Centene Corp (CNC) — Q1 2018 Earnings Call Transcript

Thank you, Operator. Good morning, everyone. Thank you for joining us on our 2018 First 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 U.S. and Canada, or in other countries by dialing 412-317-0088. The playback code for both dial-ins is 10118311. 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, April 24, 2018 and our Form 10-K dated 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. 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 First Quarter 2018 Press Release, which is available on the Company's website, Centene.com under the Investors section. Finally, a reminder that our next Investor Day will be on Friday, June 15, 2018 in New York City. 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 First Quarter 2018 Earnings Call. During this call, we will discuss our first quarter results and provide updates on Centene's markets and products. We will also comment on healthcare legislation and regulatory changes, along with recent acquisitions and investments, including updates on Fidelis. I want to start by addressing Centene's position in today's changing healthcare landscape. Centene has evolved from being solely focused on Medicaid to becoming a multinational diversified healthcare enterprise through a mix of organic growth and strategic acquisitions. We offer around 300 solutions across 30 states, serving 12.8 million U.S. citizens and approximately 900,000 individuals in two international markets. Centene is the largest Medicaid-managed care organization in the United States. After finalizing the Fidelis acquisition, we will lead in four of the largest Medicaid states. Additionally, Centene is the largest provider of managed long-term support services and the predominant provider in the marketplace segment. Our scale enhances our operating performance, allowing us to manage temporary business challenges effectively. We are committed to ensuring future growth by investing in systems and capabilities that allow us to provide high-quality healthcare at the lowest cost. Now, I’ll discuss our recent acquisitions and investments. We are pleased with the progress of the Fidelis Care acquisition and the regulatory approval process. Recently, we secured approval from the New York Department of Health and the New York Department of Financial Services. We are in talks with the New York Attorney General to finalize the approvals soon, targeting closing by July 1. Integration planning is already underway and progressing well. Earlier this month, we agreed to commitments with the New York Department of Health, including a $340 million contribution over five years aimed at improving healthcare for vulnerable populations. In April, we completed the acquisition of MHM Services, enhancing our healthcare and staffing solutions provided to conventional systems and governmental agencies. We also acquired the remaining 49% ownership in Centurion, our joint venture with MHM in correctional healthcare services, allowing us to serve over 300,000 individuals across more than 300 facilities in the U.S. This acquisition expands our correctional operations from seven states to 13. In March, we finalized the acquisition of Community Medical Group in Miami Dade County, Florida. This aligns with Centene's strategy for vertical integration, focusing on serving individuals in numerous government-sponsored healthcare programs. CMG supports around 70,000 Medicaid, Medicare Advantage, and marketplace members, with a unique clinical care model incorporating primary care, specialty care access, transportation, and social support services. This acquisition lays the groundwork for expanding this care model across Florida and potentially other states with limited access. In the same month, Centene made an equity investment in RX Advance, a full-service pharmacy benefits manager. This partnership will help reduce administrative costs and enhance affordable drug-impacted medical costs, while giving us rights to increase equity investment in the future. We also raised our ownership in Interpreta to 80%, focusing on clinical and genomic data and real-time analytics. Overall, these acquisitions and investments help advance our diversification strategy, solidifying Centene's position as a leader in government-sponsored healthcare. By enhancing our capabilities in provider, pharmacy, and technology, we are setting the stage for growth and improved margins. Now, I’ll provide an update on the healthcare legislative and regulatory environment. It appears unlikely that Congress will pass new healthcare legislation in 2018, with any changes likely occurring through regulations. In April, CMS released its final payment notice rule for exchanges for 2019, and we are confident in our ability to adapt to these changes. Moving on to first quarter 2018 financials, we are pleased to report a strong start to the year with solid growth in both revenue and earnings. Membership at the end of the quarter was 12.8 million, an increase of 684,000 beneficiaries from the same time in 2017. Revenues rose 13% year-over-year to $13.2 billion. The adjusted SG&A expense ratio increased by 100 basis points to 10.3%, largely due to growth in our marketplace business. The HBR decreased by 330 basis points to 84.3%, thanks to improved Medicaid performance and the return of the health insurance fee. We reported adjusted diluted earnings per share of $2.17, up from $1.12 a year ago, representing growth of 94%. Operating cash flows were $1.8 billion, or 5.5 times net earnings. Jeff will provide further financial details, including updated guidance for 2018, in his remarks. A note on medical costs related to flu: we experienced an uptick in flu cases in the first quarter, peaking in February, affecting the first quarter HBR by around 40 basis points year-over-year. However, due to our scale and diversity, we can absorb these costs. Flu trends are seen as episodic and don’t reflect our ability to manage overall medical expenses. We expect stable medical cost trends in the low single digits. Regarding market and product developments, we experienced notable Medicaid activities this quarter. In Arizona, we were awarded a contract to provide physical and behavioral health services, expanding our coverage to the Central region and reaching 1.5 million beneficiaries beginning October 1, 2018. In Texas, we were awarded a contract under the CHIP Rural Service Area Program, but the state canceled these awards in April due to an evaluation error. We will continue providing CHIP coverage until new contracts are offered. In Pennsylvania, we started serving beneficiaries in a new long-term care program and surpassed expectations, serving 22,400 beneficiaries. The second phase of this program will begin by January 2019. As for Medicare, we initiated Medicare Advantage operations in eight additional Medicaid states under our WellCare brand, with over 340,000 beneficiaries by quarter-end, and we expect to see further growth in this area. Our marketplace business is thriving as well, with Ambetter being a national leader. We gained market share exceeding our targets, retaining 80% of our 2017 exchange members and serving over 1.6 million exchange members. With the closing of the Fidelis Care transaction, we will be able to offer products in 16 states. Finally, we anticipate a composite Medicaid rate adjustment increase of around 1% for 2018 while CMS’s 2019 Medicare Advance notice showed better-than-expected rates. In conclusion, our strong first quarter results position us well for continued momentum throughout 2018. Centene remains committed to growth, leveraging both organic expansion and strategic acquisitions. We have demonstrated our capacity to effectively integrate acquisitions across various sizes and expect to achieve double-digit growth in both revenue and earnings. We forecast continued margin expansion as we enhance process efficiencies and automation. Our next Investor Day is June 15 in New York City, and we look forward to seeing you there. Thank you for your ongoing support of Centene, and now I will hand the call over to Jeff.

