very good sign for the marketplace and we're ready to bring it on.

Great. That’s helpful. And then you have -- you guys have provided some additional disclosure for the books of business in terms of revenue. When we try to triangulate some math around that, it looks like we get to government net margin that might be just under 2.5%. Would you roughly agree with that? And then is there room to expand margins on that business excluding M&A accretion from Fidelis?

You’re talking about the Medicaid? When you say the government, you’re talking about the Medicaid line right?

Yes, Medicaid. Exactly not the commercial line.

Yes, I mean, I’m not going to comment about our specific net margins. There's always rooms -- room to expand margins scale, I think it helps. Additionally, all the states are different, right. So it's a portfolio approach for us. So there's always room for improvement and we always look to do that over time.

We had the same goal of expanding margins, so …

And our next questioner today will be Sarah James with Piper Jaffray. Please go ahead.

Thank you. I was hoping you could walk us through some of the sequential tailwind between 2Q and 3Q. It would be really helpful if you could break that out into M&A related and other areas that you’re working for improvement. Thanks.

You mean from this quarter to our third quarter, is that what you're specifically asking about?

Yes, I’m.

Yes. I mean, I think the biggest thing you have to realize going from Q2 to Q3 and this is the same from Q1 to Q4 is just how the marketplace business performs, right. So it's always the lowest in the first quarter and it pretty much trends up from there all the way to the fourth quarter and then you have the fourth quarter which includes all the open enrollment cost. It also includes the enrollment cost for Medicare as well. So, I guess, what I would expect is HBR's would increase from here consistent I think with what Michael said and what I said in my prepared remarks, which is this year from an adjusted earnings perspective is developing pretty much consistent with last year.

Any other tailwinds that you’re looking for either from M&A or from medical management on [multiple speakers]? Thanks.

Yes, obviously, the Fidelis acquisition, right, comes in on July 1. So that’s significant. And we're glad to have that. The other thing is that we mentioned the CMG, NHM and some of the other transactions that we did, those are -- obviously, will benefit the P&L, but from a size perspective is less than of a needle mover. So Fidelis interest rates have also continued to increase, which has been favorable as well.

Right. Then where Centene looking to expand to in 2019 for exchanges? And can you help us size the impact on pricing for the -- did that when you include the removal of risk adjusters? There's been some reports that it's in the 20% range and I was interested to hear how you’re thinking about that?

Well, I think we -- one, we have to see what’s happening in these adjusters, So we deal as we typically deal with the here and now. And I hate to say this Sarah, but we will talk more about '19 in our December guidance call, which is when we typically talk about the next year, but as it lead to the other part of the question, we just say, we are going to treat it as it is now because there's no basis. You will start to know the what ifs. I think that’s where you get to in sideways. And our success has been just that. Look at it, make a decision and go forward. Does that help?

Yes. Thanks, Michael.

Thank you.

And our next questioner today will be Matt Borsch with BMO Capital Markets. Please go ahead.

Hi, yes. Thank you. I was hoping you could comment on the enrollment drop in group commercial. I know I asked about that business on the recent Investor event. And I'm sorry if I miss something that you previously said about that.

[Indiscernible] go ahead.

Sure. Good morning. Yes, the enrollment drop in the group business, which you’ve just alluded to is really a reflection of pricing discipline and market discipline that we've been bringing to that business. Frankly, as you guys know, that’s a philosophy that we bring to all our products in all our market. And obviously, we all need to make choices and figure out the right pricing and the right discipline to bring. So it's a manifestation of that.

I maybe just add on to that question. My own comment is we’ve heard that California is seeing somewhat more intense price competition. Would that been -- can I infer that would dovetail with what you're talking about?

Kevin?

Yes. Again, but that discipline is not limited to any specific states. It's something that we bring to all our markets and all our products.

Okay. Thanks. And can you just -- as we now step closer to Medicare Advantage open enrollment, are you getting any sense for we're hearing snippets of information may be rumor that -- are you getting any sense for where you may be positioned relative to competitors?

