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 June 30, 2011
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)
   
7700 Forsyth Boulevard
 
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). T 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 July 15, 2011, the registrant had 50,312,876 shares of common stock outstanding.
 


 
 
 
 
 
CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

   
PAGE
     
Part I
Financial Information
Item 1.
 
 
1
 
2
 
3
 
4
 
5
Item 2.
10
Item 3.
15
Item 4.
15
Part II
Other Information
Item 1.
16
Item 1A.
16
Item 2.
22
Item 5.
22
Item 6.
23
24

 
 

 
CAUTIONARY STATEMENT ON 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,” and Part II, Item 1A.  “Risk Factors.”  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 and we undertake no obligation to update or revise the forward-looking statements included in this filing, whether as a result of new information, future events or otherwise, after 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;
·  
membership and revenue projections;
·  
timing of regulatory contract approval;
·  
changes in healthcare practices;
·  
changes in federal or state laws or regulations, including the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act and any regulations enacted thereunder;
·  
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.

 
 

 
PART I
FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
 
   
June 30,
2011
   
December 31,
 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents of continuing operations
  $ 474,450     $ 433,914  
Cash and cash equivalents of discontinued operations
          252  
Total cash and cash equivalents
    474,450       434,166  
Premium and related receivables, net of allowance for uncollectible accounts of $574 and $17, respectively
    152,135       136,243  
Short-term investments, at fair value (amortized cost $77,560 and $21,141, respectively)
    78,808       21,346  
Other current assets
    69,143       64,154  
Current assets of discontinued operations other than cash
          912  
Total current assets
    774,536       656,821  
Long-term investments, at fair value (amortized cost $508,299 and $585,862, respectively)
    518,490       595,879  
Restricted deposits, at fair value (amortized cost $26,615 and $22,755, respectively)
    26,662       22,758  
Property, software and equipment, net of accumulated depreciation of $157,706 and $138,629, respectively
    340,392       326,341  
Goodwill
    281,981       278,051  
Intangible assets, net
    30,342       29,109  
Other long-term assets
    38,041       30,057  
Long-term assets of discontinued operations
          4,866  
Total assets
  $ 2,010,444     $ 1,943,882  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Medical claims liability
  $ 482,913     $ 456,765  
Accounts payable and accrued expenses
    152,578       185,218  
Unearned revenue
    111,110       117,344  
Current portion of long-term debt
    3,172       2,817  
Current liabilities of discontinued operations
          3,102  
Total current liabilities
    749,773       765,246  
Long-term debt
    336,468       327,824  
Other long-term liabilities
    53,899       53,378  
Long-term liabilities of discontinued operations
          379  
Total liabilities
    1,140,140       1,146,827  
                 
Commitments and contingencies
               
                 
Stockholders’ equity:
               
Common stock, $.001 par value; authorized 100,000,000 shares; 52,831,462 issued and 50,295,329 outstanding at June 30, 2011, and 52,172,037 issued and 49,616,824 outstanding at December 31, 2010
    53       52  
Additional paid-in capital
    405,711       384,206  
Accumulated other comprehensive income:
               
Unrealized gain on investments, net of tax
    7,183       6,424  
Retained earnings
    505,862       453,743  
Treasury stock, at cost (2,536,133 and 2,555,213 shares, respectively)
    (50,343 )     (50,486 )
Total Centene stockholders’ equity
    868,466       793,939  
Noncontrolling interest
    1,838       3,116  
Total stockholders’ equity
    870,304       797,055  
Total liabilities and stockholders’ equity
  $ 2,010,444     $ 1,943,882  
 

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
June 30,
 
Six Months Ended
June 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
                     
Premium
$
1,248,588
 
$
1,025,928
 
$
2,401,365
 
$
2,025,243
Service
 
29,428
   
24,682
   
55,812
   
47,589
Premium and service revenues
 
1,278,016
   
1,050,610
   
2,457,177
   
2,072,832
Premium tax
 
36,998
   
26,162
   
74,194
   
72,661
Total revenues
 
1,315,014
   
1,076,772
   
2,531,371
   
2,145,493
Expenses:
                     
Medical costs
 
1,035,740
   
859,335
   
1,992,814
   
1,699,043
Cost of services
 
20,312
   
15,707
   
40,488
   
32,859
General and administrative expenses
 
166,425
   
133,470
   
329,006
   
268,977
Premium tax
 
37,234
   
26,551
   
74,663
   
73,294
Total operating expenses
 
1,259,711
   
1,035,063
   
2,436,971
   
2,074,173
Earnings from operations
 
55,303
   
41,709
   
94,400
   
71,320
Other income (expense):
                     
Investment and other income
 
2,933
   
4,142
   
6,682
   
11,199
Debt extinguishment costs
 
(8,488
 
— 
   
(8,488
 
— 
Interest expense
 
(5,256
)
 
(3,869
)
 
(10,951
)
 
(7,682)
Earnings from continuing operations, before income tax expense
 
44,492
   
41,982
   
81,643
   
74,837
Income tax expense
 
16,429
   
17,254
   
30,757
   
29,779
Earnings from continuing operations, net of income tax expense
 
28,063
   
24,728
   
50,886
   
45,058
Discontinued operations, net of income tax expense (benefit) of $0, $(90), $0 and $4,350, respectively
 
—  
   
(226
)
 
—  
   
3,694
Net earnings
 
28,063
   
24,502
   
50,886
   
48,752
Noncontrolling interest (loss)
 
(311
)
 
1,729
   
(1,233
)
 
1,977
Net earnings attributable to Centene Corporation
$
28,374
 
$
22,773
 
$
52,119
 
$
46,775
                       
Amounts attributable to Centene Corporation common stockholders:
                     
Earnings from continuing operations, net of income tax expense
$
28,374
 
$
22,999
 
$
52,119
 
$
43,081
Discontinued operations, net of income tax (benefit) expense
 
—  
   
(226
)
 