Thank you, Michael, and good morning. This morning, I will cover the strong first quarter results and updates on the Fidelis acquisition, and provide more color on the changes we made to our annual guidance as announced this morning. As Michael mentioned, we had a good start to the year with strong first quarter results led by the growth and performance in our marketplace business, and year-over-year improvements in the performance of our Medicaid business. This more than compensated for the additional flu costs we experienced in the first quarter. I will provide more details on that in a minute. For the first quarter 2018, total revenues were $13.2 billion, an increase of 13% over 2017 and adjusted diluted earnings per share for the first quarter 2018 were $2.17, an increase of 94% over the last year. The first quarter adjusted diluted earnings per share were driven by membership growth and the associated profitability in the health insurance marketplace business and the benefit of tax reform. Additionally, the first quarter results were approximately $0.12 per diluted share higher than previous expectations due to the lower share count and lower interest expense associated with the delay in the financing for the Fidelis acquisition, which was included in our previous guidance on March 1. Let me provide some more details for the quarter. Total revenues grew by approximately $1.5 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 expansion of the Missouri contract and the Pennsylvania LTSS program and the return of the health insurer fee in 2018. This growth was partially offset by lower revenues in California, associated with the removal of the in-home support services program from managed care. Moving on to HBR; our health benefits ratio was 84.3% in the first quarter this year, compared to 87.6% in last year's first quarter and 87.3% in the fourth quarter of 2017. The decrease year-over-year is primarily driven by the growth in the marketplace business and the effect of early enrollment compared to the prior year, lower costs in our Medicaid business, and the reinstatement of the health insurer fee in 2018. This was partially offset by new business, which initially operates at a higher HBR, and additional flu cost year-over-year of approximately 40 basis points. Sequentially, the 300 basis point decrease in HBR from the fourth quarter of 2017 is primarily attributable to growth in the marketplace business, which seasonally has a lower HBR in the first quarter, the reinstatement of the health insurer fee, and additional expenses recorded in the fourth quarter of 2017 associated with the CSRs. This was partially offset by increased flu costs compared to the fourth quarter of 2017. Our adjusted selling, general, and administrative expense ratio was 10.3% in the first quarter this year compared to 9.3% last year and 10.5% in the fourth quarter of 2017. The increase in the ratio year-over-year is due to additional costs incurred during the first quarter to service additional marketplace membership. A sequential decrease is due to increased costs associated with the open enrollment periods for both the Medicare and marketplace businesses in the fourth quarter of 2017. This was partially offset by increased variable compensation expense related to earnings performance in the first quarter. Additionally, we spent $0.05 per diluted share on business expansion costs during the first quarter, which is consistent with the prior year. Our effective tax rate for the first quarter was 34.1%, compared to 39.7% in the first quarter of 2017. The lowered tax rate was driven by the effect of the income tax reform in 2018, partially offset by the return of the health insurer fee. Now on to the balance sheet; cash and investments totaled $11.9 billion at quarter-end, including $452 million held by unregulated subsidiaries. Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level. Debt at quarter-end was $5.2 billion, including $675 million of borrowings on our revolving credit facility. Our debt-to-capital ratio was 40.3% excluding our non-recourse mortgage note compared to 43% at Q1 last year and 40.3% at the end of 2017. We continue to focus on deleveraging, and consistent with our past practice, we used equity as a significant component to fund various investments and acquisitions completed in the first quarter. Although we increased our borrowings in our revolving credit facility, we ended the first quarter with a debt-to-capital ratio consistent with the year-end. Our medical claims liability totaled $4.8 million at quarter-end and represents 43 days in claims payable compared to 41 days at the end of 2017. The increase in DCP is the result of growth in the marketplace business in the first quarter and the timing of payments. Cash flow provided by operations is $1.8 billion in the first quarter or 5.5x net earnings. Cash flow for the quarter benefited from growth in the claims reserves and the risk adjustment payable associated with the marketplace business. Before we discuss the changes to our 2018 annual guidance, let me spend a few minutes to update you on the Fidelis acquisition. As Michael mentioned in his comments, we have revised the expected closing date for the Fidelis acquisition from April 1 to July 1, 2018. The integration and synergy planning continue to go well and we expect to hit the ground running. As a result, we expect to achieve half of the $25 million of year one synergies in 2018. Additionally, we continue to expect the transaction to deliver our previously communicated accretion targets. We expect to fund the transaction with approximately $2.3 billion of equity and $1.6 billion of debt. As we have indicated in our earnings release today, we have updated our annual guidance assumptions to reflect the equity and debt financing as of May 1. These are guidance assumptions, and the ultimate timing of the debt and equity financing will be subject to market conditions. Now on to our annual guidance; let me be direct here, there are a lot of updates, so let me give you our perspective. First, we had a good quarter that exceeded our expectations by $0.05 per diluted share after accounting for the timing of the Fidelis debt and equity financing. We have increased our full year GAAP and adjusted diluted earnings per share expectations by the $0.05. Second, as we stated earlier, Fidelis continues to perform in line with our expectations, and the changes we are making to guidance are the result of the timing of the transaction, the associated financing, and the undertakings. The change in adjusted diluted earnings per share is the result of an additional month of overhang on the financing and removing a full quarter of Fidelis earnings. Just to give you some perspective, if the Fidelis acquisition and the associated financing transactions had been effective January 1, 2018, our full year adjusted earnings per share guidance would be $0.35 to $0.40 higher. Third, we have closed several investments and acquisitions and have included those in our updated guidance. On an adjusted EPS basis, CMG and MHM are accretive transactions for 2018. That accretion is being offset by strategic investments in RX Advance and Interpreta that we believe will drive long-term growth in margin expansion. In aggregate, these transactions are dilutive on a GAAP basis in 2018 due to transaction costs and intangible amortization. In summary, our updated full-year 2018 guidance for revenue and earnings per share is as follows. Total revenues between $58.2 billion and $59 billion, GAAP earnings per share of $4.36 to $4.70, an adjusted diluted earnings per share of $6.75 to $7.15. With the seasonality of the marketplace business, we view the second and third quarters as relatively equal from an earnings perspective, with the fourth quarter being lower due to the open enrollment costs for the marketplace in Medicare. We are pleased with the strong performance in the first quarter and the addition of the acquisition and investments we completed that will continue to drive long-term growth in margin expansion. That concludes my remarks and Operator, you may now open the line for questions.

