UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
                                            

 
FORM 10-Q


 
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the quarterly period ended September 30, 2009
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   

For the transition period from                  to
                                            


Commission file number 001-31826
 



CENTENE CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
42-1406317
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
7711 Carondelet Avenue
 
St. Louis, Missouri
63105
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:
 
(314) 725-4477
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: T Yes £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). £ Yes £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer T Accelerated filer £ Non-accelerated filer £ (do not check if a smaller reporting company) Smaller reporting company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes  £    No  T

As of October 16, 2009, the registrant had 45,403,369 shares of common stock outstanding.





 
 
 
CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

   
PAGE
     
Part I
Financial Information
Item 1.
Financial Statements
 
 
1
 
2
 
3
 
4
 
5
Item 2.
10
Item 3.
17
Item 4.
17
Part II
Other Information
Item 1.
18
Item 1A.
18
Item 2.
24
Item 6.
25
26
 
 



 
 


PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
September 30,
2009
   
December 31,
 2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents of continuing operations
  $ 389,135     $ 370,999  
Cash and cash equivalents of discontinued operations
    4,847       8,100  
Total cash and cash equivalents
    393,982       379,099  
Premium and related receivables, net of allowance for uncollectible accounts of $19 and $595, respectively
    104,798       92,531  
Short-term investments, at fair value (amortized cost $45,332 and $108,469, respectively)
    45,692       109,393  
Other current assets
    61,294       75,333  
Current assets of discontinued operations other than cash
    8,292       9,987  
Total current assets
    614,058       666,343  
Long-term investments, at fair value (amortized cost $475,078 and $329,330, respectively)
    486,889       332,411  
Restricted deposits, at fair value (amortized cost $17,177 and $9,124, respectively)
    17,286       9,254  
Property, software and equipment, net of accumulated depreciation of $96,314 and $74,194, respectively
    209,920       175,858  
Goodwill
    219,100       163,380  
Intangible assets, net
    23,454       17,575  
Other long-term assets
    37,100       59,083  
Long-term assets of discontinued operations
    27,207       27,248  
Total assets
  $ 1,635,014     $ 1,451,152  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Medical claims liability
  $ 410,997     $ 373,037  
Accounts payable and accrued expenses
    204,411       219,566  
Unearned revenue
    68,024       17,107  
Current portion of long-term debt
    645       255  
Current liabilities of discontinued operations
    23,846       31,013  
Total current liabilities
    707,923       640,978  
Long-term debt
    276,687       264,637  
Other long-term liabilities
    55,992       43,539  
Long-term liabilities of discontinued operations
    1,155       726  
Total liabilities
    1,041,757       949,880  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 45,402,369 and 45,071,179 shares, respectively
    45       45  
Additional paid-in capital
    277,709       263,835  
Accumulated other comprehensive income:
               
Unrealized gain on investments, net of tax
    7,812       3,152  
Retained earnings
    335,192       275,236  
Treasury stock, at cost (2,373,893 and 2,083,415 shares, respectively)
    (46,497 )     (40,996 )
Total Centene stockholders’ equity
    574,261       501,272  
Noncontrolling interest
    18,996        
Total stockholders’ equity
    593,257       501,272  
Total liabilities and stockholders’ equity
  $ 1,635,014     $ 1,451,152  
 
The accompanying notes to the consolidated financial statements are an integral part of these statements. 

 
 
1

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2009
 
2008
 
2009
   
2008
 
Revenues:
                         
Premium
$
960,009
 
$
817,740
 
$
2,754,713
   
$
2,338,550
 
Service
 
27,300
   
17,962
   
72,740
     
56,958
 
Premium and service revenues
 
987,309
   
835,702
   
2,827,453
     
2,395,508
 
Premium tax
 
50,925
   
22,897
   
182,685
     
66,249
 
Total revenues
 
1,038,234
   
858,599
   
3,010,138
     
2,461,757
 
Expenses:
                         
Medical costs
 
803,062
   
671,920
   
2,298,108
     
1,932,172
 
Cost of services
 
15,843
   
12,854
   
46,364
     
43,467
 
General and administrative expenses
 
130,024
   
118,628
   
381,524
     
323,391
 
Premium tax
 
51,295
   
23,284
   
183,785
     
66,636
 
Total operating expenses
 
1,000,224
   
826,686
   
2,909,781
     
2,365,666
 
Earnings from operations
 
38,010
   
31,913
   
100,357
     
96,091
 
Other income (expense):
                         
Investment and other income
 
3,750
   
2,708
   
11,781
     
15,724
 
Interest expense
 
(4,064
)
 
(4,377
)
 
(12,210
)
   
(12,436
)
Earnings from continuing operations, before income tax expense
 
37,696
   
30,244
   
99,928
     
99,379
 
Income tax expense
 
12,426
   
12,145
   
35,060
     
38,464
 
Earnings from continuing operations, net of income tax expense
 
25,270
   
18,099
   
64,868
     
60,915
 
Discontinued operations, net of income tax (benefit) expense of $(792), $242, $(1,148) and $390, respectively
 
(1,460
)
 
149
   
(2,394
)
   
1,159
 
Net earnings
 
23,810
   
18,248
   
62,474
     
62,074
 
Noncontrolling interest
 
2,542
   
   
2,518
     
 
Net earnings attributable to Centene Corporation
$
21,268
 
$
18,248
 
$
59,956
   
$
62,074
 
                           
Amounts attributable to Centene Corporation common shareholders:
                         
Earnings from continuing operations, net of income tax expense
$
22,728
 
$
18,099
 
$
62,350
   
$
60,915
 
Discontinued operations, net of income tax (benefit) expense
 
(1,460
)
 
149
   
(2,394
)
   
1,159
 
Net earnings
$
21,268
 
$
18,248
 
$
59,956
   
$
62,074
 
                           
Net earnings (loss) per share attributable to Centene Corporation:
                         
Basic:
                         
Continuing operations
$
0.53
 
$
0.42
 
$
1.45
   
$
1.40
 
Discontinued operations
 
(0.04
)
 
   
(0.06
)
   
0.03
 
Earnings per common share
$
0.49
 
$
0.42
 
$
1.39
   
$
1.43
 
Diluted:
                         
