Feb 19, 2009
Executives
Julie Loftus Trudell – Investor Relations James G. Carlson – Chairman of the Board, President, Chief Executive Officer James W.
Truess – Chief Financial Officer, Executive Vice President John E. Littel – Executive Vice President - External Affairs Richard C.
Zoretic – Chief Operating Officer, Executive Vice President
Analysts
Thomas Carroll - Stifel Nicolaus & Company, Inc. Joshua Raskin - Barclays Capital Greg Nersessian - Credit Suisse Peter Costa - FTN Midwest Scott Fidel – Deutsche Bank Carl McDonald - Oppenheimer & Co., Inc.
John Rex - J.P. Morgan Daryn Miller - Goldman Sachs
Operator
Welcome to AMERIGROUP Corporation's fourth quarter earnings conference call. (Operator Instructions) I will now turn the conference call over to Julie Loftus Trudell, Senior Vice President, Investor Relations of AMERIGROUP.
Please go ahead.
Julie Loftus Trudell
Good morning and thank you for joining AMERIGROUP's fourth quarter conference call and webcast. With me this morning are AMERIGROUP's Chairman and CEO, Jim Carlson, and Chief Financial Officer Jim Truess.
In addition, Dick Zoretic, our Chief Operating Officer, and John Little, our Government Relations Executive Vice President, will be available for Q&A. The press release announcing our fourth quarter earnings was distributed this morning.
A replay of this call will be available shortly after the conclusion of this call through Thursday, February 26th. The numbers to access this replay are in the press release.
The conference call will also be available through the Investors page of the company's website, approximately two hours following the conclusion of this live broadcast for 30 days. The press release and this conference call are intended to be disclosures through methods reasonably designed to provide broad, non-exclusionary distribution to the public in compliance with Regulation Fair Disclosure.
The safe harbor provision of the Private Securities Litigation Reform Act of 1995 apply to this call, and some of the statements we'll mention today are forward-looking, including, among other things, our estimates for 2009. We can give no assurance that they will prove to be accurate because they are of a prospective nature.
The actual results that are produced in the future could differ materially than those we discuss today. I encourage you to read our annual report on Form 10-K for the year ended December 31, 2007 that we filed with the SEC and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished with the SEC for certain known risk factors that could cause our actual results to differ materially from our current estimates.
We will be discussing financial information that included non-GAAP financial measures in our call today. Certain financial figures in today's comments are non-GAAP numbers which exclude the effect of one-time charges for the litigation settlement previously disclosed in our second quarter earnings release.
Please refer to our 2008 fourth quarter earnings release issued this morning and our current report on Form 8-K filed today with the SEC for the most directly comparable GAAP financial measures and reconciliation to the non-GAAP financial measures discussed today. As this point I'd like to turn the call over to Jim Carlson.
Jim?
James G. Carlson
Thanks, Julie. Good morning and thank you for joining our call today.
All in all, 2008 turned out to be a pretty darn good year for AMERIGROUP. We grew our business nearly 15% despite planned exits from two markets, and we secured the entry into two additional Medicaid markets - New Mexico and Nevada - as well as five new states for Medicare.
Financially, we generated nearly $275 million in cash flow, excluding the impact of a litigation settlement. Our strategy of investing in high-quality short-term instruments preserved our balance sheet, though falling interest rates still pushed down the returns generated by our investment portfolio, suppressing 2008 earnings by over $0.25 per share.
Despite this, we achieved earnings per share of $2.77, which was above the $2.60 high end of our original guidance range. We also tackled and resolved some difficult issues.
We settled the long-standing qui tam litigation related to our former Illinois health plan, which enabled us to end years of legal and financial uncertainty. That settlement led to our reporting a GAAP loss for the full year.
We won the procurement in the District of Columbia, but made a disciplined though tough decision to exit that market. In both new and existing markets in TANF, SCHIP, long-term care and Medicare, we achieved meaningful growth as well as strong operational performance.
Throughout the year we continued to see our medical trends moderate and, with the help of our state partner, we successfully navigated significant rate and program issues in our first full year in Tennessee. We made tremendous strides in not only delivering breakthroughs in customer service but also in lowering the percentage of our premiums that support administrative expenses, a difficult combination for any organization to achieve.
Most importantly and yet again, we made a positive and lasting difference in the lives and health of the individuals we are entrusted to serve. These accomplishments are the product of dedicated and exceptional associates who demonstrate their abilities relative to execution, discipline, results and compassion every day.
As partial evidence of this, AMERIGROUP was recently honored as one of America's Best Places to Work in Health Care in 2008 by Modern Health Care Magazine. We expect 2009 and 2010 to continue to be challenging years for health care and for the general economy.
For our part, in 2009 we will be focused on maintaining low medical cost trends while elevating our performance relative to clinical quality indicators, prudently managing our balance sheet, continuing to diversify our business, both in terms of markets served and product offerings, reaching out to providers in order to engage them to collaborate more effectively and more actively participating in the public policy and clinical effectiveness arena. In doing these things, we expect to help our government partners conserve scarce resources and manage their health care programs wisely while providing a reasonable return for investors.
Moving on to the quarter, our fourth quarter was solid. We reported earnings per diluted share of $0.70, with quarterly premium revenues of $1.2 billion, reflecting a 10.3% increase over the prior year.
Our health benefits ratio was 81.4%, reflecting our strong operating performance. The SG&A ratio was 13.1% of total revenues.