A random one here, just thinking about Medicare Advantage, star scores of '19. In the final call notice, it seemed like they decoupled the audit measures and related penalties in the BAP score. I know that was an issue for you guys. Just trying to understand whether there were any implications for your '19 rates, star scores, or the appeal processes underway?

Well, we have the appeals process still underway, and we continue to evaluate alternatives. The crosswalk et cetera is appropriate, so we see minimizing any impact on the 2019 rates and income.

Got it. So nothing really direct there? Okay. And just to help us wrap our heads around the seasonality of the marketplace, is there any way you could frame or call out the discreet upside for EPS on seasonality in Q1, and then relatedly, what kind of offset we should be thinking about later in the year like the 4Q?

I'll let Jeff go into that.

Yes. A couple of things. I would say first, it's two things in the first quarter. Number one, it's higher membership; and two, a little bit better performance on a year-over-year basis from an HBR perspective. So really, two things driving the phenomenon in the first quarter. I'm not going to get into specifics, but I think I made commentary in the past that marketplaces close to break even by the fourth quarter, so the majority of the earnings are in the first quarter with the fourth quarter really being the offset, and it starts to decline from the first quarter to the fourth quarter.

Got it. Just last one for me real quick. July 1 for Fidel, it sounds like you're framing that as maybe a little bit more of conservatism than actual timing given there's only one regulatory approval out there. Is that a fair statement?

I think it's fair to say that we do everything with certain abundance of conservatism, but I want to be realistic. I don't want to end up saying something that is not certain. So I think saying no later than July 1 is probably the best way to represent.

Thank you. As I walk through the guidance updates, one of the areas that looked conservative to me was the SG&A and I was hoping maybe you could bridge the changing guidance for us. I know we got some Fidelis payments and strong growth, but it still just seemed pretty conservative, so maybe you can break out some of the investments you spoke about and any other moving pieces? Thanks.

Yes, several factors are influencing the metrics, mainly due to the reblending of Fidelis. When we remove Fidelis from a quarter, it impacts our General and Administrative expense ratio, which is currently lower compared to Centene's. Adjusting for that timing alters the metrics because of how the companies will be integrated over the next six months. This is the primary factor at play. Additionally, we've made some investments recently that also affect the ratios, but the main driver remains the reblending as we exit Fidelis from the quarter.

Got it. And I think that Florida is expected to be announced today. I know in the past you guys have talked about your IPNs, and I'm just wondering if there's any update that you can share with us on Florida?

Stay tuned. We'll hopefully hear more today. There's nothing more to say about that, Sarah. It's just a matter of waiting and seeing.

Great, thanks. I wanted to dive into the guidance a little bit as far as the $0.05 from the quarter outperformance. You guys mentioned flu being up 40 basis points year-over-year, which I guess is about $0.20 out of EPS. I just want to ensure how you were thinking about that $0.05 of outperformance in the quarter? Were you already assuming something like 40 basis points from flu, or was that actually better and a little bit of an offset versus how you thought about your guidance?

Jeff, do you want to take that?

Yes. I guess, Kevin, the way I'd look at it is the last guidance update we gave was February 6, so we've had indications that flu is a little bit higher. The way we view it is we were $0.05 ahead of our internal forecast and really what I would do is I'd start with the $2.17 and back off the $0.12. It was just mathematics on the movement of shares and then you have the $0.05 beat that we mentioned. With the commentary we made on February 6, we said that Q1 would be higher than Q2, and it's really driven by the marketplace business and the early enrollment that I mentioned. So I think if you do that, that's the number you will come up with.

We are also ahead on our over the individual estimate on the marketplace, which was a contributor to it. A combination of things, but what we try to say earlier was when you reach the scale we have, the flu is about one line on the medical expense.

Okay. So what was the actual $0.05 outperformance in the quarter? I guess if you beat by $0.05 per quarter, the thought might be, well, then you raise guidance by $0.20 for the year. Is there something that kind of had an offset as you think about the rest of the year?