—  
   
3,694
Net earnings
$
28,374
 
$
22,773
 
$
52,119
 
$
46,775
                       
Net earnings (loss) per common share attributable to Centene Corporation:
                     
Basic:
                     
Continuing operations
$
0.57
 
$
0.46
 
$
1.04
 
$
0.89
Discontinued operations
 
—  
   
—  
   
—  
   
0.08
Earnings per common share
$
0.57
 
$
0.46
 
$
1.04
 
$
0.97
Diluted:
                     
Continuing operations
$
0.54
 
$
0.45
 
$
1.00
 
$
0.86
Discontinued operations
 
—  
   
—  
   
—  
   
0.08
Earnings per common share
$
0.54
 
$
0.45
 
$
1.00
 
$
0.94
                       
Weighted average number of shares outstanding:
                     
Basic
 
50,167,052
   
49,135,552
   
49,959,892
   
48,203,312
Diluted
 
52,489,414
   
50,866,318
   
52,171,213
   
49,807,084

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)
Six Months Ended June 30, 2011
 
 
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, 2010
52,172,037
 
$
52
 
$
384,206
 
$
6,424 
 
$
453,743
 
2,555,213
 
$
(50,486)
 
$
3,116  
 
$
797,055
 
Comprehensive Earnings:
                                                 
Net earnings
—  
   
—  
   
—  
   
—  
   
52,119
 
—  
   
—  
   
(1,233)
   
50,886
 
Change in unrealized investment gain, net of $450 tax
—  
   
—  
   
—  
   
759
   
—  
 
—  
   
—  
   
—  
   
759
 
Total comprehensive earnings
                                             
51,645
 
Common stock issued for employee benefit plans
659,425
   
1
   
11,488
   
—  
   
—  
 
—  
   
—  
   
—  
   
11,489
 
Issuance of stock warrants
—  
   
—  
   
—  
   
—  
   
—  
 
(50,000)
   
1,172 
   
—  
   
1,172
 
Common stock repurchases
—  
   
—  
   
—  
   
—  
   
—  
 
30,920
   
(1,029)
   
—  
   
(1,029
)
Stock compensation expense
—  
   
—  
   
8,839
   
—  
   
—  
 
—  
   
—  
   
—  
   
8,839
 
Excess tax benefits from stock compensation
—  
   
—  
   
1,178
   
—  
   
—  
 
—  
   
—  
   
—  
   
1,178
 
Contribution from Noncontrolling interest
—  
   
—  
   
— 
   
—  
   
—  
 
—  
   
—  
   
244  
   
244
 
Deconsolidation of Noncontrolling interest
—  
   
—  
   
—  
   
—  
   
—  
 
—  
   
—  
   
(289) 
   
(289
)
Balance, June 30, 2011
52,831,462
 
$
53
 
$
405,711
 
$
7,183
 
$
505,862
 
2,536,133
 
$
(50,343)
 
$
1,838 
 
$
870,304
 

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

 
3


CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2011
 
2010
 
           
Cash flows from operating activities:
         
Net earnings
  $ 50,886   $ 48,752  
Adjustments to reconcile net earnings to net cash provided by operating activities
             
Depreciation and amortization
    28,567     24,918  
Stock compensation expense
    8,839     6,888  
Gain on sale of investments, net
    (107 )   (3,987 )
Debt extinguishment costs
    8,488      
Gain on sale of UHP
        (8,201 )
Deferred income taxes
    (3,529 )   4,928  
Changes in assets and liabilities
             
Premium and related receivables
    (16,146   (57,718 )
Other current assets
    (4,001 )   948  
Other assets
    (878 )   1,719  
Medical claims liabilities
    24,684     (28,868 )
Unearned revenue
    (12,465 )   (85,950 )
Accounts payable and accrued expenses
    (34,739   (3,536 )
Other operating activities
    3,555     1,851  
Net cash provided by (used in) operating activities
    53,154     (98,256 )
Cash flows from investing activities:
             
Capital expenditures
    (31,744 )   (31,177 )
Capital expenditures of Centene Center LLC
    (3,384 )   (32,425 )
Purchases of investments
    (103,239 )   (306,124 )
Proceeds from asset sales
        13,420  
Sales and maturities of investments
    120,448     291,735  
Investments in acquisitions, net of cash acquired
    (3,192 )   (21,473 )
Net cash used in investing activities
    (21,111 )   (86,044 )
Cash flows from financing activities:
             
Proceeds from exercise of stock options
    12,264     1,759  
Proceeds from borrowings
    419,183     42,161  
Proceeds from stock offering
        104,534  
Payment of long-term debt
    (414,695 )   (97,193 )
Contributions from (distributions to) noncontrolling interest
    244     (4,840 )
Excess tax benefits from stock compensation
    1,369     295  
Common stock repurchases
    (1,029 )   (568 )
Debt issue costs
    (9,095 )    
Net cash provided by financing activities
    8,241     46,148  
Net increase (decrease) in cash and cash equivalents
    40,284     (138,152 )
Cash and cash equivalents, beginning of period
    434,166     403,752  
Cash and cash equivalents, end of period
  $ 474,450   $ 265,600  
               
Supplemental disclosures of cash flow information:
             
Interest paid
  $ 11,822   $ 7,320  
Income taxes paid
  $ 40,111   $ 27,940  
               
Supplemental disclosure of non-cash investing and financing activities:
             
Contribution from noncontrolling interest
  $   $ 306  
Capital expenditures
  $ 1,381   $ 36,280  
 
 
The accompanying notes to the consolidated financial statements are an integral part of these statements.

 
4

 
CENTENE CORPORATION AND SUBSIDIARIES

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

1. Basis of Presentation

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 included in the Form 10-K for the fiscal year ended December 31, 2010.  The unaudited interim financial statements herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, footnote disclosures, which would substantially duplicate the disclosures contained in the December 31, 2010 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.
 