Continuing operations
$
0.51
 
$
0.41
 
$
1.41
   
$
1.37
 
Discontinued operations
 
(0.03
)
 
   
(0.05
)
   
0.02
 
Earnings per common share
$
0.48
 
$
0.41
 
$
1.36
   
$
1.39
 
                           
Weighted average number of shares outstanding:
                         
Basic
 
43,001,870
   
43,232,941
   
43,023,431
     
43,381,819
 
Diluted
 
44,291,604
   
44,530,347
   
44,247,153
     
44,541,424
 

The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
2


CENTENE CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Nine Months Ended September 30, 2009
 ­
   
Centene Stockholders’ Equity
               
   
Common Stock
                       
Treasury Stock
               
   
$.001 Par
Value
Shares
   
Amt
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
$.001 Par
Value
Shares
 
Amt
 
Non
controlling
Interest
   
Total
 
Balance, December 31, 2008
 
45,071,179
   
$
45
   
$
263,835
   
$
3,152
 
$
275,236
 
2,083,415 
 
$
(40,996)
 
$
—  
   
$
501,272
 
Consolidation of Access Health Solutions LLC
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
29,144  
     
29,144
 
Consolidation of Centene Center LLC
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
17,400  
     
17,400
 
Comprehensive Earnings:
                                                           
Net earnings
 
—  
     
—  
     
—  
     
—  
   
59,956
 
—  
   
—  
   
2,518 
     
62,474
 
Change in unrealized investment gains, net of $2,846 tax
 
—  
     
—  
     
—  
     
4,660
   
—  
 
—  
   
—  
   
—  
     
4,660
 
Total comprehensive earnings
                                                       
67,134
 
Common stock issued for employee benefit plans
 
331,190
     
—  
     
2,403
     
—  
   
—  
       
—  
   
—  
     
2,403
 
Common stock repurchases
 
—  
     
—  
     
—  
     
—  
   
—  
 
292,478 
   
(5,539)
   
—  
     
(5,539
)
Treasury stock issued for compensation
 
—  
             
—  
     
—  
   
—  
 
(2,000)
   
38 
           
38
 
Stock compensation expense
 
—  
     
—  
     
11,428
     
—  
   
—  
 
—  
   
—  
   
—  
     
11,428
 
Excess tax benefits from stock compensation
 
—  
     
—  
     
43
     
—  
   
—  
 
—  
   
—  
   
—  
     
43
 
Conversion fee1
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
(26,895) 
     
(26,895
)
Distributions to noncontrolling interest
 
—  
     
—  
     
—  
     
—  
   
—  
 
—  
   
—  
   
(3,171) 
     
(3,171
)
Balance, September 30, 2009
 
45,402,369
   
$
45
   
$
277,709
   
$
7,812
 
$
335,192
 
2,373,893
 
$
(46,497)
 
$
18,996  
   
$
593,257
 

(1)  
Conversion fee represents additional purchase price to noncontrolling holders of Access Health Solutions LLC for the transfer of membership to the Company’s wholly-owned subsidiary, Sunshine State Health Plan, Inc.


 
The accompanying notes to the consolidated financial statements are an integral part of these statements.
 
 
3


CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net earnings
  $ 62,474     $ 62,074  
Adjustments to reconcile net earnings to net cash provided by operating activities
               
Depreciation and amortization
    30,800       26,018  
Stock compensation expense
    11,428       11,576  
Loss on sale of investments, net
    261       4,923  
Deferred income taxes
    4,516       13,987  
Changes in assets and liabilities —
               
Premium and related receivables
    (381     (50,797 )
Other current assets
    (2,595 )     (6,422 )
Other assets
    (593 )     (713 )
Medical claims liabilities
    31,612       28,109  
Unearned revenue
    54,725       (37,931 )
Accounts payable and accrued expenses
    (17,656     74,723  
Other operating activities
    2,386       967  
Net cash provided by operating activities
    176,977       126,514  
Cash flows from investing activities:
               
Capital expenditures
    (42,696 )     (52,588 )
Purchases of investments
    (647,086 )     (372,221 )
Sales and maturities of investments
    546,640       356,367  
Investments in acquisitions, net of cash acquired, and investment in equity method investee
    (31,533 )     (83,509 )
Net cash used in investing activities
    (174,675 )     (151,951 )
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    1,717       4,770  
Proceeds from borrowings
    468,500       152,005  
Payment of long-term debt
    (456,059 )     (109,410 )
Distributions to noncontrolling interest
    (3,171 )      
Contribution from noncontrolling interest
    7,495        
Excess tax benefits from stock compensation
    43       3,016  
Common stock repurchases
    (5,539 )     (18,244 )
Debt issue costs
    (405 )      
Net cash provided by financing activities
    12,581       32,137  
Net increase in cash and cash equivalents
    14,883       6,700  
Cash and cash equivalents, beginning of period
    379,099       268,584  
Cash and cash equivalents, end of period
  $ 393,982     $ 275,284  
                 
Supplemental disclosures of cash flow information:
               
Interest paid
  $ 8,556     $ 8,467  
Income taxes paid
  $ 43,308     $ 28,370  
                 
Supplemental disclosure of non-cash investing and financing activities:
               
Contribution from noncontrolling interest
  $ 5,491     $  
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
4

CENTENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)

1. Organization and Operations

Centene Corporation, or the Company, is a multi-line healthcare enterprise operating in two segments: Medicaid Managed Care and Specialty Services.  The Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, Foster Care, Medicare Special Needs Plans and the Supplemental Security Income Program, also known as the Aged, Blind or Disabled program, or ABD.  The Specialty Services segment provides related services, including behavioral health, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management, to state programs, healthcare organizations, employer groups, and other commercial organizations, as well as to the Company’s own subsidiaries.  The Specialty Services segment also provides a full range of healthcare solutions for individuals and the rising number of uninsured Americans.

2. Basis of Presentation

The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the fiscal year ended December 31, 2008.  Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2008 audited financial statements, have been omitted from these interim financial statements where appropriate.  In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of the interim periods presented.