I'll start and you can pick it up. If you look at it, we mentioned that a significant factor was the overperformance and growth of the exchange. Additionally, the earnings on the exchange tend to decrease each quarter due to deductibles and similar factors, which helps clarify the situation. Jeff, do you want to add?

Yes, this is $0.05 better than our expectations, not the broader consensus figure. We anticipated this outcome. On February 6, I mentioned that 2018 would likely follow a similar pattern to 2017, suggesting that around 54% of the earnings would be generated in the first half of the year, with Q1 expected to outperform Q2. Based on those calculations, we find ourselves currently $0.05 above expectations. Additionally, we are also exceeding our individual estimates in the marketplace, which played a role in this performance.

Okay. So any color on Fidelis' actual performance so far? Any updates there?

Yes. I made comments in my prepared remarks that they're in line with expectations. So I think they continue to perform well, and really all that we're talking about this morning is really outperforming Q1 and the rest is really just the timing of the transaction closing.

Thanks. So now that you have some of the claims experiences, any change on how you're viewing exchange margins for the full year? It sounds like in the first quarter at least, that it's starting out a little bit higher than what you thought. And also since now you're developing rates for 2019, do you have any initial commentary there on what you're going to make into rates and whether you're going to have a consistent footprint, or expand or shrink?

I'll start and let Jeff pick up. But I think when we talk about the first quarter marketplace, I'll remind you that we had an increasing moment over our original expectations and we tend not to get too much into '19 until we do guidance in December of the year. It's kind of early that we're talking about expectations in the way we do business in the marketplace. Jeff, anything?

I think Michael is right. It's really volume-driven. You'll notice in our filings we do have some minimal MLR payables. To some extent, we're projecting a full-year margin and that's what we're recording to.

All right. Thanks for taking my question. I just wanted to understand some of the pennies of movement here in the Fidelis timing. I think when you last updated us and pushed the timing from February to March, that was a $0.06 change and then the loss or the push from March out of the quarter is a $0.12 change, and then you're funding two months ahead of when you anticipated to close in the second quarter. So first, what's the difference between the $0.06 and the $0.12, and then secondly, just for the full year, how much should we think about 2018? How much drag is 2018 carrying that will then not be present in 2019? Thanks.

A couple of things. The $0.12 you're mentioning is Q1, right? The $0.12?

Well, I think you said in your prepared remarks that the $0.12 upside in the quarter was the result of the delay from March 1?

Yes. That's $0.12 for Q1. That would not be the case for the full year because the first quarter share count would be one-third of the total shares for the quarter versus on the full year, it gets diluted by the full year share count. So the $0.12 is not the number for the full year, it's really the Q1 number. That's a little bit different there. What we've done is we've packaged up all of the movement of Fidelis into one line item. We have assumed the offerings in March, we're moving those to May, and the transaction closing in April, we're moving that to July. That is all encapsulated in the $0.25 that's in the adjusted diluted EPS range.

Yes. Can you provide the amount for the two months of advanced funding?

Yes. The overhang? Sure. Yes. The overhang is between $0.10 to $0.12 for sure.

We will be adjusting our marketing approach, particularly for the open enrollment period. We plan to refine our direct-to-consumer strategy and anticipate seeing continued improvements in results.

Yes. Thank you. If I could ask about a different topic. Just give us your assessment of the group commercial market as you come into this year. I realized a lot of that or the vast majority is in California, but just like to hear what your update is on price competition in medical cost trends? Thanks.

Sure. I think we've stated we're committed to the commercial business. I believe it's going to perform very well for us, continue to grow it. Personally, I was involved when they were doing some renewal work, and they have a good product that's very well-received out there. As I think about it, I'm just giving you as candid a statement as I can; over time there may be additional opportunities working with state governments. We're talking about that kind of thing. We believe it is good learning coming out of the California model, and as time and energy permits, we'll consider alternatives to how it might be expanded.

First question. Obviously the industry backdrop around pharmacy benefits is really evolving and you made an investment at RX Advance. I know you have your own PBM and you have legacy health net relationships with CVS. Can you just give us any thoughts that you have on updated thinking around pharmacy benefits in light of what you're doing and what the industry is doing?

I'll share a general comment, and Jeff can provide additional insights since he has been primarily focused on the M&A side. We believe this represents a significant step towards the modernization and necessary evolution of pharmacy benefits. I'll hand it over to you, Jeff.

