Ladies and gentlemen, thank you for standing by, and welcome to the Molina Healthcare’s third quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions) I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations. Juan José Orellana: Hello everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2009. The company's earnings release reporting its results was issued today after the market closed, and it is now posted for viewing on our company website. On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; Dr. James Howatt, our CMO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. I also would like to remind you that our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions that are subject to numerous risks, uncertainties, and other factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release, our 10-K annual report, and our 10-Q quarterly reports filed with the Securities and Exchange Commission. These reports can be accessed under the Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of October 28, 2009, and we disclaim any obligation to update such statements. This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the company's website at www.molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina.

The third quarter has been challenging for Molina Healthcare. Compared to the third quarter of last year, our premium revenue has grown by 16% and our membership has grown by 14%, but our profitability has suffered due to rising medical care costs. Our financial performance continues to be affected by many of the same factors we had discussed our during our second quarter conference call. These factors include higher utilization of physician services, higher outpatient costs, and an increase of new members with their higher medical costs. In the third quarter, emergency room utilization increased in part driven by a resurgence in the 2009 H1N1 flu epidemic. As you know, President Obama recently declared a national emergency due to this novel flu epidemic. The H1N1 flu first became a factor in the second quarter. Flu activity declined during the summer months, but baseline flu activity remained elevated. With the return of children to school in the fall, we saw a resurgence of the H1N1 flu beginning in September and continuing through October. As Dr. Michael Siegel discussed during the second quarter call, the H1N1 flu virus seems to disproportionately attack children and young adults—the patient population that comprises the majority of Molina Healthcare’s membership. Public health officials are vigorously attempting to immunize the public, giving priority to high risk groups such as children and pregnant women. We’re doing our part to aid in this effort by administering the vaccine in our clinics in California and Virginia; however, the vaccine only recently became available in limited supply, while the H1N1 epidemic began in the second quarter of this calendar year. On another front, the California Health Plan’s results have had a continuing negative effect on our profitability, decreasing our consolidated earnings by $0.58 per share so far this year. Not all…

Earnings for the third quarter of 2009 were $0.33 per fully diluted share. Net income was $9 million for the quarter compared to $16 million reported for the third quarter of 2008. Our 2009 third quarter revenue increased 16% or $123 million compared to the third quarter of 2008. Enrollment growth was very strong across all of our markets. Our enrollment now exceeds 1.4 million members and grew by 43,000 members or 3% in the third quarter alone. However, these accelerated enrollment trends are adding to significant medical margin pressure. In absolute numbers, Florida and California added the most members during the quarter. However, on a year to date basis, Florida and California are also the two states exhibiting the highest medical care ratios. We believe that as we streamline our networks and transition towards a more tightly managed organization, our financial results will improve. As Mario noted, the company has a long-term commitment to California and Florida, and we’re taking steps to improve the profitability of our health plans in those states. This may result in a reduction in membership in certain markets in connection with our restructuring of our provider networks and tighter utilization management. Our medical care ratio increased from 84.6% in the third quarter of 2008 to 86.7% in the third quarter of 2009. This is an increase of 210 basis points year over year and a slight 10 basis point decrease over the prior quarter ended June 30, 2009. Nearly half of this year over year increase can be attributed to the California health plan. As previously discussed, our primary concern is to improve the financial performance of our California Health Plan. Our medical cost trends continue to be consistent with those identified by the company during the second quarter 2009. Except in the case…

(Operator Instructions) Our first question comes from the line of Daryn Miller – Goldman Sachs. Daryn Miller – Goldman Sachs: Your MCR year over year is up over 200 basis points. Did you say only 50 basis points of that was due to H1N1?

That’s right, Daryn. Daryn Miller – Goldman Sachs: Was there any incentive comp reversal in the third quarter?

No. Daryn Miller – Goldman Sachs: Just thinking back to last year where we had an issue where guidance was actually lowered and that happened. Was there a reason why it wasn’t lowered this time?

Why what wasn’t lowered, Daryn? Daryn Miller – Goldman Sachs: Incentive compensation with the change in the outlook?

I think the difference may have been, as I recall last year, we probably had something on the books when we lowered guidance versus we didn’t have anything accrued at this time. Daryn Miller – Goldman Sachs: So, you haven’t accrued yet for that?

That’s correct. Daryn Miller – Goldman Sachs: On the Florida MCR at 95%, are you accruing to a target there or is that what the state is running at? Just provide a little bit more clarity as to what cost elements if it is higher, what is driving that higher?