Our total membership was approximately 1.6 million. Membership decreased by 132,000 members due primarily to our exits in West Tennessee and the District of Columbia, both of which went smoothly.
Our risk membership excluding exist in D.C. increased 76,000 or 5.1% when compared to the end of the fourth quarter of last year.
Sequentially, our risk membership increased 30,000 compared to the third quarter of 2008. At the end of the year we had $310 million of unregulated cash, with a debt-to-capital ratio of 26.4%.
Our cash flow from operations during the quarter was $104 million. Let me give you a quick update on some developments in our markets.
We've completed our first full quarter of operations in New Mexico in the new groundbreaking coordinated long-term care program, which integrates the management of acute care, long-term care, and home and community based services under a single contract. While still early in the cycle, our team in the state has done a great job launching this program.
At year end we served 11,000 members there. In Tennessee we continue to make progress.
The combination of TennCare's rate increases and benefit changes plus our team's effective management appears to be achieving the impact we predicted - exchanging 24-hour private duty nursing services in favor of more clinically appropriate home health care benefits. We're currently working with the state on a long-term care program for late 2009.
As many of you are aware, on December 30th our New Jersey subsidiary terminated its agreement to purchase Centene's Medicaid business in New Jersey due to events that occurred following the execution of the purchase agreement but prior to closing. While this transaction is not material, I would like to note that the decision to terminate the purchase agreement was one based on facts, and while I cannot fully discuss pending litigation, I think it would be helpful to provide you with a brief overview of those.
Earlier in 2008 the state announced that beginning in 2009 it would begin using risk scoring to set capitation rates for Medicaid managed care plans, TANF and SCHIP populations. At the time our subsidiary entered into the purchase agreement with Centene, the state had not yet announced the final risk scoring methodology or the final periodic risk scores of each Medicaid managed care plan.
Shortly after execution of the purchase agreement, the state notified MCOs of their respective risk scores and the effect of the score on each plan's 2009 capitation rates. Upon learning of the risk score and risk adjustment applicable to Centene's capitation rates effective January 1, 2009, our subsidiary availed itself of its right to terminate the purchase agreement in accordance with its terms.
Centene has filed suit claiming, among other things, that the determination was improper. We believe firmly that the termination was proper and contractually sound.
Under this plan, our New Jersey subsidiary received a risk adjustment effective January 1, 2009 reflecting approximately a 3% rate reduction for our TANF and SCHIP populations. This adjustment was about 2% more than our preliminary expectations for our business.
While we cannot comment on scores for other companies, we do believe that there was a broad range of outcomes, some going up and some coming down. Rates will now be adjusted every six months.
We were also asked by the State of Nevada to step in and serve individuals enrolled in their Medicaid and SCHIP programs. After due diligence on the adequacy of premium rates and the operating environment, we entered into a contract and began operations there on February 1, 2009.
We currently are serving approximately 50,000 members in that market. Medicaid plays an especially important role in our health care system in tough economic times, and we are pleased with the steps that the president and Congress have taken already to shore up safety net programs.
Getting the S-SCHIP program reauthorized and expanded is a critical first step to improving access and cost for low-income families. By the end of 2010, subject to the state's authorizing expansions, this program is expected to cover 11 million children.
AMERIGROUP currently covers about 1 of every 25 children enrolled, and we look forward to potential expansions of this program in our states. The states have been facing unprecedented budget shortfalls for more than a year.
Last August we began working with a number of concerned groups on federal medical assistance percentage or FMAP relief. Congress recognized the importance of stabilizing the states and the stimulus nature of Medicaid funding.
The American Recovery and Reinvestment Act includes approximately $88 billion in assistance for state Medicaid programs in the form of an increase to the FMAP. Each state will receive a minimum increase of 6.2% and the balance of the funding will be based on the unemployment rate in each state.
The bill also includes maintenance of effort requirements to encourage states to restore cuts that were made in the past year as well as funds to enable them to address growing caseloads as a result of unemployment and, in some markets, flexibility to expand both Medicaid and SCHIP enrollment. This doesn’t mean that the budget crunch is lifted for states, but the stimulus does provide considerable relief and should allow states to conduct actuarially sound rate processes.
Further, we have not at this point factored the SCHIP expansion, FMAP infusion, or increases in enrollment due to unemployment into our guidance. While we are cautiously optimistic about the potential positives from these actions, we will await further detail in each of our markets before making any adjustments to our outlook.
We were encouraged by the three states that have rate cycles early in the year. In both Ohio and Maryland we received rate increases on January 1st in the mid-4% range and New York preliminarily provided a trend increase in the mid single digits, but there are a number of open program issues to resolve before the rates are final.
In setting rates for April 1st, the state also restored the temporary 1% reduction that was part of health care reductions made in October. Each of these states conducted their rates processes without the certainty of the stimulus funding.
Florida has had two special sessions to address their budget shortfalls. In the most recent the state cut a number of provider rates and services, which resulted in a 1.7% reduction from March through June.
The legislature will convene in its regular session in March, so we are hopeful that they will consider restoration of some of these reductions as well as prepare for an actuarially sound rate process for fiscal year '10. Obviously, we'll get a better sense of the impact of the stimulus and changes in the economy as we get closer to the summer rate season.
So with that, I'll turn it over to Jim to run through the numbers. Jim?
James W. Truess
Thanks, Jim. Good morning, everyone.
I'm going to begin by providing summary comments on the quarter. I'll keep those brief.