Beginning January 1, 2009, the Company has presented the investment in Access Health Solutions LLC, or Access, as a consolidated subsidiary in its financial statements.  Prior to January 1, 2009, Access had been recorded under the equity method of accounting.  We determined that we should have accounted for our investment in Access as a consolidated subsidiary since July 1, 2007.  The impact of the difference in presentation is not material to our financial statements for any period.  As a result of the presentation of Access as a consolidated subsidiary beginning January 1, 2009, cash flows from investing activities increased by $4,839 to reflect the cash held by Access on January 1, 2009.  The noncontrolling interest of Access is presented within stockholders’ equity. 
 
Certain 2008 amounts in the consolidated financial statements have been reclassified to conform to the 2009 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.  Any material subsequent events have been considered for disclosure through the filing date of this Form 10-Q.
 
3. Recent Accounting Pronouncements

 Effective January 1, 2009, the Company adopted new guidance related to business combinations.  The changes from the previous guidance include, but are not limited to: (1) acquisition costs are recognized separately from the acquisition; (2) known contractual contingencies at the time of the acquisition are considered part of the liabilities acquired and and measured at their fair value; all other contingencies are part of the liabilities acquired and measured at their fair value only if it is more likely than not that they meet the definition of a liability; (3) contingent consideration based on the outcome of future events is recognized and measured at the time of the acquisition; and (4) business combinations achieved in stages (step acquisitions) recognize the identifiable assets and liabilities, as well as noncontrolling interest, in the acquiree, at the full amounts of their fair values.  The new guidance will be utilized for all acquisitions after January 1, 2009.

Effective January 1, 2009, the Company adopted new guidance related to consolidation and reporting of noncontrolling interest, which was issued to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way, that is, as equity in the consolidated financial statements. Moreover, this guidance eliminates the diversity that existed in accounting by requiring transactions between an entity and noncontrolling interest be treated as equity transactions.  As discussed in Note 2, Basis of Presentation, and Note 7, Centene Center LLC, the noncontrolling interest in Access and Centene Center LLC is presented within stockholders’ equity.
 
In April 2009, new guidance was issued related to the recognition and presentation of other-than-temporary impairments.  The guidance applies to fixed maturity securities only and requires separate display of losses related to credit deterioration and losses related to other market factors.  When an entity does not intend to sell the security and it is more likely than not that an entity will not have to sell the security before recovery of its cost basis, it must recognize the credit component of an other-than-temporary impairment in earnings and the remaining portion in other comprehensive income.  The adoption of the guidance did not have a material effect on the Company’s financial statements.

In June 2009, new guidance was issued related the consolidation of variable interest entities to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This guidance is effective for fiscal years beginning after November 15, 2009 and early adoption is prohibited.  The Company is currently evaluating the impact of adopting this guidance on the consolidated financial statements and related disclosures.

The Company has determined that all other recently issued accounting guidance will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

4. Discontinued Operations: University Health Plans, Inc.

In November 2008, the Company announced its intention to sell certain assets of its New Jersey health plan, University Health Plans, Inc., or UHP.  The assets, liabilities and results of operations of UHP were classified as discontinued operations for all periods presented beginning in December 2008.  UHP was previously reported in the Medicaid Managed Care segment.  The total revenue associated with UHP included in results from discontinued operations was $37,170  and $38,538 for the three months ended September 30, 2009 and 2008, respectively, and $109,256  and $112,086 for the nine months ended September 30, 2009 and 2008, respectively.  Additional information regarding the sale of UHP is included in Note 13, Contingencies.

In 2008, the Company conducted an impairment analysis of the assets of UHP.  The impairment analysis resulted in an impairment charge associated with property, software and equipment of $2,546.  During the nine months ending September 30, 2009, the Company incurred additional exit costs primarily related to employee retention programs.  In total, the Company has incurred $3,403 of exit costs.  The change in the exit cost liability for UHP is summarized as follows:

Balance, December 31, 2008
  $ 1,110  
Incurred
    2,293  
Paid
    (1,104 )
Balance, September 30, 2009
  $ 2,299  

5. Acquisitions

2009 Acquisitions

·  
Access.  In July 2007, the Company acquired a 49% ownership interest in Access, a Medicaid managed care entity in Florida.  The Company accounted for its investment in Access using the equity method of accounting through December 31, 2008.  During the quarter ended March 31, 2009, the Company began presenting its investment in Access as a consolidated subsidiary in its financial statements. The consolidation of Access resulted in goodwill of approximately $44,500, and other identified intangible assets of approximately $5,400.  In 2009, the Company paid an additional $26,895 conversion fee for the transfer of membership from Access to the Company’s wholly-owned subsidiary, Sunshine State Health Plan, Inc.

·  
Additional 2009 Acquisitions.  The Company acquired assets of the following entities: Pediatric Associates LLC, effective February 2009,  Amerigroup Community Care of South Carolina, Inc., effective March 2009 and InSpeech, Inc., effective July 2009.  The Company paid a total of approximately $12,500 in cash for these acquisitions.  Goodwill of approximately $9,500 and other identifiable intangible assets of approximately $1,500 were included in the Medicaid Managed Care segment and other identifiable intangible assets of $1,700 were included in the Specialty Services segment, all of which is deductible for income tax purposes.
 
 
5

 
2008 Acquisition

·  
Celtic Insurance Company.  On July 1, 2008, the Company acquired Celtic Insurance Company, or Celtic.  The Company paid approximately $82,100 in cash and related transaction costs, net of unregulated cash acquired.  In conjunction with the closing of the acquisition, Celtic paid to the Company an extraordinary dividend of $31,411 in July 2008.  Goodwill of $24,300 and other identifiable intangible assets of $8,600 were included in the Specialty Services segment.


6. Goodwill
 
The following table summarizes the changes in goodwill by operating segment:
 
   
Medicaid Managed Care
   
Specialty
Services
   
Total
 
Balance as of December 31, 2008
  $ 51,548     $ 111,832     $ 163,380  
  Acquisitions
    54,028       1,692       55,720  
Balance as of September 30, 2009
  $ 105,576     $ 113,524     $ 219,100  

Increases to goodwill in 2009 were related to the presentation of Access as a consolidated subsidiary and the acquisitions discussed in Note 5, Acquisitions.