Certain 2010 amounts in the consolidated financial statements have been reclassified to conform to the 2011 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.
 
2. Acquisitions

—  
Casenet, LLC.  In December 2010, the Company acquired an additional ownership interest in Casenet, LLC for total consideration of $6,619, bringing its ownership interest to 68%.  The initial allocation resulted in goodwill of $1,752 and other identifiable intangible assets of $4,500 that were recorded in the Specialty Services segment.  During the second quarter of 2011, the Company finalized the allocation of the fair value that resulted in goodwill of $8,975, other identifiable intangible assets of $3,561 and an increase in unearned revenue of $6,284.  The goodwill is not deductible for income tax purposes.  During the second quarter of 2011, the Company increased its ownership interest in Casenet to 73%.

—  
Citrus Health Care, Inc. In December 2010, the Company acquired certain assets in non-reform counties of Citrus Health Care, Inc., a Florida Medicaid and long term care health plan for $28,689.  During 2010, the Company performed a preliminary allocation of fair value that resulted in goodwill of $22,951 and other identifiable intangible assets of $5,738 that were recorded in the Medicaid Managed Care segment.  During the second quarter of 2011, the Company finalized the allocation of the fair value that resulted in goodwill of $19,069 and other identifiable intangible assets of $9,620.  All of the goodwill is deductible for income tax purposes.
 
3. Investments and Restricted Deposits

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

 
June 30, 2011
 
December 31, 2010
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
$ 28,254   $ 548   $ (34 ) $ 28,768   $ 28,665   $ 510   $ (140 ) $ 29,035
Corporate securities
  190,542     3,746     (73 )   194,215     197,577     3,124     (586 )   200,115
Restricted certificates of deposit
  5,888             5,888     6,814             6,814
Restricted cash equivalents
  13,400             13,400     8,814             8,814
Municipal securities:
                                             
General obligation
  113,851     3,466         117,317     109,866     3,601     (6 )   113,461
Pre-refunded
  32,072     689         32,761     32,442     756         33,198
Revenue
  102,027     2,845     (2 )   104,870     100,198     2,781     (15 )   102,964
Variable rate demand notes
  91,160             91,160     106,540             106,540
Asset backed securities
  13,387     301         13,688     17,391     243     (43 )   17,591
Cost method investments and equity method securities
  7,347             7,347     7,060             7,060
Life insurance contracts
  14,546             14,546     14,391             14,391
Total
$ 612,474   $ 11,595   $ (109 ) $ 623,960   $ 629,758   $ 11,015   $ (790 ) $ 639,983

The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost method and equity method investments.  The Company’s investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets with the focus on high credit quality securities.  The Company limits the size of investment in any single issuer other than U.S. treasury securities and obligations of U.S. government coporations and agencies.  As of June 30, 2011, the Company had no single issue with a par value greater than $5,000.  As of June 30, 2011, 36% of the Company’s investments in securities recorded at fair value that carry a rating by Moody’s or S&P were rated AAA, 76% were rated AA- or higher, and 99% were rated A- or higher.  At June 30, 2011, the Company held certificates of deposit, life insurance contracts and cost and equity method invesments which did not carry a credit rating.

The fair value of available-for-sale investments with gross unrealized losses by investment type and length of time that individual securities have been in a continuous unrealized loss position were as follows:

 
June 30, 2011
 
December 31, 2010
 
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 and obligations of U.S. government corporations and agencies
$ (34 ) $ 7,371   $   $   $ (140 ) $ 9,246   $   $
Corporate securities
  (73 )   21,733             (586 )   40,341        
Municipal securities:
                                             
General obligation
                  (6 )   1,131        
Revenue
  (2 )   838             (15 )   2,419        
Asset backed securities
                  (43 )   5,276        
Total
$ (109 ) $ 29,942   $   $   $ (790 ) $ 58,413   $   $

 
5

 
As of June 30, 2011, the gross unrealized losses were generated from 34 positions out of a total of 401 positions.  The decline in fair value of fixed income securities is a result of movement in interest rates subsequent to the purchase of the security.

For each security in an unrealized loss position, the Company assesses whether it intends to sell the security or if it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes.  If the security meets this criterion, the decline in fair value is other-than-temporary and is recorded in earnings.  The Company does not intend to sell these securities prior to maturity and it is not likely that the Company will be required to sell these securities prior to maturity; therefore, there is no indication of other than temporary impairment for these securities.

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

 
June 30, 2011
 
December 31, 2010
 
 
Investments
 
Restricted Deposits
 
Investments
 
Restricted Deposits
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
One year or less
$ 77,560   $ 78,808   $ 19,516   $ 19,516   $ 21,141   $ 21,346   $ 17,387   $ 17,392  
One year through five years
  396,676     406,770     7,099     7,146     464,270     474,255     5,368     5,366  
Five years through ten years
  37,983     37,990             39,732     39,731          
Greater than ten years
  73,640     73,730             81,860     81,893          
Total
$ 585,859   $ 597,298   $ 26,615   $ 26,662   $ 607,003   $ 617,225   $ 22,755   $ 22,758  

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 has an option to redeem at amortized cost substantially all of the securities included in the Greater than ten years category listed above.
 
Realized gains and losses are determined on the basis of specific identification or a first-in, first-out methodology, if specific identification is not practicable.  The Company’s gross recorded realized gains and losses on investments were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2011
 
2010
 
2011
 
2010
 
Gains
$   $ 683   $ 133   $ 3,717  
Losses
  (11 )   (245 )   (26 )   (245 )
Net realized (losses) gains
$ (11 ) $ 438   $ 107   $ 3,472  

Realized gains in six months ended June 30, 2010 included a gain of $2,961 representing a gain from a distribution from the Reserve Primary fund in excess of our adjusted basis.