I think the results are solid and straightforward. The balance sheet and cash flow are also strong.
I do want to spend the majority of my time on our guidance, which we are reaffirming. I think it's a positive story as well, and I want to make sure it's as clear as possible.
So starting with the quarter, net income was $37.3 million in the fourth quarter, resulting in earnings per diluted share of $0.70 versus $31.1 million or $0.57 in the fourth quarter of 2007 and compared to $39.4 million or $0.74 per diluted share in the third quarter of 2008. Fourth quarter premium revenues were $1.2 billion, reflecting a 10% increase in premium revenue compared to the fourth quarter of 2007.
Sequentially, premium revenues increased $56 million or 5.1% compared to the third quarter of 2008. The sequential increase primarily reflects the first full quarter of operations in New Mexico as well as rate increases on September 1st in Texas and the normal Georgia rate increase that came through in the fourth quarter.
For the year, premium revenues increased 14.8% to $4.4 billion from $3.9 billion in 2007. Fourth quarter investment income and other revenue were $12.7 million compared with $23.7 million in the fourth quarter of 2007.
Sequentially, investment income and other revenue decreased $4.9 million or 28% from the third quarter of 2008. Investment income and other revenue decreased due to the conclusion of the West Tennessee Administrative Service Only business on October 31st and a decrease in investment yields.
Our investment yields declined about 30 basis points in the fourth quarter as expected, but we continue to believe the quality and value of our portfolio remains solid. Health benefits as a percent of premium revenues were 81.4% for the fourth quarter of 2008 versus 82.9% for the fourth quarter of 2007 and compares to 80.1% in the third quarter of 2008.
For the full year 2008, HBR was 81.4% versus 83.1% for the full year 2007. Throughout the year we continued to see our medical trends moderate.
The fourth quarter of 2008 health benefits ratio reflects favorable medical cost performance during the quarter, with the majority of health plans including Tennessee - exceeding our expectations. HBR was also impacted by favorable reserve development, primarily in Texas, which contributed to the lower health benefits ratio this quarter.
Our performance in Texas is now such that we are sharing a large portion of our upside results with the state through the experience rebate mechanism. The selling, general and administrative expense ratio was 13.1% of total revenues for the fourth quarter of 2008, unchanged from the fourth quarter of 2007 and compared with 14.4% in the third quarter of 2008.
Our core SG&A expenses were right on plan for the quarter. We have been aggressively managing expenses throughout the year and the fourth quarter reflects the ongoing impact of those efforts.
Total SG&A expenses for the quarter remains elevated due to experience rebate expense in Texas associated with favorable performance in the state. The favorable results in Texas positively impacted the health benefits ratio, but through the experience rebate mechanism increased the SG&A ratio.
For the full year 2008, the selling, general and administrative expense ratio was 13.5% compared with 12.6% for the full year 2007. Depreciation and amortization increased $2.1 million to $10.9 million when compared to the third quarter of 2008.
The increase was primarily due to the accelerated amortization of debt issuance costs associated with increased principal payments on debt. The fourth quarter tax rate was 39.5% versus 38.9% in the third quarter.
The rate increase is primarily attributable to a change in the blended state income tax rate. Cash flow provided by operations totaled $103.7 million for the quarter, representing 2.8 times net income.
Excluding the litigation settlement, cash flow provided by operations was $273.9 million for the full year, representing 1.8 times adjusted net income. At year end cash and investments totaled $1.4 billion, of which $310 million was unregulated.
Our unregulated cash increased approximately $27 million during the quarter compared to September 30, 2008. Our regulated subsidiaries provided strong dividends that allowed us to grow our cash position, further capitalize our new markets in New Mexico, and reduce debt.
Late in the quarter we amended our credit agreement, which enhances our flexibility. As a result, restrictions that we previously had on share repurchases in 2009 have been relaxed and we can continue to repurchase shares this year.
We now have increased flexibility to buy our convertible notes in the open market, and we now have a provision that allows us to conduct auctions to repurchase our term loan. In the fourth quarter we purchased through an auction approximately $5.5 million of the outstanding term loan under our credit agreement.
We repurchased the debt at 88% of face value and now have $44.3 million outstanding on our term loan. At the close of the quarter our debt-to-total capital ratio decreased to 26.4% from 27.6% in the third quarter of 2008.
We recently announced a 3 million share increase to the company's ongoing share repurchase program, which was initially authorized on February 12, 2008. In the fourth quarter we repurchased 320,000 shares of common stock for approximately $7.8 million.
As of December 31, 2008, we had purchased approximately 1.2 million shares for approximately $30.6 million. We are pleased with the position of our balance sheet.
Our unregulated cash position at $310 million is probably the strongest in the industry given our size, and we also have one of the lowest leverage ratios in the industry, so we haven't manufactured that liquidity through leverage. And our regulated subsidiaries are well capitalized, approaching 400% of RBC at year end.
We believe our balance sheet is uniquely well positioned and where it should be during these times of heightened uncertainty. With our amended credit facility and increased share buyback authority, we believe we have broad flexibility to deploy capital towards appropriate opportunities.
Our days in claims payable was 52 days, down 3 days from 55 last quarter, and remains at the higher end of our expected range of 45 to 55 days. The decline in days primarily reflects the completed claim system transition in several markets and their return to normalized processing pace as well as the impact from our first full quarter of operations in New Mexico versus a partial third quarter.