Well, I think we're looking at it on an ongoing basis, but it's probably too early to make a specific comment.

All right. Thank you.

The next questioner today will be Peter Costa with Wells Fargo. Please go ahead.

Good morning, everyone.

Good morning. I think we’ve beaten the risk adjusters to death here, so I won't talk about it.

There always has to be -- we had -- there always has to be one issue, Peter, that we beat to death. Glad to with the risk adjusters. Go ahead.

So I like to move on down to the income statement a little bit and understand about the health insurance fee true up a little bit. How much of that is a true up just in this quarter? It went up $12 million from the first quarter. Should we be thinking about that going up every quarter at the same amount or -- and so $183 million each quarter from here? And then how much that is offset in terms of Medicaid picking up the tab for the premium -- in premiums versus what's in commercial or say Medicare where that would be a headwind to earnings?

Yes. So that's specifically what I commented on my prepared remarks. You're exactly right. There was a true up this quarter and how that true up comes about is we're estimating how much our fee is compared to the entire industry, right. So we're using information from third parties to figure out what the denominator is in that and we got new information that the denominator changed a little bit. And so we increased the health insurer fee. Now on the Medicaid side, that’s a pass-through -- predominantly a pass-through, that’s how we treat it. So you’re recording the additional revenue and expense and it offsets with the net earnings line. On the commercial side, that is not. Our premiums don't change. We bid premiums and so those don't change. So that was a little bit of a bad guy in the tax line, if you will. And that's what we mentioned in our prepared remarks and that really offset what I would call the additional investment income that we had really from the capital that we had on the books for the financing of the Fidelis transaction. So I -- what I would say is, I think going forward, Q2 or Q3, Q4, I think it would be relatively consistent with what it was in the past, a little bit less than what you saw this quarter.

So a little bit less than this quarter meaning down to the $171 million or meaning …

Right around -- I would say, north to -- little north of $175 million.

Okay. And then in terms of the interest income item that you mentioned, that was up quite a bit in the quarter. You said most of that was related to the Fidelis Care cash balance. But how much was interest rates and how much of that will continue going forward?

I think they're -- I mean, there's a little more than $10 million that was just on Fidelis capital. So that can give you an idea of what it was.

Okay. That helps. Thank you very much.

Our next questioner today will be Michael Newshel with Evercore ISI. Please go ahead.

Thanks. Jeff, I think -- I mean, you already clarified, but just to make sure it sounds like you’re framing the annual second quarter risk adjustment true up as more of a recurring benefit relative to the size of the exchange premium base that we shouldn’t treat as nonrecurring item?

Its right.

So basically -- yes, so basically that -- the 2017 benefit you’re recognizing in 2018, should we think about as being offset by conservatism embedded into the payables you're accruing for the 2018 plan?

Yes. Absolutely.

And that should flow through the earnings next year and the second quarter or 2019.

Yes.

Assuming, of course, there's no change in the program, is that the right way to think about it?

That’s exactly right.

And we -- and I anticipate it will be as close to accurate next year as it were this year.

Got it. And then maybe just a second one then. So -- when you close the Fidelis acquisition, was there any evaluation of the reserves or adjustments made in the asset purchase?

Well, we haven't. So that closed July, so we haven't -- we're not reporting our accounting for that yet. But, yes, we will go through a entire fair valuation exercise associated with the Fidelis transaction. We have -- the first time, we'll see that is when we report Q3. So we’ve begun our procedures on that. Obviously, we did a lot of planning for that, but we've kicked that off and that will be the beginning of the fair valuation exercise that we will complete within 1-year from the balance sheet.

Right. Thank you.

The next questioner today will be A. J. Rice with Credit Suisse. Please go ahead.

Hi, everybody.

Hi.

Continuing to beat the dead horse on the risk adjusters. Is your 5% pre-tax margin outlook for the exchanges in 2018 inclusive of the $79 million risk adjuster accrual?

Yes. I believe we said it's -- I think my commentary specifically was higher than 5% and below 10% at one of our investor days. So, yes, yes, it is. When we look at the margins, when we’re giving those margins, that's what I would call a fully complete reconcile with the government margin number.