The Company continuously 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.  The Company recognizes an impairment loss for cost and equity method investments when evidence demonstrates that it is other-than-temporarily impaired.  Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.

Investment amortization of $5,009 and $5,716 was recorded in the six months ended June 30, 2011 and 2010, respectively.

4. 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 June 30, 2011, for assets and liabilities measured at fair value on a recurring basis:
 
  
   
Level I
 
Level II
 
Level III
 
Total
 
Assets
                 
Cash and cash equivalents
  $ 474,450   $   $   $ 474,450  
                           
Investments available for sale:
                         
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 19,117   $ 2,277   $   $ 21,394  
Corporate securities
        194,215         194,215  
Municipal securities:
                         
General obligation
        117,317         117,317  
Pre-refunded
        32,761         32,761  
Revenue
        104,870         104,870  
Variable rate demand notes
        91,160         91,160  
Asset backed securities
        13,688         13,688  
Total investments
  $ 19,117   $ 556,288   $   $ 575,405  
                           
Restricted deposits available for sale:
                         
Cash and cash equivalents
  $ 13,400   $   $   $ 13,400  
Certificates of deposit
    5,888             5,888  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    6,844     530         7,374  
Total restricted deposits
  $ 26,132   $ 530   $   $ 26,662  
                           
Total assets at fair value
  $ 519,699   $ 556,818   $   $ 1,076,517  
Liabilities
                         
Interest rate swap contract
  $   $ 1,819   $   $ 1,819  
 
 
6

 
The following table summarizes fair value measurements by level at December 31, 2010, for assets and liabilities measured at fair value on a recurring basis:
 
   
Level I
 
Level II
 
Level III
 
Total
 
Assets
                 
Cash and cash equivalents
  $ 433,914   $   $   $ 433,914  
                           
Investments available for sale:
                         
U.S. Treasury securities and obligations of U.S. government corporations and agencies
  $ 14,809   $ 7,096   $   $ 21,905  
Corporate securities
        200,115         200,115  
Municipal securities:
                         
General obligation
        113,461         113,461  
Pre-refunded
        33,198         33,198  
Revenue
        102,964         102,964  
Variable rate demand notes
        106,540         106,540  
Asset backed securities
        17,591         17,591  
Total investments
  $ 14,809   $ 580,965   $   $ 595,774  
                           
Restricted deposits available for sale:
                         
Cash and cash equivalents
  $ 8,814   $   $   $ 8,814  
Certificates of deposit
    6,814             6,814  
U.S. Treasury securities and obligations of U.S. government corporations and agencies
    7,130             7,130  
Total restricted deposits
  $ 22,758   $   $   $ 22,758  
                           
Total assets at fair value
  $ 471,481   $ 580,965   $   $ 1,052,446  

The Company periodically transfers U.S. Treasury securities and obligations of U.S. government corporations and agencies between Level I and Level II fair value measurements dependent upon the level of trading activity for the specific securities at the measurement date.  The Company utilizes matrix pricing services to estimate fair value for securities which are not actively traded on the measurement date.  The Company designates these securities as Level II fair value measurements.  The aggregate carrying amount of the Company’s life insurance contracts and cost-method investments, which approximates fair value, was $21,893 and $21,451 as of June 30, 2011 and December 31, 2010, respectively.
 
5. Debt

Debt consists of the following:

 
June 30, 2011
 
December 31, 2010
 
Senior notes, at par
$ 250,000   $ 175,000  
Unamortized discount on Senior notes
  (3,074    
Interest rate swap fair value
  (1,819    
Senior notes, net
  245,107     175,000  
Revolving credit agreement
      60,000  
Mortgage notes payable
  88,335     89,500  
Capital leases and other
  6,198     6,141  
     Total debt
  339,640     330,641  
Less current portion
  (3,172 )   (2,817 )
     Long-term debt
$ 336,468   $ 327,824  

Senior Notes

In May 2011, the Company exercised its option to redeem its $175,000 7.25% Senior Notes due April 1, 2014 ($175,000 Notes).  The Company redeemed the $175,000 Notes at 103.625% and wrote off unamortized debt issuance costs, resulting in a pre-tax expense of $8,488.

In May 2011, pursuant to a shelf registration statement, the Company issued non-callable $250,000 5.75% Senior Notes due June 1, 2017 ($250,000 Notes) at a discount to yield 6%.  At June 30, 2011, the unamortized debt discount was $3,074.  The indenture governing the $250,000 Notes contains non-financial and financial covenants.  Interest is paid semi-annually in June and December.  In connection with the issuance, the Company entered into an interest rate swap as discussed below.  Gains and losses due to changes in the fair value of the interest rate swap completely offset changes in the fair value of the hedged portion of the underlying debt and are recorded as an adjustment to the $250,000 Notes.  At June 30, 2011, the fair value of the interest rate swap decreased the principal amount of the notes by $1,819.
 
Revolving Credit Agreement

In January 2011, the Company replaced its $300,000 revolving credit agreement with a new $350,000 revolving credit facility, or the revolver.  The revolver is unsecured and has a five-year maturity with non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum net worth.  Borrowings under the revolver bear interest based upon LIBOR rates, the Federal funds rate, or the prime rate.  There is a commitment fee on the unused portion of the agreement that ranges from 0.25% to 0.50% depending on the total debt to EBITDA ratio, as defined.  As of June 30, 2011, the Company had no borrowings outstanding under the agreement, leaving availability of $350,000.

The Company has outstanding letters of credit of $43.3 million as of June 30, 2011, which are not part of the revolver.  The letters of credit bore interest at 1.75% on June 30, 2011.
 
 
7

 
6. Interest Rate Swap

In May 2011, the Company entered into $250,000 notional amount of interest rate swap agreements (Swap Agreements) that are scheduled to expire June 1, 2017. Under the Swap Agreements, the Company receives a fixed rate of 5.75% and pays a variable rate of LIBOR plus 3.5% adjusted quarterly, which allows the Company to adjust the $250,000 Notes to a floating rate. The Company does not hold or issue any derivative instrument for trading or speculative purposes.