Prior to discussing guidance, let me review the reclassifications that we will be making to the income statement in 2009. As you know, many of our states levy taxes on premiums and the tax rates vary widely by state from 1.75% to 5.5% of revenues.
Historically, premium tax has been embedded in our SG&A expense line. Starting in the first quarter of 2009, we will report premium tax on a separate line following SG&A and before depreciation and amortization.
By isolating premium tax, the remaining SG&A expenses are more reflective of core operating expenses and the ratio is not as significantly impacted by changing business volumes in states with high premium tax rates. Our SG&A ratio is also impacted by experience rebate in Texas.
Our Texas health plan is required to share favorable outcomes - sometimes called an experience rebate with the State of Texas in the event results exceed established thresholds. Beginning in the first quarter of 2009, we will remove this rebate amount from SG&A and include it as a reduction against premium revenue.
I think this makes sense because the amount is effectively a rebate of premium to the state. This will serve to reduce variability in our SG&A ratio that we sometimes experience due to variations in experience rebate just as we've experienced this quarter.
On balance, these reclassifications will increase the health benefits ratio and reduce the SG&A ratio. I think this presentation will be more useful to investors.
Specifically now on guidance, we are reiterating our 2009 annual earnings in the range of $2.50 to $2.65 per diluted share. Let me spend a few minutes to detail our assessment of the progression from 2008 to 2009.
We are pleased with the performance that our business delivered during 2008 in this particularly challenging environment. Our results reflect a net income margin of 3.3% excluding the one-time litigation charge, which is toward the high end of our long-term margin expectation of 2.5% to 3.5%.
In 2009, our guidance implies the net income margin will moderate to the middle of our range. This movement is driven by three primary factors.
First, 2008 was impacted by a range of unique items that on balance favorably impacted EPS by roughly $0.11. These include retroactive premium rate increases in Georgia and Tennessee, net favorable reserve development, and market exits in West Tennessee and D.C.
While what constitutes unique items versus run rate items is subject to significant analytical judgment, I believe an impact in the rage of $0.11 is an accurate reflection of the broad range of items that played through 2008. The second factor incorporated in our 2009 guidance is a reduction in investment income.
We anticipate that interest rates for the foreseeable future will be below what we achieved in 2008. We assume the yields on our portfolio will average well below 2% in 2009, most likely in the range of 1.5% to 2%.
We project the impact on earnings from lower investment income to be approximately $0.26 to $0.28 per diluted share compared to 2008. To diverge for just a moment, I think it's important to note that if yields on fixed income were at more normalized longer-term levels - let's say 4.5% - we would expect our annual earnings to be roughly $0.50 higher on an EPS basis.
For a variety of reasons, I don't believe interest rates on higher quality instruments will stay low, as they are today, for an indefinite period. It's just hard to predict exactly when they will change and we are not assuming a change in 2009.
Finally, we are planning for an increase in non-cash interest expense due to the change in accounting for our convertible notes. This factor decreases earnings by approximately $0.12 per diluted share in 2009.
This impact is partially offset by lower outstanding debt and lower interest rates in 2009, bringing the net impact down to approximately $0.07 per diluted share. Neutralizing for these three items, our EPS guidance implies underlying earnings growth percentages in the upper single to lower double digit range.
We believe this is a prudent assumption. It is still early in the year, with important premium rate renewals yet to come and four quarters ahead of us.
If history is any guide, many things will develop during the year. Some will be challenges, but some will be positives as well.
Please note that our 2009 guidance statistics incorporate the new 2009 income statement reclassifications that I discussed earlier. Our 2009 estimates in the range of $2.50 to $2.65 are predicated on the following assumptions, among others: Total revenues in the $4.9 to $5 billion range, which reflects 10% to 13% organic premium revenue growth.
Investment income and other of below $29 million versus $71.4 million in 2008. The decrease in this line reflects the loss of the West Tennessee ASO revenue of approximately $20 million as well as a decrease in investment income.
Health benefits ratio in the low 84% range. This ratio is calculated using the premium revenue under our new classification; in comparison to the equivalent 2008 ratio of 82.9%, the 2009 ratio is increasing due primarily to the full year impact of new market entries.
Additionally, the sequential comparison is impacted by the retroactive premium rates received and the favorable reserve development experienced in 2008. Selling, general and administrative expenses in the low to mid 8% range.
This ratio in 2008 on an equivalent basis after adjusting for the reclassification was 9.8%. The improvement between the years is due primarily to the conclusion of the West Tennessee ASO business, the discontinued operations costs of market exits in 2008, and variable compensation expense associated with more favorable than projected results in 2008.
And diluted shares outstanding of approximately 54 million. Let me cover one last item on guidance.
Although we don't give quarterly guidance, I recognize that the seasonality of our business can sometimes generate questions. As a general comment, it is important to recognize that the distribution of medical costs across the year is a key component in our business.
In most cases our populations have incurred the highest medical costs in the first quarter, while rate increases tend to be more heavily weighted towards the back half of the year. The result is that earnings are usually lowest in the first quarter, with an associated higher health benefits ratio.
I think it's worthwhile to consider this seasonality. Over the last couple of years the first quarter has been in the upper teens as a percentage of the full year earnings once you account for the effect of the retroactive rate increase in Georgia that boosted the first quarter in 2008.
I don't foresee a reason these seasonal patterns would change going forward. In addition, we expect that first quarter investment income will reflect an average yield on investment below 2%, as I mentioned earlier.