You have to do it when you’re including it in guidance. You have to be …

That’s right.

Right. So I know originally you guys have talked about in for some time and talked about long-term profitability on the exchanges being in the 3% to 5% range. If -- it sounds like you're running 5% or north of that. Now is there any updated thought on what the long-term profitability of the exchanges might be?

Yes, I think you're right. We had a lot of history with the product and its performed consistently year-over-year. That's why we ultimately changed our 3% to 5% and updated that to north of 5%. For competitive reasons, I’m not going to get into the actual margin number, but it's a very good product for us.

Okay. But you're saying, you think the north of 5% is sustainable basically?

Yes.

Okay. And then just -- this is a technical cleanup. On the California Medicaid expansion, MLR retroactive adjustment, I think you're saying that the $0.20 headwind was in the reported 85.7% MLR. But you’re taking that out when you -- on the EPS -- adjusted EPS calculation of $1.80. I just wanted to confirm that.

Yes. That’s true. In my prepared comments, I mentioned it was a 20 basis point increase to the HBR for the quarter. We don't provide an adjusted HBR number. So I just gave you the 20 basis points.

Okay. All right. That's good. Thanks a lot.

Thank you.

And our next questioner today will be Zack Sopcak with Morgan Stanley. Please go ahead.

Thanks for the question. I just wanted to go back to the contribution from Fidelis for the second half of the year. Is it fair to think that the cadence of the contribution is going to follow the same path as Centene historically has in 3Q and 4Q?

Yes. Excluding that -- the exchange business, the marketplace business, right. You're talking Centene historically prior to the marketplace business?

Yes. I guess, I’m talking when adding Fidelis that I think of the contribution being the same as your general cadence between 3Q and 4Q, or is there something that’s going to change the overall timing due to the accretion from Fidelis?

No, no. I would say that, yes, they would follow what I call a traditional Medicaid earnings path for a year. So, you have flu season which kicks off in Q1 or Q4, and can go into Q1. And so those months are usually or those quarters are usually the highest HBR quarters. The summer months a little better, so, yes, I think it would follow that same seasonality path because they’re predominantly Medicaid.

Okay, got it. And a question back to the marketplace. So with CMS adjusting again the amount that they invest in navigators, are you thinking again about how you’re going to invest, I guess in advertising in general for the marketplace going to the next year and should we think about that at a similar level as we saw it coming into this year?

Yes, that’s -- yes. Similar level, I would say it's larger actually because the business is larger for us, right. And we are planning for growth in 2019, but that kind of goes back to the whole risk adjustment comment. If you go back to last year, in the second quarter, we had the risk adjustment that was pretty much offset by the additional costs that we loaded into the fourth quarter of 2017, because the government limiting marketing. Those costs are already included in our 2018 guidance, which is one of the reasons why we included the risk adjustment favorability as well. Both items are in. And those costs are actually higher than they were last year because of the size of the business.

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

And the next questioner today will be Justin Lake with Wolfe Research. Please go ahead.

Hi. Thanks, guys. I appreciate the question. So on risk adjustment, I want to make sure I’ve got it completely correct. So, it sounds like I’m almost completely and exactly wrong in that you're saying that you put up a pretty significant reserve for adverse deviation every year on this thing?

Yes, just for the record before Jeff responds, you said that. I didn’t.

But it's always fun to be publicly incorrect, so let's just make sure I have this straight. So Jeff you put up with this theme [ph], because it looks like it's north of 10% of your -- what you -- what the spot number ends up being, you’re putting up 10% plus.

Yes, what I will tell you is that's an actuarial estimate, of course, and it's done by state. That's also net of minimum MLRs, so the calculation is actually more complicated than just aggregating the business altogether and taking one. And obviously there are a lot of carriers that have had problems with this in the past. So, yes, we have had a, what I call a consistent reserve for adverse deviation. And that's been -- you can see that in the actual results and how it's played out over the last three years.

And where it's interesting is because the business is actually growing, the deviation reserve you’re putting up for this year, for '18, is actually even bigger on the -- from a headwind perspective than tailwind you're getting for last year.

That would be an accurate statement. We are using the same methodology that we have used since the beginning of the program. The only thing that’s happened is we’ve gotten more states and the business is growing.

All right. And then let me just -- you said this is in guidance and obviously I take you guys, your word. The thing that was confusing is last year was it in guidance for '17, because you beat the 2Q when you had this true up benefit, you beat by $0.30 versus consensus. And you had it very clearly in the write up that you had this $0.17 beat. And that’s where I think at least I got confused because it looks like it was upside last year and this year …

Yes.

… it wasn't. So can you -- it -- was it consistent or was this the first year you didn't -- you decided to put it in guidance? Can you clear that up for me?

Yes, yes. I mean, I hate to go all the way back to December of 2016, but you have to remember where we were in December 2016, it was postelection. And if you recall, we actually added $0.20 of conservatism for the whole marketplace product as a result of the election. So at that point in time, we did not include the risk adjustment in the number, in the guidance. But post that we seen stability in the market, we have a consistent level of development. So heading into this year, because we had the costs, right, remember in 2017 when we had the favorability in Q2, we added the costs to Q4 pretty much offsetting that because the government was limiting its marketing. So fast forward to this year, the costs were in, the benefit of the risk adjustment in really driven by stability in the program and we were comfortable enough with our estimates and what the costs were going to be for the year. So it was in guidance, yes.

Got it. So in '17 it wasn’t in guidance. You did that from a conservatism perspective, because of everything going on.

That’s right.

And it was in guidance and going forward it will be in guidance, so we should expect and comparing this is -- you will basically just assume that this occurs at 10% or plus or whatever the reserve is each and every year?

Yes. Yes and I -- and -- there has been consistency in the past. I do want to be careful, it's an estimate, right. We are estimating it. We've had very consistent track record of estimating it. But we are using the same methodology that we have used since the beginning of the program.

And I just want to emphasize what Jeff said earlier that it's not a 10% market by market evaluation that really gets rolled up by our accounting folks.

All right, guys. Thanks for all the color. I appreciate it.

The next questioner today will be David McDonald with SunTrust. Please go ahead.

Good morning. Just a couple of quick questions. One, I wanted to come back to RXAdvance. You’ve obviously had that relationship now for a handful of months, can you just talk for a minute about are you already starting to see some of the efficiencies around administrative cost, and also has it noticeably improved your visibility around gaps in care and the ability to decrease some of these drug impacted medical costs?

Yes, I will start off and Jesse can pick it up, but it's been a couple of months and there will be a lot to see in a couple of months, but Jesse?

Yes, I think that’s pretty couple of -- kind of pieces of context around that. One, one is to Michael's point, we’re in the kind of the rollout process. So that wouldn't be fair to comment on kind of specific visibility, but we continue to have confidence that the efficiencies that we have referenced are there. And those benefits will continue to accrue as we expand the offering in the future.

And then guys just one quick follow-up. How do we think about with regards to Fidelis, the pacing of the expansion of services that Fidelis, how quickly you expect to roll out some of these additional services and just any visibility around that?

Well, I think it's going to be a function of -- we’ve worked out in the medical management. And we've already been planning for it to the prior to close, we’ve planned the rollout. I’m not going to add the whole plan of when medical management is coming, case management, interpreter and the other things. Jeff?

Yes, yes. I mean, obviously we’re trying to -- I mean, it's a big component of the synergy capture. So we've been planning on this for quite some time and we are accelerating those as fast as we can.

Okay. Thank you.

And by the way we’ve a very willing recipient. They’ve been sitting there waiting and biting it to bits, so to speak to get at it.

And our next questioner today will be Gary Taylor with JP Morgan. Please go ahead.

Hi. Good morning. One clarification and then two questions. The first, Jeff, when you talked about the $400 million for the California MLR rebate remainder of year, that's simply a cash flow item already accrued, correct?