Yes, AJ. There are many factors to consider regarding this topic, but I believe the starting point is that change is needed in the PBM model. There are a couple of facets to this, both related to our investment in RX Advance. One aspect is the technology opportunities for automation and cloud, which offer important administrative cost efficiencies. Additionally, this improves overall quality, experience, and the ability to enhance interoperability across the payer landscape. Another crucial element is the recognition of the benefits of having internal capabilities for pharmacy management, especially how they relate to physical health and behavioral health. We have prioritized this from the start. What we're seeing now is the potential to combine technology and scale while also implementing new operating models. Specifically, we are moving toward a value-based approach in pharmacy that hasn't been present before, which I believe will help address longstanding transparency concerns in the industry.

Okay, great. Maybe one other follow-up. You guys have done great at expanding your health marketplace enrollment and now you're the largest player in the marketplace, I think nationwide with more than 10% of the market. As you've gotten these additional members, maybe earlier in the year to figure this out, but if you go ahead to make adjustments to your traditional provider networks because you're now picking up people that are outside of those geographies, one metric I know you might measure that is out-of-network claims and so forth. Any updates on thinking around those issues?

I'll just leave a comment. I was thinking about traditional network and do we deserve that support and that's the network, our recipients wish. We've, of course, had to expand it with the increasing membership. But that's not a strategic change there.

Okay. Any thoughts about the network expansion? Are you not seeing many out-of-network claims, or is it too early in the year to determine if you will?

I would say that it's pretty consistent with our historic experience. Any time we see that, if we had a deficiency, just including the total increase in some of the markets. We need to expand the network, and there's a lot of energy being put into getting that network expanded. We're going to stick to our knitting, so to speak, and we stick to 400% of the federal poverty level below, and the majority is up to 250% of the federal poverty level below; and that's our market, we're not trying to be all things to all people.

Good morning. Looking back to the annual guidance again and sort of where the different numbers are, I'm just trying to understand a couple of different aspects of it. First, you said if you had Fidelis for the whole year your earnings would be $0.35 to $0.40 higher. Yet, you adjusted for the delay of potentially a quarter your earnings by $0.25. You took out more for the quarter. Then your share price is about 20% higher than when you announced the deal. So in theory, the Fidelis Care is actually more accretive than it was before. And then you mentioned the outperformance that you had in the quarter being $0.05, but you didn't raise the guidance for the full year by anything more than what it was in the Q1 performance despite some of the costs in flu being overcome. I'm just trying to understand why your numbers are so conservative? Is there something with Fidelis that is not performing, or some changes from the conversion that you had not considered before that makes that deal less attractive?

There is a lot in that question, but I'll start at the beginning here. So the $0.25, you have to remember that includes another month of overhang, right, compared to last guidance that includes another month of both shares and the debt overhang. So that number is probably larger than what you're expecting just because of the additional month of overhang. My second point would be to go to my prepared remarks; I think Fidelis is performing exactly what we expected.

I think that chapter is a very important point. Until it's done, it's not done, so you want to be conservative to see what's in, how those numbers come out.

Regarding the share price, we have updated both the share price and interest expense since we announced this transaction in September of last year. Bond rates have moved against us, while the share price has moved in our favor. We have relatively conservative expectations at this point, but we have not raised any capital yet.

I think it's really important that every aspect of the deal has been very consistent, and we're not seeing any changes in the original assumptions we made. The management is as strong as we believe today and has engaged us. We believe they have managed through the delay incredibly well, so it's a very strong team. We find the regulatory environment in New York to be very favorable. We are very effective at working with MOL; they are very professional in everything they do, and we expect every aspect of the Fidelis deal to be a positive one.

Good morning, I'm just going to beat the Fidelis horse one more time. No impact in the first quarter, obviously the second quarter sounds like it's $0.12 dilutive at this point just from the financing overhang with no operations. What's the Fidelis impact on the second half? I'm just trying to figure it's just an accretive deal for 2018.

Yes, we've had this conversation before. I think if you go back to the numbers that we said today where if we had Fidelis for a full year, right, you would be increasing $0.35 to $0.40. So if you just do that math, and then assume mid to up or single-digit accretion as we've said, it is an accretive deal for the year. So, and we're picking up half of that accretion in 2018.