We believe our ability to generate solid cash flow will continue in 2009. Our history indicates that cash flow from operations in the range of 1.25 to 1.7 time net income is common when revenues are growing in the range we project for 2009.
However, there's also some seasonality to cash flow. I wouldn't be surprised to see cash flow from operations in the first quarter of 2009 be low, similar to what we experienced in the first quarter of 2008.
We anticipate variable compensation payments and experience rebate payments in the first quarter. Also, unearned revenue is relatively high at year end and the normal sequential variability in premium receipts may bring that down at quarter end.
On balance, these changes in working capital items are more likely to reduce cash flow from operations in the first quarter, but through subsequent quarters these effects tend to normalize. We remain optimistic and excited about the prospects for our business.
We have concluded a strong 2008 and there are numerous macro factors that bode well for us in the future. While there is much to be concerned about in the general economy, we continue to believe that our business will grow and prosper.
Well, I may have missed my objective of being succinct, so let me conclude here. We're happy to take your questions.
Operator?
Operator
Thank you. (Operator Instructions) Your first question comes from Thomas Carroll - Stifel Nicolaus & Company, Inc.
Thomas Carroll - Stifel Nicolaus & Company, Inc.
Administratively, could you maybe tell us what the positive PPD in the quarter was and maybe how much of it was from Texas?
James W. Truess
In the quarter we were benefited net about $0.08 from development, and that comes about let me just break down the pieces here for you - we had net favorable development on the medical line that helped us about $0.16 and that was offset by $0.08 of out of period experience rebate, so that got us to the net $0.08.
Thomas Carroll - Stifel Nicolaus & Company, Inc.
And then I just wanted to ask a clarification on your New Jersey litigation. And I understand you can't talk much about it, but was there a provision in your contract with Centene that said we, AMERIGROUP, when we find out what the new risk adjustment scores are, have the ability to step away from this agreement?
Was it that explicit?
James G. Carlson
I have to be a little careful about that because of the litigation, but I will say that anytime we're engaged in an M&A opportunity we always include a material adverse effect clause. And our view on such clauses is, unless something is specifically scheduled out as an exception to it, it affects all features of a transaction.
So, as you can imagine, that's a portion of the contract that we're basing our claim that we think this agreement was broken effectively based upon contractual terms.
Thomas Carroll - Stifel Nicolaus & Company, Inc.
Florida, you mentioned a 1.7% rate decrease between March and June. Is that on top of the 2.7% number that we've previously discussed?
John E. Little
No, that's in place of. The original estimates were in the 2.5% to 3%, but when they factor in some of the provisions and our member mix, it comes out to about 1.7%, some of which is passed through.
Thomas Carroll - Stifel Nicolaus & Company, Inc.
Okay, so that's favorable to AMERIGROUP, then, obviously here. So we'll get a new rate change in Florida beginning July 1?
John E. Littel
Correct. I'm sorry, Tom, that's September 1st.
Operator
Your next question comes from Joshua Raskin - Barclays Capital.
Joshua Raskin - Barclays Capital
First question just on the guidance. I think, Jim, you'd mentioned that the S-SCHIP reauthorization, the stimulus bill, and then even higher levels of unemployment, none of that was in your guidance, and I'm just curious - you know, we've seen signed bills at this point what exactly are we waiting for and should we assume then that your guidance did not assume actuarially sound rate increases in your states?
James G. Carlson
Well, I think, Josh, the way we've looked at the S-SCHIP enterprise and FMAP is that they're fairly interconnected. We've long advocated for covering all of America's children.
We're really pleased by the legislation being such a high priority. But it's been difficult to forecast at what pace the states would grow the size of their programs knowing that the states have to come up with their portion of the funds to make the matching calculation work.
And you also have to go out and find the people and there's a personal responsibility component to SCHIP where the people have to pay very modest premiums. So as we were building our budget and issuing our preliminary guidance almost 100 days ago, I guess - it's almost 4 months ago - we really didn't have at that point in time enough clarity on whether these ideas would become laws.
And even at this point in time it's very difficult for us to identify with any great precision when we'll see expansion in the markets in which we participate. So we do think the intention's there, the money's there; with FMAP now being passed as part of the stimulus bill, the states that do want to expand their SCHIP programs have the ability to fund their portion of it.
Still have to go through rolling out these as program expansions, still have to find the people, get them enrolled, so maybe it's fair to think that by the end of the year we'll see an uplift of some sort. When we're in a position to quantify it, we'll update our view accordingly.
Joshua Raskin - Barclays Capital
So it really sounds like just more of a timing issue. So if we were to think about AMERIGROUP's 4% national share on SCHIP membership and maybe over the next two years we make an assumption about how much of that 11 million is actually enrolled, is it sort of fair to say okay, you think you'll maintain market share or are there reasons to believe that you'd be higher or lower?
James G. Carlson
Well, I think we're benefited by the fact that in a couple of states where there's quite a number of unenrolled people, those are states in which we operate, like Texas, New Jersey, and Florida. So there are some good catalysts for us to potentially grow.
We're not in California; probably a lot of them are in California. So I'm not sure we're ready to say the same proportion of the unenrolled people is commensurate with what we are already doing, but probably not uncomfortable with that projection either.
So I think the really big picture is we've got a new president, a new Congress. You all follow the whole $2.3 to $2.5 trillion health care economy and here in the first 30 days of a new presidency we've got the SCHIP expansion that we've advocated for for better than a decade and the FMAP funding to shore up these programs.
I think it really validates the importance of the programs that we're participating in. They're broadly seen on a bipartisan basis.
This is all net favorable for us, but I think it's premature to get too excited about the impact in 2009 until we get some more clarity.
Joshua Raskin - Barclays Capital
And then just the last follow up on that. You mentioned in your prepared remarks you did not have assumptions for higher unemployment, so are you assuming current rates of unemployment and why would you not factor in consensus?
James G. Carlson
Well, I think we just want to see exactly what's flowing through the states before we raise our perspective. We do think with the unemployment rate rising, I think there's a commonly referred to Kaiser Foundation study that says for every X number of people who lose their jobs, Y number of people go into the Medicaid programs, but we're just going to need to see exactly how that plays out state by state to recalibrate our growth.
That said, I think we would, without being provoked too hard here, would admit that if there's some upside in our view for 2009 we may see higher enrollment and revenue levels than we're able to forecast at this point in time. But we'd just like to see a little bit more clarity from within the states.
And I think the states have been trying to model out the implications of stimulus. There's some states that haven't completed their budgets yet and so forth, waiting for the details, and all of that's been going on really in the last few weeks.
So probably by the next time we are on an earnings call, I think we'd have some more clarity for you.
Operator
Your next question comes from Greg Nersessian - Credit Suisse.
Greg Nersessian - Credit Suisse
Just a couple of state questions for you specifically. I guess the Texas enrollment was down sequentially.
All the other states looked up or flat to up. I was wondering if there was some benefit changes or eligibility changes there or what was impacting the Texas enrollment for the quarter?
James G. Carlson
I'm going to ask Dick Zoretic to comment on that a little bit. There are a couple phenomena that have gone on in the last quarter that we've experienced that we'll work through pretty quickly, we think, in Texas, so I wouldn't read any long-term trends into what we're seeing.
But, Dick, want to highlight what's going on in Texas?
Richard C. Zoretic
Yes, just real quickly, I think there's two issues impacting enrollment in the fourth quarter. The first is we saw some delays in processing in the enrollment centers as a result of Hurricane Ike, some residual impact from that.
But also in addition to that the state changed its auto assignment methodology in the quarter in order to distribute members more evenly across plans. Typically in the past the standard formula has members being allocated on the basis of self-selection rates, and that has benefited us because we've historically had a very high self-selection rate.
What the state is doing at the moment is distributing members to some of the smaller, newer plans in the market to help them grow their membership up to sustainable levels. They got a few new plans in the course of the last year where the membership is very small, and the state has told us that that new or temporary auto assignment arrangement is going to be in place probably until the end of the first quarter, at which point we'll revert to the original or standard arrangement.
So at that point we would expect to see more growth from auto assignment.
Greg Nersessian - Credit Suisse
So how much more pressure do you expect in Texas, I guess, from that impact?
Richard C. Zoretic
Within the first quarter?
Greg Nersessian - Credit Suisse
Yes.
Richard C. Zoretic
Well, we think it'll fluctuate and probably not more pressure than we've already seen. And we'll be prepared to give you more detail on that at the end of the first quarter.
Greg Nersessian - Credit Suisse
The second question was in Florida. I guess WellCare discontinued their participation in the pilot program.
You share a couple of counties with them. What's your view on that?
Are you going to be taking any of that business? It doesn’t sound like it's in your guidance?
James G. Carlson
Well, I think we continue to look at the reform program pretty critically. When I say critically, I don't mean criticism, but we are certainly analyzing what the experience has been there.
It's not been a particularly good experience for us, but we have tried to work with the state. We don't want to draw a conclusion prematurely.
We hope that the state understands better some of the issues relative to having had so many competitors there nobody has enough share to really drive sort of the innovation and consumer orientation that were the original goals of the program. We haven't made a decision here as to whether we would cap our enrollment in those counties.
We're trying to get some more details about what the state's reaction to this is. We also, by the same token, are not forecasting a surge in our membership as a result of their exit right now, too.
They're about 15 to 20 different competitors in those counties, so there are a lot of places for those members to go, and I don't think it's a big needle mover in either direction for us right now. But the reform program has not performed well; I'm not surprised others are struggling with it.
I think some of the high-minded goals that were originally talked about have fallen a little short in terms of their realization and, if you really pressed, it would be easy to make a decision that those were counties that you could live without. We have not made that decision.
We're going to try to work through it with the state and try to stay there and be part of the solution.
Greg Nersessian - Credit Suisse
And then finally just sort of a conceptual question. With the growth in the Medicaid caseloads I know you guys aren't building it into your guidance, but clearly there's an expectation out there that the rising unemployment rate's going to result in more people in Medicaid - yet obviously in many states there's already an access problem, a provider access problem in terms of not enough Medicaid providers willing to accept Medicaid rates.
How do you think this may ultimately impact your provider contract? Is there a concern here that in order to continue to service that population, Medicaid providers are going to demand higher rates ultimately from you?
James G. Carlson
Well, I think the way we would look at it, Greg, is when we think about provider availability in Medicaid we're more oriented towards some of the specialists and super specialists that have full practices. And, frankly, they don't even want commercial managed care; they'd like to be able to be paid charges.
So we don't really have significant access problems relative to the medical homes, the primary care physicians, OBGYNs. I mean, there's obviously going to be some spotty challenges for our people who've built these provider networks or the local health plan managers, but it's really not been a significant issue for us in the past.
And I would just sort of remind everybody that the size of the Medicaid program is over $350 billion, and, frankly speaking, it keeps getting bigger and bigger and there are way more clinicians and hospitals that need that revenue flow, even if they don't like the unit cost as much as they like commercial or Medicare reimbursement. So we're not really seeing any exodus of physicians and so forth.
We do think that there may be some pressure from some of the hospitals, but the fee schedules often are driven by fee for service benchmarks within the state Medicaid programs. There's always pressure on unit costs and in our industry we're not immune to that sort of thing, but there's nothing that the economy in and of itself, I think, is driving relative to increased pressure that we're going to have to respond to.
Greg Nersessian - Credit Suisse
So you think your network capacity is appropriate for whatever the level of caseload growth you end up seeing?
James G. Carlson
Yes, we certainly do. And we suspect with some of the softening in the commercial sector, there may be even more providers interested than there have been in the past.
I guess given our queue that's building up, we're going to have to limit folks to one question if we can, please.
Operator
Your next question comes from Peter Costa - FTN Midwest.
Peter Costa - FTN Midwest
Could you explain to me - I appreciate breaking out the reclassification of all the prior quarters in the press release - the seasonality on your SG&A going forward will be similar to what we saw in 2008 under the reclassification side, and then why exactly did it decline in absolute dollars on the reclassification from 3Q to 4Q?
James W. Truess
I think probably one of the tough things about looking at the SG&A in '08 from a seasonality perspective is we did have quite a few things flowing through on that line related to the market exits and that sort of thing. We also ramped up in New Mexico in the third quarter.
And so the fourth quarter, where you see our SG&A's come down, that's probably much more reflective of the run rate into '09 whereas particularly the second and third quarter had a range of other items that were playing through there that elevated SG&A.
Peter Costa - FTN Midwest
So sort of projecting that flat going forward is the right way to think of it?
James W. Truess
Yes. I think as long as you're working into our ratio range, as long as that's getting you into our ratio range, I think you should be in pretty good shape.
The other thing I'd say about SG&A on an absolute dollar basis for us, that is going to tend to be more consistent quarter-over-quarter, particularly in a year like '09 where we're pretty well in the new markets that we're going to be in and we're not changing our SG&A structure a lot going into '09. More what we're getting the effect of is we have a very robust infrastructure in place, we're taking on this new business, and we're not adding a ton of costs for that.
So it's probably much more of a flat amount on a dollar basis quarter by quarter.
Operator
Your next question comes from Scott Fidel – Deutsche Bank.
Scott Fidel – Deutsche Bank
My first question is what is the average rate increase at this point that you're building into your '09 forecast? Then I know you mentioned in your prepared remarks that you still have a couple of states that aren't yet finalized yet.
If you could just remind us which of those states you still have to finalize rates for '09?
James W. Truess
Generally speaking, we think longer term this is a business that usually should have rate increases in the 3% to 5% range. We think that for '09 on the renewals that we're getting they're going to be below the bottom of that range, below 3%, so what you're getting in '09 is kind of the connected effect of the rates that we got in '08 that flow into '09 and then the renewals that we're getting in '09.
But generally we think that our guidance implies that we're below the bottom of what I think is the long term number. Just real quickly, the states that still have upcoming normal rate renewals is Georgia, Tennessee, Florida, Virginia, Texas and New Jersey.
Scott Fidel - Deutsche Bank
And if I could just ask one quick follow up just on S-SCHIP and just trying to think about the impact potentially to the P&L if you start to grow S-SCHIP a lot faster, how does the difference in premiums, PMPM, look on S-SCHIP and then how should we think about maybe with MLR and G&A how the S-SCHIP book might look relative to, let's say, your consolidated book of business?
James W. Truess
S-SCHIP certainly has a much a lower PMPM. Obviously, it varies state by state, but let's say very, very roughly speaking around $100.
The MLR's probably not that far off our company average. Obviously, that can vary a bit and it depends.
It can be a little bit higher on the SG&A side just because the premium is so low and some of the administrative costs are somewhat equivalent. But I think by and large outside the premium, the other factors are not dramatic.
Scott Fidel - Deutsche Bank
Then, Jim, just what's your tax rate for Q4 '09?
James W. Truess
I think it's pretty similar to where we've been running for the full year '08, let's say in the 38% range.
Operator
Your next question comes from Carl McDonald - Oppenheimer & Co., Inc.
Carl McDonald - Oppenheimer & Co., Inc.
My first question is just did you bid for the Texas rural SCHIP contract? And then secondly if you have any thoughts on the loss ratio profile of the new members that you could pick up because of unemployment, any thoughts around is it a higher or lower level of utilization?
James G. Carlson
Sure. We did bid.
Our bias is typically to bid every time we see a good business opportunity. That said, we are predicting that there were a lot of bidders.
And our competitiveness is enhanced by the fact we do a great job for the state already, and it's weakened a little bit by the fact we don't have an existing network that covers all those rural sections of Texas. So we have a pretty modest expectation, but nonetheless we wouldn't hesitate to continue to demonstrate to Texas our willingness to serve their needs.
We'd love to get some good news there; won't be surprised if we don't.
James W. Truess
That's a tough question. We study that issue a lot.
I don't think we have a view at this point that incremental membership that we may see as either favorable or unfavorable. I think there's a lot of conventional wisdom that I think goes in either direction, so I'd say we probably don't have a bias one way or the other on that one.