The interest rate swaps are formally designated and qualify as fair value hedges. The interest rate swaps are recorded at fair value in the Consolidated Balance Sheet in other assets or other liabilities.  Gains and losses due to changes in fair value of the interest rate swaps completely offset changes in the fair value of the hedged portion of the underlying debt. Therefore, no gain or loss has been recognized due to hedge ineffectiveness.  Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both were recognized in interest expense in the Consolidated Statement of Operations.

The fair value of the Swap Agreements as of June 30, 2011 was a liability of approximately $1,819, and is included in other long term liabilities in the Consolidated Balance Sheet. The fair value of the Swap Agreements excludes accrued interest and takes into consideration current interest rates and current likelihood of the swap counterparties’ compliance with its contractual obligations.

7. Contingencies

In May 2008, the Internal Revenue Service (IRS) began an audit of the Company’s 2006 and 2007 tax returns.  In connection with the IRS examination, the field agent initially denied the $34,856 tax benefit related to the abandonment of the FirstGuard stock in 2007 based on certain assumptions of fact by the IRS.  In June 2011, the Company met with the IRS appeals officer and agreed to a tentative settlement for the open tax years of 2006 and 2007.  The tentative settlement is not expected to have a material impact on the consolidated financial statements.

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 individually, or in the aggregate, to have a material effect on its financial position or results of operations.

8. Earnings Per Share

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2011
 
2010
 
2011
 
2010
Net earnings attributable to Centene Corporation common stockholders:
                     
Earnings from continuing operations, net of tax
$
28,374
 
$
22,999
 
$
52,119
 
$
43,081
Discontinued operations, net of tax
 
   
(226
)
 
   
3,694
Net earnings
$
28,374
 
$
22,773
 
$
52,119
 
$
46,775
Shares used in computing per share amounts:
                     
Weighted average number of common shares outstanding
 
50,167,052
   
49,135,552
   
49,959,892
   
48,203,312
Common stock equivalents (as determined by applying the treasury stock method)
 
2,322,362
   
1,730,766
   
2,211,321
   
1,603,772
Weighted average number of common shares and potential dilutive common shares outstanding
 
52,489,414
   
50,866,318
   
52,171,213
   
49,807,084
                       
Net earnings per share attributable to Centene Corporation common stockholders:
                     
Basic:
                     
  Continuing operations
$
0.57
 
$
0.46
 
$
1.04
 
$
0.89
  Discontinued operations
 
   
   
   
0.08
  Earnings per common share
$
0.57
 
$
0.46
 
$
1.04
 
$
0.97
                       
Diluted:
                     
  Continuing operations
$
0.54
 
$
0.45
 
$
1.00
 
$
0.86
  Discontinued operations
 
   
   
   
0.08
  Earnings per common share
$
0.54
 
$
0.45
 
$
1.00
 
$
0.94
                       
 
The calculation of diluted earnings per common share for the three and six months ended June 30, 2011 excludes the impact of 30,586 and 113,244 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 six months ended June 30, 2010 excludes the impact of 1,913,073 and 1,864,028 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.
 
9. 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 offering products for behavioral health, care management software, health insurance exchanges, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management.  The health plans in Arizona, operated by our long-term care company, and Massachusetts, operated by our individual health insurance provider, are included in the Specialty Services segment.

Segment information for the three months ended June 30, 2011 follows:
 
 
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
Premium and service revenues from external customers
$ 1,098,924     $ 179,092     $     $ 1,278,016
Premium and service revenues from internal customers
  17,297       177,351       (194,648 )    
Total premium and service revenues
$ 1,116,221     $ 356,443     $ (194,648 )   $ 1,278,016
                             
Earnings from operations
$ 42,551     $ 12,752     $     $ 55,303

Segment information for the three months ended June 30, 2010 follows:
 
 
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
Premium and service revenues from external customers
$ 900,463     $ 150,147     $     $ 1,050,610
Premium and service revenues from internal customers
  15,101       122,963       (138,064 )    
Total premium and service revenues
$ 915,564     $ 273,110     $ (138,064 )   $ 1,050,610
                             
Earnings from operations
$ 28,043     $ 13,666     $     $ 41,709

 
8

 
Segment information for the six months ended June 30, 2011 follows:
 
 
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
Premium and service revenues from external customers
$ 2,099,563     $ 357,614     $     $ 2,457,177
Premium and service revenues from internal customers
  33,044       324,471       (357,515 )    
Total premium and service revenues
$ 2,132,607     $ 682,085     $ (357,515 )   $ 2,457,177
                             
Earnings from operations
$ 70,617     $ 23,783     $     $ 94,400

Segment information for the six months ended June 30, 2010 follows:
 
 
Medicaid
Managed Care
   
Specialty
Services
   
Eliminations
   
Consolidated
Total
Premium and service revenues from external customers
$ 1,780,442     $ 292,390     $     $ 2,072,832
Premium and service revenues from internal customers
  30,227       247,949       (278,176 )    
Total premium and service revenues
$ 1,810,669     $ 540,339     $ (278,176 )   $ 2,072,832
                             
Earnings from operations
$ 46,743     $ 24,577     $     $ 71,320

10. Comprehensive Earnings

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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2011
 
2010
 
2011
 
2010
Net earnings
$ 28,063   $ 24,502   $ 50,886   $ 48,752
                       
Reclassification adjustment, net of tax
  10     323     192     135
Change in unrealized gains on investments, net of tax
  1,204     1,874     567     1,917
Total change
  1,214     2,197     759     2,052
                       
Comprehensive earnings
  29,277     26,699     51,645     50,804
Comprehensive (losses) earnings attributable to the noncontrolling interests
  (311 )   1,729     (1,233 )   1,977
Comprehensive earnings attributable to Centene Corporation
$ 29,588   $ 24,970   $ 52,878   $ 48,827
 
 
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.  The discussion contains forward-looking statements that involve both known and unknown risks and uncertainties, including those set forth under Part II, Item 1A. “Risk Factors” of this Form 10-Q.
 