7. Centene Center LLC

In June 2009, the Company executed an agreement as a 50% joint venture partner in a real estate development entity, Centene Center LLC, to include the Company’s corporate headquarters.  Centene Center LLC is a variable interest entity, or VIE, and the Company concluded it was the primary beneficiary.  Accordingly, the Company’s consolidated financial statements include the accounts of Centene Center LLC.  The Company’s interest in Centene Center LLC includes an initial equity investment of $17,400.  Centene Center LLC has posted a $1,750 letter of credit to a tenant of the development, collateralized by a portion of the entity’s cash balances.  The assets and liabilities of Centene Center LLC as of September 30, 2009 are as follows (on a 100% basis):

 
Total Assets
  $ 71,242  
         
         
Total Liabilities
  $ 36,438  
         
Equity
       
Centene Corporation (50% ownership)
  $ 17,402  
Joint venture partners (50% ownership)
    17,402  
Total equity
  $ 34,804  
         
Total Liabilities and Equity
  $ 71,242  

As part of financing the real estate development, the joint venture executed a $95,000 construction loan due June 1, 2011, which may be extended for two additional one year terms.  The Company and its development partner have guaranteed up to $65,000 each associated with this construction loan.  As of September 30, 2009, there were no amounts outstanding under this loan.  Additional information regarding the construction loan is included in Note 10, Debt.
 
8. Investments and Restricted Deposits

Short-term and long-term investments and restricted deposits by investment type consist of the following:

   
September 30, 2009
   
December 31, 2008
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury securities
  $ 26,579     $ 282     $ (1 )   $ 26,860     $ 4,054     $ 130     $     $ 4,184  
Corporate securities
    82,040       655       (184 )     82,511       47,733       74       (1,154 )     46,653  
State and municipal securities
    380,846       11,338       (57 )     392,127       360,638       5,964       (11 )     366,591  
Equity securities
    9,734       381       (198 )     9,917       7,183       17       (885 )     6,315  
Money market funds
    4,018                   4,018       12,988                   12,988  
Life insurance contracts
    14,573                   14,573       14,327                   14,327  
Asset backed securities
    19,797       64             19,861                          
Total
  $ 537,587     $ 12,720     $ (440 )   $ 549,867     $ 446,923     $ 6,185     $ (2,050 )   $ 451,058  

The Company’s investments are classified as available for sale with the exception of life insurance contracts and certain cost method investments.  The Company monitors investments for other than temporary impairment.  Certain investments have experienced a decline in fair value due to changes in credit quality, market interest rates and/or general economic conditions.  Based on management’s intent and ability to not sell these investments prior to their anticipated recovery, no other than temporary impairment has been recorded in the nine months ended September 30, 2009.  Investments in a gross unrealized loss position at September 30, 2009 and December 31, 2008, are as follows:

   
September 30, 2009
   
December 31, 2008
 
   
Less Than 12 Months
   
12 Months or More
   
Less Than 12 Months
   
12 Months or More
 
   
Unrealized Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
 
U.S. Treasury securities
  $ (1 )   $ 1,134     $     $     $     $ 314     $     $  
Corporate securities
    (183 )     39,825       (1     86       (1,071 )     20,898       (83 )     2,072  
State and municipal securities
    (56 )     8,790       (1     101       (9 )     3,798       (2 )     101  
Equity securities
    (98 )     730       (100     602       (885 )     2,658              
Asset backed securities
                                               
Total
  $ (338 )   $ 50,479     $ (102 )   $ 789     $ (1,965 )   $ 27,668     $ (85 )   $ 2,173  
 
 
6

 
The contractual maturities of short-term and long-term investments and restricted deposits as of September 30, 2009, are as follows:

   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 45,332     $ 45,692     $ 10,188     $ 10,193  
One year through five years
    387,473       399,063       6,989       7,093  
Five years through ten years
    31,628       31,879              
Greater than ten years
    55,977       55,947              
Total
  $ 520,410     $ 532,581     $ 17,177     $ 17,286  

The contractual maturities of short-term and long-term investments and restricted deposits as of December 31, 2008, are as follows:
   
Investments
   
Restricted Deposits
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
One year or less
  $ 108,469     $ 109,393     $ 6,038     $ 6,044  
One year through five years
    181,958       185,867       3,086       3,210  
Five years through ten years
    56,936       56,188              
Greater than ten years
    90,436       90,356              
Total
  $ 437,799     $ 441,804     $ 9,124     $ 9,254  

 
Actual maturities may differ from contractual maturities due to call or prepayment options.  Asset backed securities are included in the one year through five years category, while equity securities and life insurance contracts are included in the five years through ten years category.

The Company’s gross recorded realized gains and losses on investments were as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2009
 
2008
 
2009
 
2008
 
Gains
  $ 297     $ 300     $ 850     $ 872  
Losses
    (128 )     (4,726 )     (1,111 )     (5,097 )

9. Fair Value Measurements
 
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the extent to which the fair value estimates are based upon observable or unobservable inputs.  Level inputs are as follows:
 
Level Input:
  
Input Definition:
Level I
  
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
   
Level II
  
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
   
Level III
  
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
 
The following table summarizes fair value measurements by level at September 30, 2009 for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
   
Level II
   
Level III
   
Total
 
Cash and cash equivalents
  $ 389,135                 $ 389,135  
                                 
Investments available for sale:
                               
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 17,311     $ 1,735     $     $ 19,046  
Corporate securities
          72,838             72,838  
State and municipal securities
          392,127             392,127  
Equity securities
    3,790                   3,790  
Asset backed securities
          19,861             19,861  
Total investments
  $ 21,101     $ 486,561     $     $ 507,662  
                                 
Restricted deposits available for sale:
                               
Cash and cash equivalents
  $ 4,249     $     $     $ 4,249  
Certificates of deposit
    5,223                   5,223  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,814                   7,814  
Total restricted deposits
  $ 17,286     $     $     $ 17,286  
                                 
Total assets at fair value
  $ 427,522     $ 486,561     $     $ 914,083  

In prior periods, the fair value estimates of corporate securities and state and municipal securities were categorized as Level I.  The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.  The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments was $24,919 as of September 30, 2009.
 