Daryn, what’s driving it higher than what we’d like and expect to see is that patients are going through a transition phase from the MediPass to the full risk HMO. As a result of that, we have to keep continuity of care, so certain drugs that are not on our formulary, we’ve got to continue to supply for a period of time. We expect over time we will bring that down below 90, but that’s an actual number; it’s not a target number. Daryn Miller – Goldman Sachs: That’s specifically related to the population that’s transitioning then?

Correct.

.: Joshua Raskin – Barclays Capital: Can you talk a little about the timing of the recognition of these issues and why not preannounce the quarter? It doesn’t look like you guys are sort of even in the ballpark.

Josh, I think that the first two months of the quarter are running pretty well. We had some issues in the third month of the quarter which brought the earnings down for the whole quarter, so there was really no reason or time to do the preannouncement. Joshua Raskin – Barclays Capital: Following up on that, it sounded like the summer months were okay from a flu perspective, and it picked up in September and October. If we assume 50 basis points is about $4.5 million and we make the assumption of something in the ballpark of $4 million in the month of September, do you think you’ll be profitable in the fourth quarter?

This is why we withdrew that element of guidance. Joshua Raskin – Barclays Capital: What’s differentiating Molina from some of your competitors even in the state of California? Is it the clinics or is it population or county mix? I’m just sort of curious why and certainly others have mentioned this. It just seems the magnitude for you guys seem to be particularly harsh.

I think it’s a combination of things. Part of it as we mentioned has to do with the LA County contract where we are getting less than the full premium revenue because HealthNet withholds a portion for administrative functions. A lot of it is driven by higher hospital cost and some of it has to do with some of these other contracts like Yolo County which we’re exiting and the AIM program which we’re exiting, so it’s really a mix of all of those things. In terms of what others are saying, I don’t know. I don’t know who else has reported it in California and what they have said, but this is our experience, and as John pointed out, the first two months of the quarter, we were right on track with our guidance, and September was a very difficult month.

.: Greg Nersessian – Credit Suisse: My first question was just on the timing of when think you guys might update the guidance. Are you going to wait till you report the actual fourth quarter or is there going to be an interim announcement? What are your thoughts on that right now?

Right now we are not planning to give guidance for the fourth quarter if that’s what you’re asking. Greg Nersessian – Credit Suisse: So we won’t know what the fourth quarter looks like until you actually report it?

Correct. Greg Nersessian – Credit Suisse: And no plan to do an investor day or anything like that you typically schedule in January.

We are going to have the investor day. I think right now it’s slotted for towards the end of January, January 20 or something, and we give our outlook for the year at that point, and we plan to do that. Greg Nersessian – Credit Suisse: But that would be before you report the fourth quarter?

Correct, as we do every year. Greg Nersessian – Credit Suisse: So you’ll give an update on 2009 obviously then when you’re giving the 2010 guidance?

To the extent we have greater clarity on what’s going on, yes. Greg Nersessian – Credit Suisse: How much membership is in the Yolo and the San Diego programs that you’re getting out of?

Those books of business are pretty small, but they are running significant losses, and that’s why we’re exiting. You’re not going to see a big impact on overall membership, but you should see an improvement in profitability as a result. Greg Nersessian – Credit Suisse: Have you talked to HealthNet yet about the situation? Is there a change in mind to reassess that relationship?

We have regular ongoing conversations with HealthNet. Greg Nersessian – Credit Suisse: You mentioned that you’re meeting with regulators on the coding. Has that happened yet? Have you started to talk to them yet? What’s been the response on the ER coding so far?

I don’t think that we have met with any government agencies with regard to this yet. We’re still gathering the data. We want to be very careful and very thoughtful about this. Greg Nersessian – Credit Suisse: So no sense of how the regulators are going to approach this up-coding issue?

No, but I do think it seems to be fairly widespread.

.: Carl McDonald – Oppenheimer: I just wanted to get a better sense of how far along the spectrum the results in California are. If you were to pull out the three counties that you highlighted, would rest of the California business be profitable or is it just that these three counties are losing a lot of money and the other counties are not losing quite as much?

It’s fair to say that the other counties are marginally profitable.

.: John Rex – J.P. Morgan: How did you adjust handling the $7.8 million Texas payment that reduced revenues and drove the cost ratio in that quarter so far up? I assume that all relates to prior quarters. Is that correct?

It would relate to the contract year ending 08/31/09 plus obviously the stub period starting the new year in September. I think the best way to handle that is we breakout premium and medical cost by state in the back of the earnings release. I would take the 09/30/09 year to date number there as a run rate. John Rex – J.P. Morgan: What strikes me though is most of that didn’t relate to the third quarter, the vast majority of it, and so if I back out that impact, I end up with an MCR of something like 85.9%.

I would just caution to the extent that an adjustment to that doesn’t relate to quarters before this. Also much of that is driven by claims development in previous quarters too. There’s a constant process of truing up the amount owed to Texas under the experience rebate, so to the extent, we might be going back and increasing or decreasing a portion of the rebate in prior quarters, we’re also driven by having to go back and increase or decrease our estimate of medical expenses for that quarter. John Rex – J.P. Morgan: My point on this though is that but for that you wouldn’t have missed the quarter essentially? That’s the myth, and when you look down the line items across the different markets, the sequential change in the loss ratio is frankly for most of them is modest, many improved; you do that and you’re in an improved position, so I guess what I’m struggling with is what were you thinking you were going to do in the 3Q then if absent this Texas adjustment you would have been running, you would have been inline, you would have actually made the quarter, then what were we actually thinking because it actually looks like it would have been okay absent that?

There is an adjustment to Texas revenue every quarter based upon the development and experience rebate, so I don’t think it’s correct to say that we anticipated no adjustment to revenue during Q3 when we set guidance.

The other thing I would say is that most of the states are performing pretty well. You’re right. We have seen an increase in the flu across virtually all the states. It has had an impact, and I think that it probably is going to get worse because I don’t think the flu season has peaked yet, but for the most part, the other states are performing well. There are a few isolated problems. Clearly, California is having a big negative impact on our earnings, and that has to be addressed. The issue with Texas somewhat difficult to deal with from an accounting standpoint because as Joe points out it’s a rolling number, but we think that we have a pretty good handle on that, and as he points out, going forward, if you use the year to date numbers as a run rate, you can kind of project what Texas is going to look like. There are a few issues we’ve got to deal with. Some of them are clearly within our control. They have to do with contracting, they have to do with premium rates and network strategy. Some of them like the flu epidemic due to the H1N1 and perhaps the second flu epidemic coming from the seasonal flu later in the year are outside of our control, but as I mentioned, I think the long-term prospects are good. There are some problems that have to be dealt with, but most of these are things that we cannot control. John Rex – J.P. Morgan: Where would you have expected California to come in this quarter? It went up 50 basis points, from 91.7 to 92.3. Were you expecting that to improve a couple of hundred basis points? Again, I’m just trying to find what was so out of line with where your head may have been?

Traditionally, third quarter has the lowest medical care ratio, and as I think I pointed out earlier the first two months, we were running along with what we expected. It really was a couple of factors largely in September that frankly if you look it at what’s happening with the flu season, the H1N1, we just don’t know if that’s going to continue to go up. At some point it’s got to peak, but we don’t know if it’s going to peak in October, November, or December, and that’s having a big impact on us because of our population and frankly the inabilities to tell if this is going to be outpatient or inpatient related, so I would echo Mario’s points. We have a number of states that are doing well. California, we expected it to bounce back some, and it didn’t. John Rex – J.P. Morgan: What was the order of magnitude that you expected? I’m just trying to get an idea of what was the correct…

I don’t want to go into giving projections by state John, but we have been working on the California issues and other issues as well. Remember we talked in the second quarter about terminating the contract in Washington for basic health. Now, that contract will run out through the remainder of the year, but it’s a problem. A number of the contracts we terminated in California have rolling termination dates, and so one of the points that I wanted to make on this call is that when we tell you we’re going to take an action, it’s not immediate. Some of these have 90-, 120-, 270-day notice requirements, so we can tell you that we’re making a change, but this is a little bit like the battleship analogy. This thing doesn’t turn on a dime. I don’t want you to think that we’re sleep at the switch, but by the same token, some of these things do take time to see the results. John Rex – J.P. Morgan: You’re saying we shouldn’t think of this excess $7.8 million Texas payment for a run rate also. Is that correct? I am not sure if I understand why we shouldn’t think of it ex-fact though.

John, I want to say there are many factors in any given quarter that both work favorably and unfavorably in the results, and I think to attach attention to any specific one is probably not the wisest approach. John Rex – J.P. Morgan: Any detail on Michigan you can offer or comments on Michigan?

What aspect of Michigan, John? John Rex – J.P. Morgan: I think that was one that you’re citing specifically.

The problem in Michigan right now is that we don’t know what’s going to happen with the budget. We were told originally to expect 4.5% rate increase, and then the budget did not pass. There has been a 1-month extension. We could know by end of this week or early next week what the budget situation is. On the other hand, they may not pass the budget; we may not get a rate increase. They may modify provider rates. They may do another extension. It’s really up in the air. With California, we’re sort of used to this. They never pass the budget on time it seems, but this is a new phenomenon in Michigan, and as I pointed out, the states are under a lot of pressure, and we don’t know for sure what’s going to happen. When the stimulus package money goes away at the end of 2010, the states are going to face tremendous pressure unless something is done, and we don’t expect the number of people on Medicaid to drop much in 2010, so all these things taken together make it a pretty uncertain environment for us right now in the fourth quarter. John Rex – J.P. Morgan: You had spiked it out distinctly from others, so I just didn’t know if there is something else unique about the market that was on your mind.

It’s mainly the budget issue and the fact that they are continuing to pay us at last year’s rates, not the higher rates that we were told to expect.

(Operator Instructions). The next question comes from the line of Craig Silver – Private Investor. Craig Silver – Private Investor: I would like to ask your opinion on this healthcare reform. Maybe can tell your thoughts on the public options being discussed. Is that good, bad, or neutral for our company?

It’s kind of a difficult question, Craig, but I think that for Molina Healthcare, it’s really neutral. What we basically do is contract with the government to provide health care, and we do it through the Medicaid program, the CHIP program, and the Medicare program. The public option that is being discussed is really an alternative for commercial plants, so I don’t know that it’s going to have much of an impact on us, and we’ve not really taken a position on the plan. Craig Silver – Private Investor: You’re showing a $10.9 million business purchase in the quarter. Could you explain what that purchase was?

That’s a combination of activity on three fronts. It’s a true-up on our purchase of our Missouri health plan back in the last quarter of 2007. It’s a small acquisition in Laredo, Texas to transition 9000 members to the company, and it’s also partial payment of an acquisition in Florida as we transition members from HealthPass into our Florida HMO. Craig Silver – Private Investor: You also had an increase in our intangibles for the year of over $20 million. Was that also acquisitions?

Yes, the bulk of it being in Florida. Craig Silver – Private Investor: You’re showing $21 million increase in intangibles, but our purchases of transactions is only $10.9 million.

There is an accounting twist to that. Essentially, the acquisition is being accomplished in stages, so we’ve essentially got a payable to the sellers in Florida recorded that’s not showing as an actual cash payment to them yet in the cash flow statement because we haven’t released those funds yet. Craig Silver – Private Investor: Do we expect these acquisitions to improve our earnings substantially?

I think that the Florida acquisition is an ongoing process. It’s not a new thing that’s going to change things much. The acquisition in Texas is small, and I think that we’re doing that in conjunction with the expectation that we’ll be expanding through the Texas CHIP program in the fall of 2010 as a result of the RFP. Craig Silver – Private Investor: It’s very good that we’re continuing to flow cash. It’s good to see our cash balance grow. What’s the possibility of starting to see a dividend for shareholders? I think that would open up our stock to some more mutual funds that need income.

It’s something that’s been discussed in the past, but right now, I don’t anticipate a dividend in the near future. Craig Silver – Private Investor: It would helpful for our shareholders and would certainly open our stock up to more funds that are looking for not just growth but for income.

In John and Mario, you’re talking to two of the largest shareholders in the company, and we would certainly benefit from a dividend, so we’re aware of that. Craig Silver – Private Investor: You’re also benefiting from restricted share purchasing and other things that shareholders are not, so keep that in mind.

Our final question comes from the line of Tom Carroll – Stifel Nicolaus. Tom Carroll – Stifel Nicolaus: This chart you have on page 5, the emergency room visits per 1000, that shows the change year over year in the different levels, if there is 100 ER visits in a year on a normalized basis, how many fit into each of those buckets, and what does this year look like?

Normal conventional wisdom is a bell-shaped curve. For example, if you look at the American College of Emergency Physicians’ guidelines on this, a level 1 is a wound check, and a level 5 is a multi-system exam, so it’s really a bell-shaped curve. Most of this stuff falls in level 3, and so that’s why you can see why given the changes we’ve outlined in the table here, why it’s having an impact on our cost structure.

The distribution is skewing to the higher codes, and this is a new phenomenon that we’re working on. It’s a little strange. Tom Carroll – Stifel Nicolaus: Thank you.

That concludes our call. Thank you for joining us, and we’ll speak to you at the end of the fourth quarter.