OVERVIEW

Our financial performance for the second quarter of 2011 is summarized as follows:

—  
Quarter-end at-risk managed care membership of 1,580,500, an increase of 45,900 members.
—  
Premium and service revenues from continuing operations of $1.3 billion, representing 21.6% growth year over year.
—  
Health Benefits Ratio from continuing operations of 83.0%, compared to 83.8% in 2010.
—  
General and Administrative expense ratio from continuing operations of 13.0%, compared to 12.7% in 2010.
—  
Diluted net earnings per share from continuing operations of $0.54, including $(0.10) of debt extinguishment costs, compared to $0.45 in the prior year.
—  
Total operating cash flows of $(40.8) million.

The following items contributed to our revenue and membership growth over the last year:

—  
Arizona. In December 2010, Cenpatico Behavioral Health of Arizona began operating under an expanded contract to manage behavioral healthcare services for an additional four counties.  In February 2011, Bridgeway Health Solutions, LLC began operating under an agreement with Pima Health Systems of Arizona to administer their long-term care program on a non-risk basis.
 
—  
Celtic Insurance Company, Inc. In July 2010, we closed on the acquisition of certain assets and liabilities of NovaSys Health, LLC, a third party administrator in Arkansas that complements our existing Celtic business.  In November 2010, Celtic began operating under a new contract with the Texas Department of Insurance to provide affordable health insurance plans for small businesses under the new Healthy Texas initiative.
 
—  
Florida.  During 2010, we completed the conversion of members from Access Health Solutions LLC, or Access, to our subsidiary, Sunshine State Health Plan, on an at-risk basis.  Additionally, in December 2010, we completed the acquisition of Citrus Health Care, Inc., a Medicaid and long-term care health plan.
 
—  
Illinois.  In May 2011, our new subsidiary, IlliniCare Health Plan, began providing managed care services for older adults and adults with disabilities under the Integrated Care Program in six counties.
 
—  
Massachusetts.  In April 2010, we began offering an individual insurance product, under the names of Commonwealth Choice and CeltiCare Direct, for residents who do not qualify for other state funded insurance programs.
 
—  
Mississippi.  In January 2011, we began operating through the Mississippi Coordinated Access Network (MississippiCan) program.  During the second quarter of 2011, the contract effectiveness provision was amended, and accordingly, revenue, medical costs and related earnings for January 1, 2011 through June 30, 2011 were recorded during the second quarter of 2011.  As a result, the recognition of earnings of approximately $0.07 per diluted share related to the Mississippi operations from the first quarter were recorded in the second quarter of 2011.  General and administrative expenses related to the Mississippi operations were recognized in our consolidated statement of operations during the first quarter of 2011.
 
—  
South Carolina. In June 2010, we completed the acquisition of Carolina Crescent Health Plan.
 
—  
Texas.  In February 2011, we began operating under an additional STAR+PLUS ABD contract in the Dallas service area.

We expect the following item to contribute to our future growth potential:

—  
In May 2011, Bridgeway Health Solutions announced it was awarded a contract to deliver Long-term Care services in three geographic service areas of Arizona, effective October 1, 2011.

—  
In July 2011, our subsidiary, Kentucky Spirit Health Plan, announced it was awarded a three-year contract with the Kentucky Finance and Administration Cabinet to serve Medicaid beneficiaries.  Kentucky Spirit Health Plan will provide integrated healthcare which includes behavioral health, pharmacy, vision and dental services to Medicaid recipients.  Operations are expected to commence in the fourth quarter of 2011.

—  
In July 2011, Louisiana Healthcare Connections, our joint venture subsidiary, was selected to contract with the Louisiana Department of Health and Hospitals to provide healthcare services to Medicaid enrollees participating in the Medicaid Coordinated Care Network project in all three of the state’s geographical services areas for a three year term. Services for these members are expected to begin in the first quarter of 2012, with a three-phased membership roll-out ending in the second quarter of 2012.
 
In April 2010, we were notified by the Wisconsin Department of Health Services that our Wisconsin subsidiary, Managed Health Services (MHS), was not awarded the Southeast Wisconsin BadgerCare Plus Managed Care contract. The change was effective November 1, 2010; after a two-month transition period (September through October), MHS no longer served BadgerCare Plus Standard and Benchmark members in Milwaukee, Washington, Ozaukee, Waukesha and Kenosha counties.  MHS continues to serve more than 7,800 Wisconsin Core Plan and SSI members in this region and more than 72,000 members in other regions of the state.  In 2010, we filed a legal challenge to the State of Wisconsin’s decision on the southeast region reprocurement.  The lawsuit is currently pending before the Wisconsin court of appeals.  The timing and outcome of any decision from the appellate court is unknown at this time.