10. Debt

Debt consists of the following:
 
   
September 30, 2009
   
December 31, 2008
 
$175,000 senior notes
  $ 175,000     $ 175,000  
$300,000 revolving credit agreement
    86,000       63,000  
Mortgage note payable
    10,000        
$20,500 revolving loan agreement
          20,364  
Capital leases
    6,332       6,528  
Joint venture construction loan
           
     Total debt
    277,332       264,892  
Less current maturities
    (645 )     (255 )
     Long-term debt
  $ 276,687     $ 264,637  

 
7

 
$20,500 Revolving Loan Agreement and Mortgage Note Payable

During the third quarter of 2009, the Company paid the balance of the revolving loan agreement and refinanced a portion of the balance with another bank as a mortgage note payable.  The note is collateralized by the Company’s existing headquarters building and parking garage.  The mortgage is due August 31, 2014 and bears interest at the LIBOR rate plus 3%. The mortgage includes financial covenants requiring a minimum fixed charge coverage ratio.

Joint Venture Construction Loan

In June 2009, the Company and its development partner executed a $95,000 construction loan associated with the construction of a real estate development to include the Company’s corporate headquarters.  The construction loan is due June 1, 2011 which may be extended for two additional one year terms.  The loan bears interest at the LIBOR rate plus 4% with a minimum rate of 5%.  The Company and its development partner have each guaranteed up to $65,000 associated with the construction loan.  The agreement contains non-financial and financial covenants, including requirements for the Company to maintain a specified net worth.  As of September 30, 2009, there were no amounts outstanding under the construction loan.
 
11. Earnings Per Share

The following table sets forth the calculation of basic and diluted net earnings per common share:

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2009
   
2008
 
2009
   
2008
 
Earnings (loss) attributable to Centene Corporation common shareholders:
                             
Earnings from continuing operations, net of tax
 
$
22,728
   
$
18,099
 
$
62,350
   
$
60,915
 
Discontinued operations, net of tax
   
(1,460
)
   
149
   
(2,394
)
   
1,159
 
Net earnings
 
$
21,268
   
$
18,248
 
$
59,956
   
$
62,074
 
Shares used in computing per share amounts:
                             
Weighted average number of common shares outstanding
   
43,001,870
     
43,232,941
   
43,023,431
     
43,381,819
 
Common stock equivalents (as determined by applying the treasury stock method)
   
1,289,734
     
1,297,406
   
1,223,722
     
1,159,605
 
Weighted average number of common shares and potential dilutive common shares outstanding
   
44,291,604
     
44,530,347
   
44,247,153
     
44,541,424
 
                               
Net earnings (loss) per share attributable to Centene Corporation:
                             
Basic:
                             
  Continuing operations
 
$
0.53
   
$
0.42
 
$
1.45
   
$
1.40
 
  Discontinued operations
   
(0.04
)
   
— 
   
(0.06
)
   
0.03
 
  Earnings per common share
 
$
0.49
   
$
0.42
 
$
1.39
   
$
1.43
 
                               
Diluted:
                             
  Continuing operations
 
$
0.51
   
$
0.41
 
$
1.41
   
$
1.37
 
  Discontinued operations
   
(0.03
)
   
— 
   
(0.05
)
   
0.02
 
  Earnings per common share
 
$
0.48
   
$
0.41
 
$
1.36
   
$
1.39
 
 
The calculation of diluted earnings per common share for the three and nine months ended September 30, 2009 excludes the impact of 2,352,841 and 2,546,193 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.  The calculation of diluted earnings per common share for the three and nine months ended September 30, 2008 excludes the impact of 1,784,542 and 1,438,852 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

12. Stockholders’ Equity
 
On October 26, 2009, the Company’s Board of Directors extended the Company’s stock repurchase program.  The program authorizes the repurchase of up to 4,000,000 shares of the Company’s common stock from time to time on the open market or through privately negotiated transactions.  No duration has been placed on the repurchase program and the Company reserves the right to discontinue the repurchase program at any time.  During the nine months ended September 30, 2009, the Company repurchased 292,478 shares at an average price of $18.94 and an aggregate cost of $5,539.
 
13. Contingencies
 
On January 8, 2009, the Company filed a complaint in the Chancery Division of the Superior Court of New Jersey, asserting a breach of contract claim against Amerigroup New Jersey, or AGPNJ, and a tortious interference with contract claim against Amerigroup Corporation, in connection with AGPNJ’s refusal to proceed to closing under its contract to purchase certain assets of UHP’s business.  In December 2008, AGPNJ sent the Company a termination notice claiming that a material adverse effect had occurred under the contract and attempted to terminate the contract.  The Company contested whether a material adverse effect had occurred and correspondingly the propriety and validity of the purported termination, and sought to obtain specific performance of the contract and damages.  On April 20, 2009, Amerigroup Corporation and AGPNJ answered the complaint and filed a counterclaim alleging that there had been misrepresentations and/or omissions of material fact made by or on behalf of UHP and the Company.
 
On October 23, 2009, the parties entered into a settlement agreement resolving the legal claims discussed above.  Pursuant to the settlement agreement, AGPNJ will move forward with the transaction to purchase the assets, which is subject to regulatory approval and expected to be completed during the first quarter of 2010.  
 
In May 2008, the Internal Revenue Services began an audit of the Company’s 2006 and 2007 tax returns.  As a result of this audit, the IRS has initially denied the $34,856 tax benefit the Company recognized for the abandonment of the FirstGuard stock in 2007.  The Company is proceeding with the appeals process and believes that it is more likely than not that the Company’s tax position will be upheld.  Accordingly, the Company has not made any adjustments to the reserve for this position.
 
The Company is routinely subjected to legal proceedings in the normal course of business.  While the ultimate resolution of such matters is uncertain, the Company does not expect the results of any of these matters discussed above individually, or in the aggregate, to have a material effect on its financial position or results of operations.
 
 
8

 
14. Segment Information

Centene operates in two segments: Medicaid Managed Care and Specialty Services.  The Medicaid Managed Care segment consists of Centene’s health plans including all of the functions needed to operate them.  The Specialty Services segment consists of Centene’s specialty companies including behavioral health, individual health, life and health management, long-term care, managed vision, telehealth services and pharmacy benefits management functions.