It is actually -- it's regulated capital. It is already accrued. So it's already on the balance sheet of the statutory entity. So there's really no revolver borrowing or any free cash flow implications, that's regulated capital going back to the state that's been accrued since the Fidelis acquisition or since the Health Net acquisition, sorry.

Okay, thanks. Question, was there a material outpatient provider rate increase under the Florida Medicaid program during the quarter?

A couple of things I will always say. There is retroactivity in the business. We are operating obviously in -- several states across the country, and I would say this is common in Medicaid programs where there's retroactivity. Some are positive, some are negative, but we always see a certain level of retroactivity. That's the benefit of scale and diversification is that you’re matching those things up and you're using a portfolio approach. So what I would say is, yes, there was some fee schedule changes, but I would say across the Centene enterprise in total nothing out of the ordinary.

Okay, understood. So, not material enough to call out given the portfolio's performance, that’s a positive.

That’s right.

And then last one is just specifically hospital trends. So we came out of first quarter with hospitals -- at least, for profit hospital showing higher -- not just acuity, but higher same-store revenue. Most of the payers still saying overall hospital trend is fairly stable. Is there any color on your overall hospital trend?

No, I would agree to those comments. I think it's pretty consistent.

Okay. Thank you.

And the next questioner today will be Ana Gupte with Leerink. Please go ahead.

Yes, hi. Thanks. Good morning.

Good morning.

Yes. Thanks. Can you hear me?

Yes.

Yes.

Okay. All right. Thank you. Yes, so the stocks, not just yours, but Medicaid in general, has been rebating back to growth status. And my question was about your organic growth and then your priorities for your capital deployment on inorganics. If you take a look at this year it looks mostly like your growth is coming from exchanges and then to a smaller -- much smaller extent on ABD complex populations and then for a much smaller based on Medicare. So inorganically speaking, where do you think the growth is going to come from or is it going to stay more exchange driven you think or would it reaccelerate in other areas? And then, secondly, on the -- to looking at your inorganic approaches, initially I felt like you were talking a lot about Medicare. It's now very successfully you’ve Health Net and Fidelis. Mike, you would be thinking more about rollup as your priority or more tuck ins on Medicare? And then where does it play into your specialty and involve capabilities as far as cap deployment?

From the organic standpoint, I think we laid out the number of RFPs we won. The expansion is taking place there. The new RFPs will be waiting to go live. So you will see continued growth in the Medicaid business to that form of organic growth. Relative to the inorganic growth and tuck in things, I really can't talk too much about that, that's from a competitive standpoint and all of these is associated with it. And very simply, there's always -- they say many [indiscernible] between the company [indiscernible] until a deal is done, it's not done. So I want to be very cautious and conservative on that particular one. And the third part that I heard is, we continue to focus as well as on the current book of business, the Medicare, other things that we’ve talked about on the technology side of things. Our RXAdvance is a good example of that. It's a technology that I think will materially help us grow that business and contribute significantly to reducing costs. So we will continue that and to focus on those kinds of opportunities and the prison health, etcetera, just a very balanced portfolio of growth is our objective.

Helpful. Thanks, Mike. Hey, one follow-up on the technology piece. So you very nicely showcased RXAdvance at the ID. I did see John Sculley, at a public appearance, after Amazon announced they'll pack and how they might need to get into cloud-based PBMs and so on. So as you think about your equity stake in RXAdvance, and tech players like Amazon potentially making a play into the drug value chain, might you see yourself driving partnership with some of these "so called"…

Well, I think anybody that wants to purchase at a fair price our services, we will be available to talk to. And I think really -- as people understand some of these capabilities, they’re going to recognize they really need it as they move ahead and I made some musing comments that, vis-a-vis, the things they're talking about and disruptors and -- I see that as a positive and we intend to eliminate the extended disruptors ourselves with some of these technologies

Got it. Thank you. I appreciate it, Michael.

Thank you.

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

Well, I want to thank you all for your time, attention, support. And we look forward to the next call, not unlike this one. Thank you and have a good rest of the summer.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.