Operator
Your next question comes from John Rex - J.P. Morgan.
John Rex - J.P. Morgan
I just wanted to clarify your commentary and kind of the benefit from reserve development in the quarter. The $0.16, the kind of gross number, was that all in Texas and everything in terms of reserve development impact?
James W. Truess
Yes, John, that's right, that's all in, although I would say certainly the majority of that was in Texas. But the $0.16 is all in all markets.
John Rex - J.P. Morgan
So then so you're kind of net $0.08. Are you implying then kind of the cleaned up run rate, I mean, you're comfortable that a cleaned up 4Q run rate is a $0.62 run rate?
James W. Truess
Yes.
John Rex - J.P. Morgan
Okay, so that's kind of the right jumping off point. And then where are you accruing Tennessee now with the kind of experience you've had with where you are in the program right now?
James W. Truess
Well, Tennessee's now mature enough that it's being - from an actuarial perspective it's being booked to its run rate experience based on our paid claims activity in the way that any other market would be. It's running in the 80s, which is good, and we're certainly pleased with the progression.
I think as we sit here today, we're really where we thought we would be at this time six months ago, so we're certainly gratified by that. The other thing I'd mention on Tennessee is we did see a little bit of favorable development in the quarter, so when you see that finally come out that ratio will be a little bit lower than I might say on a run rate basis the ratio is.
But I think Tennessee's doing good.
John Rex - J.P. Morgan
Should it be, run rate basis, look in the mid 80s or low 80s?
James W. Truess
I might say mid to maybe a little above. I don't think Tennessee is fully where we ultimately want it to be, so I'd just probably say more in the mid to upper 80s.
John Rex - J.P. Morgan
And then you're not including any share repurchase assumptions in your EPS outlook right now, is that correct?
James W. Truess
The only thing we're including is we basically like to be purchasing at least enough to neutralize what would otherwise be growth in share count from option exercises and that sort of thing, so we have a baseline program that's largely targeted around keeping shares effectively flat.
John Rex - J.P. Morgan
So can we look out at the cash position of the parent, kind of ultimately where do you want to be in terms of excess cash at the parent when you think over the next year or two? I think you've mentioned in the past that you're going to have more commentary on kind of where that's going to go and what your thoughts would be on the use of that.
James W. Truess
I don't think at this point we're going to put a hard target out there for that unrestricted cash. I think what we've done in the last quarter is really open up our flexibility to give us as many options as we can or that we can have in order to deploy that cash.
I think probably compared to two years ago, we're probably likely to hang on to more unrestricted cash at the parent. I mean, just the general external environment's a lot more volatile these days.
But I continue to view us - we want to be opportunistic, we want to have the ability to make choices when they present themselves. It's been interesting to see just how much movement there has been, whether it be our debt instruments or otherwise.
And so we're going to continue to give ourselves the ability to be opportunistic, but I don't think at this point we're locking ourselves into a specific range.
Operator
Your next question comes from Daryn Miller - Goldman Sachs.
Daryn Miller - Goldman Sachs
A question regarding your convertible debt. If you were to retire that with the debt trading par in the market, can you actually retire it at below par or do you have to do it at par?
And then with the warrants that you had wrapped around that, how does that factor into that buyback?
James W. Truess
Two pieces. The way that we can take down our convertible debt is really through open market purchases, so if we were to do that, that would be at whatever we could negotiate in the market.
So that's the only way that those could be retired. And then with the derivatives that sit on top of that, we also would have the ability to go and in essence change the notional amount of those derivatives downward to the amount that remains outstanding and, depending upon the instrument, that in and of itself would generate gains or losses depending upon where their value is today versus what we have on the books.
Daryn Miller - Goldman Sachs
Would you expect that to potentially change your share count for EPS purposes?
James W. Truess
No, I don't think so because the convert is out of the money and all the derivatives are out of the money right now, so those changes per se wouldn't have an impact on the share count in the near term. Theoretically it could have an impact on what the share count might otherwise be out in the distant future, but not today.
Daryn Miller - Goldman Sachs
And then what are you guys seeing in terms of flu now?
James G. Carlson
Well, I'd just remind everybody, flu's a big part of our business given the populations we serve children and frail elderly and so forth. We always have an outreach program; this year's no different.
Even though the CDC was predicting something a little bit milder, we take it seriously every year. I think what we're probably most sensitive to is changes in timing, severity, distribution over time.
So we're certainly seeing flu in our markets. We're not surprised.
There's baseline experience that we have. We don't see anything that's extraordinarily problematic at this point in time, but we probably can't give a whole lot more clarity in that until we wrack up the first quarter and see what the actual numbers are.
It's always important to watch, but we do think we've taken adequate precautions to forestall it harming us in a way that's unpredicted.
Operator
I would now like to turn the call back to Mr. Carlson for closing remarks.
James G. Carlson
Well, thanks, Operator. Our performance in 2008, delivered under demanding circumstances, allows us to substantiate the following conclusion - AMERIGROUP is a business that has been built to last in both good and difficult economic times.
We are poised to make further contributions to the health of America's financial vulnerable, disabled, and frail elderly. At AMERIGROUP we have been reminding ourselves that great companies use tough times to get even stronger.
We have come a long way in 15 years, but in many ways it feels like we're just getting started. We've accomplished much, but there's much more we can do.
So thank you for joining us on our call this morning, and we'll see you soon.
Operator
This concludes today's conference call. Thank you for your participation.
You may now disconnect.