Segment information for the three months ended September 30, 2009, follows:

   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 917,135     $ 121,099     $     $ 1,038,234  
Revenue from internal customers
    17,182       143,725       (160,907 )      
Total revenue
  $ 934,317     $ 264,824     $ (160,907 )   $ 1,038,234  
                                 
Earnings from operations
  $ 32,245     $ 5,765     $     $ 38,010  

Segment information for the three months ended September 30, 2008, follows:

   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 766,523     $ 92,076     $     $ 858,599  
Revenue from internal customers
    15,337       118,029       (133,366 )      
Total revenue
  $ 781,860     $ 210,105     $ (133,366 )   $ 858,599  
                                 
Earnings from operations
  $ 27,015     $ 4,898     $     $ 31,913  
 
Segment information for the nine months ended September 30, 2009, follows:

   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 2,658,911     $ 351,227     $     $ 3,010,138  
Revenue from internal customers
    49,306       409,897       (459,203 )      
Total revenue
  $ 2,708,217     $ 761,124     $ (459,203 )   $ 3,010,138  
                                 
Earnings from operations
  $ 70,335     $ 30,022     $     $ 100,357  
 
Segment information for the nine months ended September 30, 2008, follows:

   
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
 
Revenue from external customers
  $ 2,228,209     $ 233,548     $     $ 2,461,757  
Revenue from internal customers
    45,041       346,707       (391,748 )      
Total revenue
  $ 2,273,250     $ 580,255     $ (391,748 )   $ 2,461,757  
                                 
Earnings from operations
  $ 81,219     $ 14,872     $     $ 96,091  

15. Comprehensive Earnings

Differences between net earnings and total comprehensive earnings resulted from changes in unrealized gains (losses) on investments available for sale, as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2009
 
2008
 
2009
 
2008
Net earnings
$
23,810
 
$
18,248
  
$
62,474
  
$
62,074 
                       
Reclassification adjustment, net of tax
 
93
   
131
   
(48
)
 
188 
Change in unrealized gains (losses) on investments, net of tax
 
2,638
   
(1,504
)  
 
4,708
   
(1,410)
Total change
 
2,731
   
(1,373
)
 
4,660
   
(1,222)
                       
Comprehensive earnings
 
26,541
  
 
16,875
  
 
67,134
  
 
60,852 
Comprehensive earnings attributable to the noncontrolling interest
 
2,542
   
—  
   
2,518
   
—  
Comprehensive earnings attributable to Centene Corporation
$
23,999
 
$
16,875
 
$
64,616
 
$
60,852 


 
9

 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing, and in our annual report on Form 10-K for the year ended December 31, 2008.
 
FORWARD-LOOKING STATEMENTS

All statements, other than statements of current or historical fact, contained in this filing are forward-looking statements.  We have attempted to identify these statements by terminology including “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “seek,” “target,” “goal,” “may,” “will,” “should,” “can,” “continue” and other similar words or expressions in connection with, among other things, any discussion of future operating or financial performance.  In particular, these statements include statements about our market opportunity, our growth strategy, competition, expected activities and future acquisitions, investments and the adequacy of our available cash resources.  These statements may be found in the various sections of this filing, including those entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A.  “Risk Factors,” and Part I, Item 1 “Legal Proceedings.”  Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions.

All forward-looking statements included in this filing are based on information available to us on the date of this filing.  Actual results may differ from projections or estimates due to a variety of important factors, including:

·  
our ability to accurately predict and effectively manage health benefits and other operating expenses;
·  
competition;
·  
changes in healthcare practices;
·  
changes in federal or state laws or regulations;
·  
inflation;
·  
provider contract changes;
·  
new technologies;
·  
reduction in provider payments by governmental payors;
·  
major epidemics;
·  
disasters and numerous other factors affecting the delivery and cost of healthcare;
·  
the expiration, cancellation or suspension of our Medicaid managed care contracts by state governments;
·  
availability of debt and equity financing, on terms that are favorable to us; and
·  
general economic and market conditions.

Item 1A “Risk Factors” of Part II of this filing contains a further discussion of these and other important factors that could cause actual results to differ from expectations.  We disclaim any current intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Due to these important factors and risks, we cannot give assurances with respect to our future premium levels or our ability to control our future medical costs.
 
10

 
OVERVIEW

We are a multi-line healthcare enterprise operating in two segments.  The Medicaid Managed Care segment provides Medicaid and Medicaid-related programs to organizations and individuals through government subsidized programs, including Medicaid, the State Children’s Health Insurance Program, or CHIP, and, Supplemental Security Income including Aged, Blind or Disabled programs, or ABD. The Specialty Services segment provides specialty services, including behavioral health, life and health management, long-term care programs, managed vision, telehealth services and pharmacy benefits management, to state programs, healthcare organizations, employer groups and other commercial organizations, as well as to our own subsidiaries.  Our Specialty Services segment also provides a full range of healthcare solutions for individuals and the rising number of uninsured Americans.

During 2008, we announced our intention to sell certain assets of University Health Plans, Inc., or UHP, our New Jersey health plan.  Unless specifically noted, with the exception of cash flow information, the discussions below are in the context of continuing operations, and therefore, exclude UHP.  The results of operations for UHP are classified as discontinued operations for all periods presented.

The first quarter of 2008 included $20.8 million of premium revenue for the Georgia premium rate increase for July 1, 2007 through December 31, 2007.  All 2008 ratios and year over year changes discussed below are inclusive of this revenue.

Our third quarter performance for 2009 is summarized as follows:
 
—  
Quarter-end at-risk managed care membership of 1,386,400.
—  
Total revenues of $1,038.2 million.
—  
Health Benefits Ratio, or HBR, of 83.7%.
—  
General and Administrative, or G&A, expense ratio of 13.2%.
—  
Operating earnings of $38.0 million.
—  
Diluted earnings per share of $0.51.
—  
Operating cash flows of $114.9 million.

The following new contracts and acquisition contributed to our growth over the last year:

—  
In July 2009, we began operating under our contract in Massachusetts to manage health care services for the Central, Northern, Boston and Southern regions operating as CeltiCare Health Plan of Massachusetts.  At September 30, 2009, we served 500 members.
—  
In March 2009, we completed an acquisition of certain assets in South Carolina.  We now serve 46,100 at-risk members in South Carolina at September 30, 2009.
—  
In February 2009, we began converting non-risk managed care membership in Florida from Access Health Solutions LLC, or Access, to our new subsidiary, Sunshine State Health Plan on an at-risk basis. At September 30, 2009, we served 84,400 members on an at-risk basis while Access served 59,200 members on a non-risk basis.  Beginning January 1, 2009, we have presented our investment in Access as a consolidated subsidiary.
—  
In October 2008, we began operating under our contract in Arizona to provide Acute Care services in Yavapai county, with 17,400 members at September 30, 2009.


 
11

RESULTS OF OPERATIONS AND KEY METRICS

Summarized comparative financial data are as follows ($ in millions, except share data):

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
% Change
2008-2009
   
2009
   
2008
   
% Change
2008-2009
 
Premium
  $ 960.0     $ 817.7       17.4 %   $ 2,754.7     $ 2,338.6       17.8 %
Service
    27.3       18.0       52.0 %     72.7       57.0       27.7 %
Premium and service revenues
    987.3       835.7       18.1 %     2,827.4       2,395.6       18.0 %
Premium tax
    50.9       22.9       122.4 %     182.7       66.2       175.8 %
Total revenues
    1,038.2       858.6       20.9 %     3,010.1       2,461.8       22.3 %
Medical costs
    803.1       671.9       19.5 %     2,298.1       1,932.2       18.9 %
Cost of services
    15.8       12.9       23.3 %     46.3       43.5       6.7 %
General and administrative expenses
    130.0       118.6       9.6 %     381.5       323.4       18.0 %
Premium tax expense
    51.3       23.3       120.3 %     183.8       66.6       175.8 %
Earnings from operations
    38.0       31.9       19.1 %     100.4       96.1       4.4 %
Investment and other income, net
    (0.3 )     (1.7 )     (81.2 )%     (0.4 )     3.3       (113.0 )%
Earnings from continuing operations, before income tax expense
    37.7       30.2       24.6 %     100.0       99.4       0.6 %
Income tax expense
    12.4       12.1       2.3 %     35.1       38.5       (8.8 )%
Earnings from continuing operations, net of income tax expense
    25.3       18.1       39.6 %     64.9       60.9       6.5 %
Discontinued operations, net of income tax (benefit) expense of $(0.8), $0.2, $(1.1) and $0.4 respectively
    (1.5 )     0.1       %     (2.4 )     1.2       %
Net earnings
    23.8       18.2       30.5 %     62.5       62.1       0.6 %
Noncontrolling interest
    2.5             %     2.5             %
Net earnings attributable to Centene Corporation
  $ 21.3     $ 18.2       16.5 %   $ 60.0     $ 62.1       (3.4 )%
                                                 
Diluted earnings per common share attributable to Centene Corporation:
                                               
Continuing operations
  $ 0.51     $ 0.41       24.4 %   $ 1.41     $ 1.40       0.7 %
Discontinued operations
    (0.03 )           %     (0.05 )     0.03       (266.7 )%
Total diluted earnings per common share
  $ 0.48     $ 0.41       17.1 %   $ 1.36     $ 1.43       (4.9 )%
 
Revenues and Revenue Recognition

Our Medicaid Managed Care segment generates revenues primarily from premiums we receive from the states in which we operate health plans.  We receive a fixed premium per member per month pursuant to our state contracts.  We generally receive premium payments during the month we provide services and recognize premium revenue during the period in which we are obligated to provide services to our members.  In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of our membership.  Generally, the risk score is determined by the state analyzing encounter submissions of processed claims data to determine the acuity of our membership relative to the entire state’s Medicaid membership.

Some states enact premium taxes or similar assessments, collectively, premium taxes, and these taxes are recorded as a component of revenues as well as operating expenses.  During the second quarter of 2009, one of the states in which we operate increased their premium which was required to be passed through to hospitals in the state.  During the three and nine months ended September 30, 2009, the $24.3 million and $109.0 million respective increases were recorded as premium tax revenue and expense.

Some contracts allow for additional premium associated with certain supplemental services provided, such as maternity deliveries.  Revenues are recorded based on membership and eligibility data provided by the states, which may be adjusted by the states for updates to this data.  These eligibility adjustments have been immaterial in relation to total revenue recorded and are reflected in the period known.
 
Our Specialty Services segment generates revenues under contracts with state programs, healthcare organizations, and other commercial organizations, as well as from our own subsidiaries.  Revenues are recognized when the related services are provided or as ratably earned over the covered period of services.

Premium and service revenues collected in advance are recorded as unearned revenue.  For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance.  Premium and service revenues due to us are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and our management’s judgment on the collectability of these accounts.  As we generally receive payments during the month in which services are provided, the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of our financial condition or results of operations.
 
Our total revenue increased in the three and nine months ended September 30, 2009 over the previous year primarily through 1) membership growth, 2) premium rate increases, and 3) growth in Specialty Services.

1.  
Membership growth

From September 30, 2008 to September 30, 2009, we increased our at-risk managed care membership by 18.4%.  The following table sets forth our membership by state for our managed care organizations:

   
September 30,
 
   
2009
   
2008
 
Arizona
    17,400        
Florida
    84,400        
Georgia
    303,400       283,900  
Indiana
    200,700       172,400  
Massachusetts
    500        
Ohio
    151,200       132,500  
South Carolina
    46,100       26,600  
Texas
    450,200       433,200  
Wisconsin
    132,500       122,500  
Total at-risk membership
    1,386,400       1,171,100  
Non-risk membership
    63,200       3,700  
Total
    1,449,600       1,174,800  

 
12

 
The following table sets forth our membership by line of business:
 
   
September 30,
 
   
2009
   
2008
 
Medicaid
    1,040,500       850,500  
CHIP & Foster Care
    263,400       261,800  
ABD & Medicare
    82,500       58,800  
Total at-risk membership
    1,386,400       1,171,100  
Non-risk membership
    63,200       3,700  
Total
    1,449,600       1,174,800  
 
The following table provides supplemental information of other membership categories:

   
September 30,
 
   
2009
   
2008
 
Cenpatico Behavioral Health:
           
Arizona
    117,300       102,400  
Kansas
    41,000       40,100  
Bridgeway:
               
Long-term Care
    2,500       1,900  

From September 30, 2008 to September 30, 2009, our membership increased as a result of growth in all of our states.  We have experienced strong organic membership growth in Georgia, Indiana, Ohio, Texas and Wisconsin.  In South Carolina, our membership increased as a result of an acquisition and the conversion of the state’s fee-for-service members into managed care.  In February 2009, we began converting Access members in Florida to at-risk under our Sunshine State Health Plan.  At September 30, 2009, we had 84,400 at-risk members, while Access continued to serve 59,200 members on a non-risk basis.  In Arizona, we began providing Acute Care services in Yavapai county during October 2008.

2.  
Premium rate increases

During the nine months ended September 30, 2009, we received premium rate increases in certain markets which yield a 2.1% composite increase across all of our markets.  During the nine months ended September 30, 2008, we received premium rate increases in certain markets which yield a 2.9% composite increase across all of our markets.

In November 2007, we received a contract amendment from the State of Georgia providing for an effective premium rate increase in Georgia of approximately 3.8% effective July 1, 2007.  The state also mandated service changes, retroactively recalculated certain rate cells and adjusted for duplicate member issues.  We executed this amendment on November 16, 2007.  The State of Georgia returned the fully executed contract in January 2008 and, accordingly, we recorded the additional revenue, retroactive to July 1, 2007, in the first quarter of 2008.  The premium revenue, related to the period from July 1, 2007 to December 31, 2007, totals approximately $20.8 million.  Approximately $7.3 million of this amount is related to the mandated services, rate cell changes and duplicate member issues, the remaining $13.5 million yields a calculated 3.8% increase.

The 2008 rate increase for the state of Georgia effective July 1, 2008 was not fully executed until the fourth quarter of 2008 and accordingly, the premium revenue from July 1, 2008 to September 30, 2008 was recorded in the fourth quarter of 2008.  Consistent with 2008, we expect to record the premium revenue from July 1, 2009 to September 30, 2009 in the fourth quarter of 2009.

 
3.
Specialty Services growth

For the three and nine months ended September 30, 2009, Specialty Services from external customers was $121.1 million and $351.2 million, compared to $92.1 million and $233.5 million for the same prior year periods.  The increase is primarily attributable to the commencement of our acute care business under Bridgeway, the acquisition of Celtic as well as increased membership in our behavioral health company, Cenpatico.

Medical Costs
 
Our medical costs include payments to physicians, hospitals, and other providers for healthcare and specialty services claims. Medical costs also include estimates of medical expenses incurred but not yet reported, or IBNR, and estimates of the cost to process unpaid claims. We use our judgment to determine the assumptions to be used in the calculation of the required IBNR estimate.  The assumptions we consider include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, health care service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims.

Our development of the IBNR estimate is a continuous process which we monitor and refine on a monthly basis as claims receipts and payment information becomes available.  As more complete information becomes available, we adjust the amount of the estimate, and include the changes in estimates in medical expense in the period in which the changes are identified.

Additionally, we consult with independent actuaries to review our estimates on a quarterly basis.  The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability.  We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management’s judgment to determine the assumptions to be used in the calculation of our liability for medical costs.

While we believe our IBNR estimate is appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates.  Accordingly, we can not assure you that healthcare claim costs will not materially differ from our estimates.
 
Our results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. Our health benefits ratio, or HBR, represents medical costs as a percentage of premium revenues (excluding premium taxes) and reflects the direct relationship between the premium received and the medical services provided. The table below depicts our HBR for our external membership by member category:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Medicaid and CHIP
    84.7 %     81.3 %     84.4 %     80.7 %
ABD and Medicare
    81.1       88.1       81.7       91.4  
Specialty Services
    80.5       79.9       79.6       82.9  
Total
    83.7       82.2       83.4       82.6  

Our consolidated HBR for the three and nine months ended September 30, 2009 was 83.7% and 83.4%, respectively.  The change for the three and nine month periods as compared to 2008 are increase of 1.5% and 0.8%, respectively.  The increase in the three months ended September 30, 2009 over the comparable period in 2008 was due to the March 1, 2009 rate decrease for our CHIP/Perinate product in Texas which brought the HBR more in line with our normal range and the impact of additional costs related to the flu.  We also experienced improvements in our ABD product, particularly in Ohio, which was mostly offset by the impact of changes in rates and benefit structures in other markets.
 
 
13

 
The increase for the nine months ended September 30, 2009 as compared to 2008 is due to the effect of recording the Georgia premium rate increase retroactive to July 1, 2007 during the first quarter of 2008.  The retroactive Georgia premium rate increase in the first quarter of 2008 had the effect of decreasing the HBR for the nine month period by 0.8%.  Adjusting for the impact due to the Georgia rate increase, our HBR was flat.  Sequentially our consolidated HBR increased from 83.1% in the second quarter to 83.7%.  The higher HBR reflects the impact of additional costs related to the flu along with the effect of reserving at higher rates for new markets and receiving pass-through payments which increase the HBR ratio.

Cost of Services

Our cost of services expense includes the pharmaceutical costs associated with our pharmacy benefit manager’s external revenues. Cost of services also includes costs associated with providing service to our non-risk members as well as all direct costs to support the functions responsible for generation of our services revenues. These expenses consist of the salaries and wages of the professionals and teachers who provide the services and expenses associated with facilities and equipment used to provide services.

General and Administrative Expenses

Our general and administrative expenses, or G&A, primarily reflect wages and benefits, including stock compensation expense, and other administrative costs associated with our health plans, specialty companies and centralized functions that support all of our business units. Our major centralized functions are finance, information systems and claims processing.
 
Our G&A expense ratio represents G&A expenses as a percentage of Premium and Service revenues, and reflects the relationship between revenues earned and the costs necessary to earn those revenues.  The consolidated G&A expense ratio for the three and nine months ended September 30, 2009 were 13.2% and 13.5%, respectively, compared to 14.2% and 13.5% for the same prior year periods.  The nine months ended September 30, 2008 ratio reflects a 0.1% decrease due to the effect of recording the Georgia premium rate increase retroactive to July 1, 2007 during the first quarter of 2008.  The decreasing G&A expense ratios reflect improved leveraging of our costs over a higher revenue base and the impact of additional revenue from new business (Arizona Acute Care, Florida and South Carolina).
Other Income (Expense)

The following table summarizes the components of other income (expense), net (in millions):