 MEMBERSHIP

From June 30, 2010 to June 30, 2011, we increased our at-risk managed care membership by 45,900.  The following table sets forth our membership by state for our managed care organizations:

 
June 30,
 
December 31,
 
2011
 
2010
 
2010
Arizona
22,800   22,100   22,400
Florida
190,600   113,100   194,900
Georgia
303,100   295,600   305,800
Illinois
700    
Indiana
206,700   212,700   215,800
Massachusetts
32,900   30,100   36,200
Mississippi
30,800    
Ohio
159,900   159,300   160,100
South Carolina
82,800   92,600   90,300
Texas
470,400   475,500   433,100
Wisconsin
79,800   133,600   74,900
Total at-risk membership
1,580,500   1,534,600   1,533,500
Non-risk membership
10,400   50,900   4,200
Total
1,590,900   1,585,500   1,537,700

The following table sets forth our membership by line of business:

 
June 30,
 
December 31,
 
2011
 
2010
 
2010
Medicaid
1,172,400   1,135,500   1,177,100
CHIP & Foster Care
211,400   272,400   210,500
ABD & Medicare
156,300   93,800   104,600
Hybrid Programs
35,500   30,100   36,200
Long-term Care
4,900   2,800   5,100
Total at-risk membership
1,580,500   1,534,600   1,533,500
Non-risk membership
10,400   50,900   4,200
Total
1,590,900   1,585,500   1,537,700

 
10

 
The following table provides supplemental information of other membership categories:

 
June 30,
 
December 31,
 
2011
 
2010
 
2010
Cenpatico Behavioral Health:
         
Arizona
173,200   119,700   174,600
Kansas
45,000   39,100   39,200
 
 
RESULTS OF CONTINUING OPERATIONS

The following discussion and analysis is based on our consolidated statements of operations, which reflect our results of operations for the three and six months ended June 30, 2011 and 2010, prepared in accordance with generally accepted accounting principles in the United States.

Summarized comparative financial data for the three and six months ended June 30 is as follows ($ in millions):

 
Three Months Ended June 30,
 
Six months Ended June 30,
 
2011
 
2010
 
% Change 2010-2011
 
2011
 
2010
 
% Change 2010-2011
Premium
$
1,248.6  
 
$
1,025.9 
 
21.7
%
 
$
2,401.4  
  
$
2,025.2 
 
18.6
%
Service
 
29.4  
   
24.7 
 
19.2
%
   
55.8  
   
47.6 
 
17.3
%
Total premium and service revenues
 
1,278.0  
   
1,050.6 
 
21.6
%
   
2,457.2  
   
2,072.8 
 
18.5
%
Premium tax
 
37.0  
   
26.2 
 
41.4
%
   
74.2  
   
72.7 
 
2.1
%
Total revenues
 
1,315.0  
   
1,076.8 
 
22.1
%
   
2,531.4  
   
2,145.5 
 
18.0
%
Medical costs
 
1,035.7  
   
859.3 
 
20.5
%
   
1,992.8  
   
1,699.0 
 
17.3
%
Cost of services
 
20.3  
   
15.7 
 
29.3
%
   
40.5  
   
32.9 
 
23.2
%
General and administrative expenses
 
166.4  
   
133.5 
 
24.7
%
   
329.0  
  
 
269.0 
 
22.3
%
Premium tax expense
 
37.2  
   
26.6 
 
40.2
%
   
74.7  
   
73.3 
 
1.9
%
Earnings from operations
 
55.4  
   
41.7 
 
32.6
%
   
94.4  
   
71.3 
 
32.4
%
Investment and other income, net
 
(10.9)
   
0.3 
 
―  
%
   
(12.8) 
   
3.5 
 
(462.7
)%
Earnings from continuing operations, before income tax expense
 
44.5  
   
42.0 
 
6.0
%
   
81.6  
   
74.8 
 
9.1
%
Income tax expense
 
16.4  
   
17.3 
 
(4.8
)%
   
30.7  
   
29.7 
 
3.3
%
Earnings from continuing operations, net of income tax expense
 
28.1  
   
24.7 
 
13.5
%
   
50.9  
   
45.1 
 
12.9
%
Discontinued operations, net of income tax expense (benefit) of $0, $(0.1), $0 and $4.4 respectively
 
―  
   
(0.2)
 
 (100.0
)%
   
―  
   
3.7 
 
(100.0
)%
Net earnings
 
28.1  
   
24.5 
 
14.5
%
   
50.9  
   
48.8 
 
4.4
%
Noncontrolling interest
 
(0.3) 
   
1.7 
 
(118.0
)%
   
(1.2) 
   
2.0 
 
(162.4
)%
Net earnings attributable to Centene Corporation
$
28.4  
 
$
22.8 
 
24.6
%
 
$
52.1  
 
$
46.8 
 
11.4
%
                                   
Amounts attributable to Centene Corporation common stockholders:
                                 
Earnings from continuing operations, net of income tax expense
$
28.4  
 
$
23.0 
 
23.4
%
 
$
52.1  
 
$
43.1 
 
21.0
%
Discontinued operations, net of income tax expense (benefit)
 
―  
   
(0.2)
 
(100.0
)%
   
   
   
3.7 
 
(100.0
)%
Net earnings
$
28.4  
 
$
22.8 
 
24.6
%
 
$
52.1  
 
$
46.8 
 
11.4
%
                                   
Diluted earnings per common share attributable to Centene Corporation:
                                 
Continuing operations
$
0.54  
 
$
0.45 
 
20.0
%
 
$
1.00  
 
$
0.86 
 
16.3
%
Discontinued operations
 
―   
   
―  
 
― 
%
   
  
   
0.08 
 
(100.0
)%
Total diluted earnings per common share
$
0.54  
 
$
0.45 
 
20.0
%
 
$
1.00  
 
$
0.94 
 
6.4
%

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues and Revenue Recognition
 
Revenues are recorded based on membership and eligibility data provided by the states, which is adjusted on a monthly basis by the states for retroactive additions or deletions to membership data.  These eligibility adjustments are not significant in relation to total revenue recorded and are reflected in the period known.  We continuously review and update those estimates as new information becomes available.  It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates.

Premium and service revenues increased 21.6% in the three months ended June 30, 2011 over the corresponding period in 2010 as a result of the addition of our Mississippi contract, membership growth and premium rate increases during the second half of 2010.  During the second quarter of 2011, revenue from our Mississippi contract of $100.4 million was recognized for the period January 1, 2011 through June 30, 2011, of which $52.8 million related to the first quarter of 2011.