Couple of things; first, on the pricing side. Going into 2019 on the exchanges, obviously you're doing well and even better than expected. There has been some chatter and you can just look at the results, I mean the not-for-profits have been doing pretty well. They all got tax benefits just like you did and they're probably going to price some of it back, and specifically even some of the public comments they have made indicate that maybe a larger percentage of that pricing is going to come in the individual exchange market. I'm just curious in terms of your view of how competitive they are today and if they do get more competitive from a RO perspective, is that something you need to consider from a market share or pricing perspective for 2018, or do you feel like you're just so positively differentiated that even if they were to price a little bit lower that you still keep your share in your margins?

I mean, I think as we mentioned before, we're not going to get into the details of 2019 pricing but I think all of those factors are factors that we would take into account when we're looking at the competitive dynamics of the marketplace business and what our goals and objectives are for 2019.

I believe that some of the systems and structures we have in place will help drive costs in the right direction in 2019 and beyond. As a result, I feel confident that we will remain very competitive across all our products moving forward.

I would say, also just remember we're constantly thinking about 2019, building on our leverage and our advantage. So all those things come into the view as well.

I might also add, mind you that we are very decentralized, so we're really structured to work on a state-by-state basis and we see that as a plus.

Just a couple of quick ones. On the tax rate change, you didn't talk about that and why there was an impact to EPS; is that just sort of churning up or reconciling that, that hits non-deductibility, is that why the tax rate guidance went up a little bit?

No. Again, the tax rate guidance went up because of the reblending of Fidelis. So in New York, they pay a premium tax versus the state income tax; so if you take the post-tax reform, they would need a much lower rate than the Centene average. So when you reblend the year after moving Fidelis a quarter, the rate goes up.

Got it. On the exchange business, what's a good estimate of full-year G&A load in that business? Is that as high as 15%?

Yes, that's a pretty good number, that's close.

Okay. And then last question on Fidelis G&A which is materially lower than your corporate average, can you just remind us why that's the case? And I don't think given the synergy...

I will start there. Some of the benefit plans are different, and things like competition and structures can have an impact.

I think the other thing is that as we've planned the acquisition, we've looked at actually investing more G&A dollars there to really get medical management savings. I think we've mentioned that at the beginning of the transaction that things like payment integrity, fraud ways and abuse, all the analytic capabilities that we have here that we can support them with case management systems, etcetera, etcetera. We think more of the opportunity is in medical expense versus G&A.

The first question was on involve. I wanted to get a sense for how much you're actively marketing that Fide services outside; obviously, are growing quite remarkably as you're rolling up the acquisitions, help your net, and then in the future Fidelis? But is that also targeted more beyond inside?

We are currently in a strategic planning phase. One of our goals is to refresh our products to better align with market opportunities. For instance, we are exploring whether we can reconfigure our EAP Program to support social determinants, allowing our members to call in and be directed to resources like housing shelters or food banks if needed. Our main focus at this time is ensuring that our suite of services meets the needs of the current market.

Off your current internal market, in other words?

Correct.

Okay, all right. Secondly, as you know, the growth is coming on both on involve as well as the base business that's all the roll-ups; to what degrees are there more wide space for-profit conversions like you saw in Fidelis in New York, are there others elsewhere?

I think whether they are out there and I'm not going to talk too much about where we're going and how we're going and for obvious competitive reasons.

Okay, all right. And then finally, on the work requirements, it looks like Virginia is on the brink of Medicaid expansion. What are your thoughts about you're hearing around Florida or any of the other?

We're very supportive of the work requirements back when the former governor of Indiana was installed, and we were very supportive there helping to how to do it. And I remind you it's childless adults who don't have physical disabilities and we think that's good public policy. We will work very diligently with the states who want to do it to implement it in a very responsible way.

I just want to thank everybody. As we said, this quarter had a lot of moving parts because of Fidelis and different issues, but it was a solid quarter, it was a stronger quarter than we eventually had anticipated. We planned forward. We're pleased with that. We're pleased with how the safety use is going to unfold, and looking forward to another very strong year. So we thank you and look forward to talking to you in subsequent calls. Have a good day. Thanks.