During the second quarter of 2011, one of our states performed a special review and identified additional membership deletions for previous periods.  The amount of any reduction to revenue related to this review is subject to consideration of rate adequacy calculations, as part of actuarially soundness standards, for the appropriate periods.  We have estimated the revenue impact related to retroactive eligibility reductions due to the state and have increased our accrual for those adjustments in our consolidated financial statements.  There can be no assurance that future adjustment of amounts related to membership reconciliations will not have a material adverse effect on the Company.
 
Operating Expenses
 
Medical Costs
 
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. The 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 the HBR for our membership by member category for the three months ended June 30:
 
   
2011
   
2010
 
Medicaid and CHIP
  80.1 %   83.4 %
ABD and Medicare
  88.0     86.5  
Specialty Services
  85.8     81.7  
Total
  83.0     83.8  
 
The consolidated HBR for the three months ended June 30, 2011 of 83.0% was a decrease of 0.8% over the comparable period in 2010 primarily as a result of lower utilization and contract enhancements.

General and Administrative Expenses

General and administrative expenses, or G&A, increased by $33.0 million in the three months ended June 30, 2011 compared to the corresponding period in 2010.  This was primarily due to expenses for additional staff and facilities to support our membership growth.

The consolidated G&A expense ratio for the three months ended June 30, 2011 and 2010 was 13.0%, and 12.7%, respectively.  The consolidated G&A expense ratio was reduced by 0.6% for the recognition of revenue in the second quarter from our Mississippi contract for the period January 1, 2011 through March 31, 2011.  The resulting year over year increase in the G&A expense ratio was driven by increased business expansion costs.

 
11

 
Other Income (Expense)
 
The following table summarizes the components of other income (expense) for the three months ended June 30, ($ in millions): 
 
   
2011
   
2010
 
Investment income
  $ 3.0     $ 4.2  
Debt extinguishment costs
    (8.5 )      
Interest expense
    (5.3 )     (3.9 )
  Other income (expense), net
  $ (10.8 )   $ 0.3  

The decrease in investment income in 2011 reflects the continued low market interest rates.

In May 2011, the Company redeemed its $175.0 million 7.25% Senior Notes due April 1, 2014 at 103.625% and wrote off unamortized debt issuance costs.  Debt extinguishment costs totaled $8.5 million, or $0.10 per diluted share.

Interest expense increased during the quarter by $1.4 million primarily reflecting increased borrowings on the revolving credit agreements as well as borrowings on the mortgage loan associated with the real estate development including our corporate headquarters.  The real estate development was placed in service in the third quarter of 2010 and accordingly we ceased capitalizing interest on the project.

Income Tax Expense
 
Excluding the effects of noncontrolling interests, our effective tax rate for the three months ended June 30, 2011 was 36.7% compared to 42.9% in the corresponding period in 2010.  The decrease in the effective tax rate was driven by a higher rate in 2010 resulting from the write off of a deferred tax asset of $1.7 million during the second quarter of 2010 as a result of certain enacted legislation.  The year over year decrease in the effective tax rate was also associated with the tax benefits in 2011 from disqualifying dispositions of incentive stock options as well as the recognition of state net operating losses in Wisconsin as a result of a change in tax law during the quarter.

In May 2008, the Internal Revenue Service (IRS) began an audit of the 2006 and 2007 tax returns.  In connection with the IRS examination, the field agent initially denied the $34.9 million tax benefit related to the abandonment of the FirstGuard stock in 2007 based on certain assumptions of fact by the IRS.  In June 2011, we met with the IRS appeals officer and agreed to a tentative settlement for the open tax years of 2006 and 2007.  The tentative settlement is not expected to have a material impact on the consolidated financial statements.

Segment Results

The following table summarizes our operating results by segment for the three months ended June 30, (in millions):

   
2011
 
2010
 
% Change
2010-2011
 
Premium and Service Revenues
             
Medicaid Managed Care
  $ 1,116.2   $ 915.6     21.9 %
Specialty Services
    356.4     273.1     30.5 %
Eliminations
    (194.6 )   (138.1 )   41.0 %
Consolidated Total
  $ 1,278.0   $ 1,050.6     21.6 %
                     
Earnings from Operations
                   
Medicaid Managed Care
  $ 42.5   $ 28.0     51.7 %
Specialty Services
    12.8     13.7     (6.7 )%
Consolidated Total
  $ 55.3   $ 41.7     32.6 %

Medicaid Managed Care

Premium and service revenues increased 21.9% in the three months ended June 30, 2011 over the comparable period due to the addition of the Mississippi contract, membership growth and premium rate increases in the second half of 2010.  During the second quarter of 2011, revenue from our Mississippi contract of $100.4 million was recognized for the period January 1, 2011 through June 30, 2011, of which $52.8 million related to the first quarter of 2011.  Earnings from operations increased 51.7% in the three months ended June 30, 2011 reflecting overall growth in our membership, reduced HBR and leveraging of our general and administrative expenses.

Specialty Services

Premium and service revenues increased 30.5% in the three months ended June 30, 2011 primarily due to growth of our operations in Arizona and Massachusetts, as well as membership growth in our Medicaid segment and the associated specialty services provided to this increased membership.  Earnings from operations decreased 6.7% in the three months ended June 30, 2011 reflecting a higher HBR in 2011 and increased general and administrative expenses resulting from business expansion costs for new specialty services.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Premium and Service Revenues
 
Premium and service revenues increased 18.5% in the six months ended June 30, 2011 over the corresponding period in 2010 as a result of the addition of our Mississippi contract, membership growth and net premium rate increases during the second half of 2010.  The premium rates specified in our state contracts are generally updated on an annual basis through contract amendments.  In the six months ended June 30, 2011, we received premium rate adjustments in certain markets which yielded a net 0% composite change across all of our markets.

Operating Expenses
 
Medical Costs
 
Results of operations depend on our ability to manage expenses associated with health benefits and to accurately predict costs incurred. The 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 the HBR for our membership by member category for the six months ended June 30: