Edgar Filing: CENTENE CORP

CNC 6.30.2012 10Q

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, 2012



[ ]	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: x 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). x 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 x 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 x

As of July 12, 2012, the registrant had 51,557,739 shares of common stock outstanding.

CENTENE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



		PAGE

	Part I
	Financial Information
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)	1
	Consolidated Statements of Operations for the Six Months Ended June 30, 2012 and 2011 (unaudited)	2
	Consolidated Statement of Comprehensive Earnings for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	3
	Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2012 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)	5
	Notes to the Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	Part II
	Other Information
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.	Exhibits	38
Signatures		39

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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;


•	changes in expected contract start dates;


•	inflation;


•	provider and state 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.

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	421,894		$	573,698
Premium and related receivables	400,194			157,450
Short-term investments	152,545			130,499
Other current assets	98,805			78,363
Total current assets	1,073,438			940,010
Long-term investments	630,866			506,140
Restricted deposits	33,496			26,818
Property, software and equipment, net	379,970			349,622
Goodwill	256,288			281,981
Intangible assets, net	22,481			27,430
Other long-term assets	53,011			58,335
Total assets	$	2,449,550		$	2,190,336
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims liability	$	859,035		$	607,985
Accounts payable and accrued expenses	142,766			216,504
Unearned revenue	29,133			9,890
Current portion of long-term debt	3,302			3,234
Total current liabilities	1,034,236			837,613
Long-term debt	405,462			348,344
Other long-term liabilities	61,865			67,960
Total liabilities	1,501,563			1,253,917
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value; authorized 100,000,000 shares; 54,320,036 issued and 51,557,064 outstanding at June 30, 2012, and 53,586,726 issued and 50,864,618 outstanding at December 31, 2011	54			54
Additional paid-in capital	450,506			421,981
Accumulated other comprehensive income:
Unrealized gain on investments, net of tax	5,842			5,761
Retained earnings	553,940			564,961
Treasury stock, at cost (2,762,972 and 2,722,108 shares, respectively)	(58,914		)	(57,123		)
Total Centene stockholders’ equity	951,428			935,634
Noncontrolling interest	(3,441		)	785
Total stockholders’ equity	947,987			936,419
Total liabilities and stockholders’ equity	$	2,449,550		$	2,190,336

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues:
Premium	$	2,034,558		$	1,248,588		$	3,669,408		$	2,401,365
Service	27,041			29,428			55,659			55,812
Premium and service revenues	2,061,599			1,278,016			3,725,067			2,457,177
Premium tax	49,147			36,998			97,827			74,194
Total revenues	2,110,746			1,315,014			3,822,894			2,531,371
Expenses:
Medical costs	1,890,405			1,059,120			3,333,081			2,037,687
Cost of services	21,816			20,312			45,153			40,488
General and administrative expenses	168,062			143,045			331,249			284,133
Premium tax expense	49,176			37,234			97,926			74,663
Impairment loss	28,033			—			28,033			—
Total operating expenses	2,157,492			1,259,711			3,835,442			2,436,971
Earnings (loss) from operations	(46,746		)	55,303			(12,548		)	94,400
Other income (expense):
Investment and other income	4,045			2,933			9,336			6,682
Debt extinguishment costs	—			(8,488		)	—			(8,488		)
Interest expense	(4,739		)	(5,256		)	(9,538		)	(10,951		)
Earnings (loss) from operations, before income tax expense	(47,440		)	44,492			(12,750		)	81,643
Income tax expense (benefit)	(8,608		)	16,429			3,479			30,757
Net earnings (loss)	(38,832		)	28,063			(16,229		)	50,886
Noncontrolling interest	(3,833		)	(311		)	(5,208		)	(1,233		)
Net earnings (loss) attributable to Centene Corporation	$	(34,999	)	$	28,374		$	(11,021	)	$	52,119

Net earnings (loss) per common share attributable to Centene Corporation:
Basic earnings (loss) per common share	$	(0.68	)	$	0.57		$	(0.21	)	$	1.04
Diluted earnings (loss) per common share	$	(0.68	)	$	0.54		$	(0.21	)	$	1.00

Weighted average number of common shares outstanding:
Basic	51,515,895			50,167,052			51,320,784			49,959,892
Diluted	51,515,895			52,489,414			51,320,784			52,171,213

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net earnings (loss)	$	(38,832	)	$	28,063		$	(16,229	)	$	50,886
Reclassification adjustment, net of tax	66			10			222			192
Change in unrealized gains on investments, net of tax	(461		)	1,204			(141		)	567
Other comprehensive earnings (loss)	(395		)	1,214			81			759
Comprehensive earnings (loss)	(39,227		)	29,277			(16,148		)	51,645
Comprehensive earnings (loss) attributable to the noncontrolling interest	(3,833		)	(311		)	(5,208		)	(1,233		)
Comprehensive earnings (loss) attributable to Centene Corporation	$	(35,394	)	$	29,588		$	(10,940	)	$	52,878

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

Six Months Ended June 30, 2012



	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, 2011	53,586,726	$	54	$	421,981	$	5,761	$	564,961		2,722,108	$	(57,123	)	$	785		$	936,419
Comprehensive Earnings:
Net earnings (loss)	—	—		—		—		(11,021		)	—	—			(5,208		)	(16,229		)
Change in unrealized investment gain, net of $89 tax	—	—		—		81		—			—	—			—			81
Total comprehensive earnings																		(16,148		)
Common stock issued for employee benefit plans	733,310	—		10,725		—		—			—	—			—			10,725
Common stock repurchases	—	—		—		—		—			40,864	(1,791		)	—			(1,791		)
Stock compensation expense	—	—		11,993		—		—			—	—			—			11,993
Excess tax benefits from stock compensation	—	—		5,807		—		—			—	—			—			5,807
Contribution from noncontrolling interest	—	—		—		—		—			—	—			982			982
Balance, June 30, 2012	54,320,036	$	54	$	450,506	$	5,842	$	553,940		2,762,972	$	(58,914	)	$	(3,441	)	$	947,987

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

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CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net earnings (loss)	$	(16,229	)	$	50,886
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities
Depreciation and amortization	33,266			28,567
Stock compensation expense	11,993			8,839
Debt extinguishment costs	—			8,488
Impairment loss	28,033			—
Deferred income taxes	9,364			(3,529		)
Changes in assets and liabilities
Premium and related receivables	(232,745		)	(16,146		)
Other current assets	(34,105		)	(4,001		)
Other assets	1,520			(878		)
Medical claims liabilities	251,050			24,684
Unearned revenue	19,885			(12,465		)
Accounts payable and accrued expenses	(77,010		)	(34,739		)
Other operating activities	(4,922		)	3,448
Net cash (used in) provided by operating activities	(9,900		)	53,154
Cash flows from investing activities:
Capital expenditures	(57,442		)	(35,128		)
Purchases of investments	(406,901		)	(103,239		)
Sales and maturities of investments	253,719			120,448
Investments in acquisitions, net of cash acquired	—			(3,192		)
Net cash used in investing activities	(210,624		)	(21,111		)
Cash flows from financing activities:
Proceeds from exercise of stock options	10,320			12,264
Proceeds from borrowings	75,000			419,183
Payment of long-term debt	(21,601		)	(414,695		)
Excess tax benefits from stock compensation	5,810			1,369
Common stock repurchases	(1,791		)	(1,029		)
Contribution from noncontrolling interest	982			244
Debt issue costs	—			(9,095		)
Net cash provided by financing activities	68,720			8,241
Net (decrease) increase in cash and cash equivalents	(151,804		)	40,284
Cash and cash equivalents, beginning of period	573,698			434,166
Cash and cash equivalents, end of period	$	421,894		$	474,450
Supplemental disclosures of cash flow information:
Interest paid	$	10,312		$	11,822
Income taxes paid	$	32,394		$	40,111

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

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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, 2011. 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, 2011 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 2011 amounts in the consolidated financial statements have been reclassified to conform to the 2012 presentation. These reclassifications have no effect on net earnings or stockholders’ equity as previously reported.

The Company reclassified certain Medical Costs and General & Administrative Expenses beginning with its financial results for the year ended December 31, 2011, as well as prior periods to conform to the current presentation, to more closely align to the National Association of Insurance Commissioners definition. For the three months ended June 30, 2011, the net impact of the reclassification increased Medical Costs and decreased General & Administrative Expense by $23,380. For the six months ended June 30, 2011, the net impact of the reclassification increased Medical Costs and decreased General & Administrative Expense by $44,873.

2. Short-term and Long-term Investments and Restricted Deposits

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



	June 30, 2012									December 31, 2011
	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	$	49,184	$	690	$	(6	)	$	49,868	$	29,014	$	638	$	(13	)	$	29,639
Corporate securities	271,492		4,418		(340		)	275,570		186,018		3,762		(751		)	189,029
Restricted certificates of deposit	5,892		—		—			5,892		5,890		—		—			5,890
Restricted cash equivalents	13,118		—		—			13,118		13,775		—		—			13,775
Municipal securities:
General obligation	122,535		2,007		(57		)	124,485		126,806		2,828		(26		)	129,608
Pre-refunded	25,867		239		—			26,106		33,247		465		—			33,712
Revenue	101,285		2,046		(37		)	103,294		118,507		2,387		(34		)	120,860
Variable rate demand notes	110,565		—		—			110,565		64,658		—		—			64,658
Asset backed securities	81,092		992		(5		)	82,079		51,779		430		(17		)	52,192
Cost and equity method investments	11,068		—		—			11,068		9,395		—		—			9,395
Life insurance contracts	14,862		—		—			14,862		14,699		—		—			14,699
Total	$	806,960	$	10,392	$	(445	)	$	816,907	$	653,788	$	10,510	$	(841	)	$	663,457

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The Company’s investments are classified as available-for-sale with the exception of life insurance contracts and certain cost 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 corporations and agencies. As of June 30, 2012, 38% of the Company’s investments in securities recorded at fair value that carry a rating by Moody’s or S&P were rated AAA, 70% were rated AA- or higher, and 99% were rated A- or higher. At June 30, 2012, the Company held certificates of deposit, life insurance contracts and cost and equity method investments 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, 2012										December 31, 2011
	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	$	(6	)	$	1,465	$	—		$	—	$	(13	)	$	2,184	$	—	$	—
Corporate securities	(336		)	38,215		(4		)	72		(751		)	23,040		—		—
Municipal securities:
General obligation	(57		)	11,543		—			—		(26		)	3,710		—		—
Revenue	(37		)	7,376		—			—		(34		)	12,597		—		—
Asset backed securities	(5		)	4,565		—			—		(17		)	20,417		—		—
Total	$	(441	)	$	63,164	$	(4	)	$	72	$	(841	)	$	61,948	$	—	$	—

As of June 30, 2012, the gross unrealized losses were generated from 28 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, 2012								December 31, 2011
	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	$	151,312	$	152,545	$	26,221	$	26,223	$	129,232	$	130,499	$	19,666	$	19,666
One year through five years	487,966		495,995		7,230		7,273		406,140		413,953		7,085		7,152
Five years through ten years	34,597		34,643		—		—		34,945		34,961		—		—
Greater than ten years	99,634		100,228		—		—		56,720		57,226		—		—
Total	$	773,509	$	783,411	$	33,451	$	33,496	$	627,037	$	636,639	$	26,751	$	26,818

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.

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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 were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Gains	$	—		$	—		$	8		$	133
Losses	(1		)	(11		)	(11		)	(26		)
Net realized gains	$	(1	)	$	(11	)	$	(3	)	$	107

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 $5,918 and $5,009 was recorded in the six months ended June 30, 2012 and 2011, respectively.

3. 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.

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The following table summarizes fair value measurements by level at June 30, 2012, for assets and liabilities measured at fair value on a recurring basis:



	Level I		Level II		Level III	Total
Assets
Cash and cash equivalents	$	421,894	—		—	$	421,894
Investments available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	23,377	$	12,005	—	$	35,382
Corporate securities	—		275,570		—	275,570
Municipal securities:
General obligation	—		124,485		—	124,485
Pre-refunded	—		26,106		—	26,106
Revenue	—		103,294		—	103,294
Variable rate demand notes	—		110,565		—	110,565
Asset backed securities	—		82,079		—	82,079
Total investments	$	23,377	$	734,104	—	$	757,481
Restricted deposits available for sale:
Cash and cash equivalents	$	13,118	—		—	$	13,118
Certificates of deposit	5,892		—		—	5,892
U.S. Treasury securities and obligations of U.S. government corporations and agencies	14,486		—		—	14,486
Total restricted deposits	$	33,496	—		—	$	33,496
Other long-term assets: Interest rate swap contract	—		$	14,959	—	$	14,959
Total assets at fair value	$	478,767	$	749,063	—	$	1,227,830

The following table summarizes fair value measurements by level at December 31, 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	$	573,698	—		—	$	573,698
Investments available for sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	17,091	$	5,395	—	22,486
Corporate securities	—		189,029		—	189,029
Municipal securities:
General obligation	—		129,608		—	129,608
Pre-refunded	—		33,712		—	33,712
Revenue	—		120,860		—	120,860
Variable rate demand notes	—		64,658		—	64,658
Asset backed securities	—		52,192		—	52,192
Total investments	$	17,091	$	595,454	—	$	612,545
Restricted deposits available for sale:
Cash and cash equivalents	$	13,775	—		—	$	13,775
Certificates of deposit	5,890		—		—	5,890
U.S. Treasury securities and obligations of U.S. government corporations and agencies	7,153		—		—	7,153
Total restricted deposits	$	26,818	—		—	$	26,818
Other long-term assets: Interest rate swap contract	—		$	11,431	—	$	11,431
Total assets at fair value	$	617,607	$	606,885	—	$	1,224,492

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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’s policy regarding the timing of transfers between Level I and Level II is to measure and record the transfers at the end of the reporting period. At June 30, 2012, there were $8,286 of transfers from Level I to Level II and $1,364 of transfers from Level II to Level I. 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 other non-majority owned investments, which approximates fair value, was $25,930 and $24,094 as of June 30, 2012 and December 31, 2011, respectively.

4. Debt

Debt consists of the following:



	June 30, 2012			December 31, 2011
Senior notes, at par	$	250,000		$	250,000
Unamortized discount on Senior notes	(2,555		)	(2,814		)
Interest rate swap fair value	14,959			11,431
Senior notes, net	262,404			258,617
Revolving credit agreement	55,000			—
Mortgage notes payable	85,530			86,948
Capital leases and other	5,830			6,013
Total debt	408,764			351,578
Less current portion	(3,302		)	(3,234		)
Long-term debt	$	405,462		$	348,344

Senior Notes

In May 2011, 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, 2012, the unamortized debt discount was $2,555. In connection with the issuance, the Company entered into an interest rate swap. 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, 2012, the fair value of the interest rate swap increased the fair value of the notes by $14,959. At June 30, 2012, the variable interest rate of the swap was 3.97%.

Revolving Credit Agreement

The Company has a $350,000 revolving credit facility due in January 2016. The revolver is unsecured and has 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. As of June 30, 2012, the Company had $55,000 in borrowings outstanding under the agreement, leaving availability of $295,000.

The Company has outstanding letters of credit of $35,631 as of June 30, 2012, which are not part of the revolver. The letters of credit bore interest at 1.57%.

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5. Impairment Loss

During the second quarter of 2012, the Company's subsidiary, Celtic Insurance Company, experienced a high level of medical costs for individual health policies, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012. Additionally, in June 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act. The Affordable Care Act, among other things, limits the profitability of the individual health insurance business because of minimum medical loss ratios, guaranteed issue policies, and increased competition in the exchange market. As a result of these factors, the Company's expectations for future growth and profitability are lower than previous estimates. The Company conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit, which encompasses Celtic Insurance Company, CeltiCare Health Plan of Massachusetts, Inc., and Novasys Health, Inc. For the purpose of testing goodwill, the fair value of the Celtic reporting unit was determined using discounted expected cash flows. For the purpose of testing the customer relationship intangible, the fair value was determined using the discounted expected cash flows. The impairment analysis resulted in goodwill and intangible asset impairments of $28,033, recorded as impairment loss in the consolidated statement of operations. The impaired identifiable intangible assets of $2,340 and goodwill of $25,693 were reported under the Specialty Services segment, of which $26,589 of the impairment loss is not deductible for income tax purposes.

6. Earnings (Loss) Per Share

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



	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Net earnings (loss) attributable to Centene Corporation	$	(34,999	)	$	28,374	$	(11,021	)	$	52,119

Shares used in computing per share amounts:
Weighted average number of common shares outstanding	51,515,895			50,167,052		51,320,784			49,959,892
Common stock equivalents (as determined by applying the treasury stock method)	—			2,322,362		—			2,211,321
Weighted average number of common shares and potential dilutive common shares outstanding	51,515,895			52,489,414		51,320,784			52,171,213

Net earnings (loss) per share attributable to Centene Corporation:
Basic earnings (loss) per common share	$	(0.68	)	$	0.57	$	(0.21	)	$	1.04
Diluted earnings (loss) per common share	$	(0.68	)	$	0.54	$	(0.21	)	$	1.00

The calculation of diluted earnings (loss) per common share for the three and six months ended June 30, 2012 excludes the impact of 4,530,436 and 4,693,165 shares (before application of the treasury stock method), 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, 2011 excludes the impact of 30,586 and 113,244 shares, respectively, related to anti-dilutive stock options, restricted stock and restricted stock units.

7. 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.

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Segment information for the three months ended June 30, 2012, follows:



	Medicaid Managed Care			Specialty Services			Eliminations			Consolidated Total
Premium and service revenues from external customers	$	1,843,134		$	218,465		$	—		$	2,061,599
Premium and service revenues from internal customers	22,761			439,827			(462,588		)	—
Total premium and service revenues	$	1,865,895		$	658,292		$	(462,588	)	$	2,061,599
Earnings (loss) from operations	$	(28,457	)	$	(18,289	)	$	—		$	(46,746	)

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 six months ended June 30, 2012, follows:



	Medicaid Managed Care			Specialty Services		Eliminations			Consolidated Total
Premium and service revenues from external customers	$	3,298,869		$	426,198	$	—		$	3,725,067
Premium and service revenues from internal customers	37,613			763,906		(801,519		)	—
Total premium and service revenues	$	3,336,482		$	1,190,104	$	(801,519	)	$	3,725,067
Earnings (loss) from operations	$	(14,483	)	$	1,935	$	—		$	(12,548	)

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

8. Contingencies

In June 2012, a putative class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the Eastern District of Missouri. The lawsuit alleges, on behalf of purchasers of the Company's securities from February 7, 2012 through June 8, 2012, that the Company and certain of its officers violated federal securities laws by making false or misleading statements principally concerning the Company's fiscal 2012 earnings guidance. According to the complaint, these allegedly materially false statements had the effect of artificially inflating the price of the Company's securities, which subsequently dropped following the announcement of its revised fiscal 2012 earnings guidance on June 11, 2012. The Company believes the case is without merit and plans to vigorously defend its position.

In June 2012, we were notified by the Ohio Department of Job and Family Services (ODJFS) that Buckeye, our Ohio subsidiary, was awarded a contract to serve Medicaid members in Ohio, effective January 2013. In July 2012, a lawsuit was filed by another managed care organization against ODJFS and a temporary restraining order was granted, preventing ODJFS from implementing the new Medicaid contracts previously awarded. At June 30, 2012, the Company continued to carry goodwill and intangible assets of $42,780 associated with Buckeye pending final resolution of the award.

In addition, the Company is routinely subjected to legal proceedings in the normal course of business. While the ultimate resolution of such matters is uncertain, the Company does not expect the results of any of these matters discussed above individually, or in the aggregate, to have a material effect on its financial position or results of operations.

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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

During the second quarter of 2012, we recorded a loss of $(0.68) per diluted share composed of a $(0.16) loss from operations and an impairment loss of $(0.52), compared to net earnings per share of $0.54 in the prior year and $0.45 in the preceding quarter. The losses were the result of three primary factors:


•	In our Texas health plan, we experienced a high level of medical costs related to the March 1, 2012, expansion areas.


•	In our Kentucky health plan, we experienced increased medical costs primarily resulting from the retroactive assignment of members and a higher level of non-inpatient claims receipts during the quarter.


•	In our Celtic subsidiary, we experienced a high level of medical costs related to individual health policies. This was primarily associated with recently issued policies related to members converted from another insurer throughout the first quarter of 2012. In addition to the operating loss, we also recorded an impairment loss of $28.0 million, discussed below under the caption "Impairment Loss."

Our financial performance for the second quarter of 2012 is summarized as follows:


•	Quarter-end at-risk managed care membership of 2,397,500, an increase of 817,000 members, or 51.7% year over year.


•	Premium and service revenues of $2.1 billion, representing 61.3% growth year over year.


•	Health Benefits Ratio of 92.9%, compared to 84.8% in 2011.


•	General and Administrative expense ratio of 8.2%, compared to 11.2% in 2011.


•	Diluted net loss per share of $(0.68), including an impairment loss of $(0.52) per diluted share, compared to net earnings per share of $0.54 in the prior year.


•	Operating cash flow of $22.2 million for the second quarter of 2012.

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


•	Arizona. In October 2011, Bridgeway Health Solutions began operating under an expanded contract to deliver long-term care services in three geographic service areas of Arizona.


•	Illinois. In May 2011, our subsidiary, IlliniCare Health Plan, began providing managed care services for older adults and adults with disabilities under the Integrated Care Program in six counties.


•	Kentucky. In November 2011, our subsidiary, Kentucky Spirit Health Plan, began providing managed care services under a three-year contract with the Kentucky Finance and Administration Cabinet to serve Medicaid beneficiaries.

•

Louisiana. In February 2012, our joint venture subsidiary, Louisiana Healthcare Connections (LHC), began operating under a new contract in Louisiana to provide healthcare services to Medicaid enrollees participating in the Bayou Health program. LHC completed its three-phase membership roll-out for the three geographical service areas during the second quarter of 2012. In addition, Nurtur, our subsidiary which provides life, health and wellness programs, commenced operations to provide disease management services for state employees in Louisiana beginning in January 2012.

•

Mississippi. In January 2011, we began operating through the Mississippi Coordinated Access Network program to serve Medicaid beneficiaries. During the second quarter of 2011, the contract effectiveness provision was amended and, accordingly, revenue, medical cost and related earnings for January 1, 2011 through March 31, 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.


•	Ohio. In October 2011, Buckeye Community Health Plan, or Buckeye, began operating under an amended contract with the Ohio Department of Job and Family Services which includes the management of the pharmacy benefits for Buckeye's members.

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•

Texas. In March 2012, the Company began operating under contracts in Texas that expanded its operations through new service areas including the 10 county Hidalgo Service Area and the Medicaid Rural Service Areas of West Texas, Central Texas and North-East Texas, as well as the addition of STAR+PLUS in the Lubbock Service Area. The expansion also added the management of outpatient pharmacy benefits in all service areas and products, as well as inpatient facility services for the STAR+PLUS program.

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


•	We expect to realize the continued benefit of business commenced during 2011 in Arizona, Illinois, Kentucky, Louisiana, Texas and Ohio as discussed above.


•	In July 2012, we began operating under a new contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state, initially operating as Coordinated Care.


•	In July 2012, our subsidiary, Home State Health Plan, began operating under a new contract with the Office of Administration for Missouri to serve Medicaid beneficiaries in the Eastern, Central, and Western Managed Care Regions of the state.

•

In June 2012, we were notified by the Ohio Department of Job and Family Services that Buckeye Community Health Plan (Buckeye), our Ohio subsidiary, was selected to be awarded a new and expanded contract to serve Medicaid members in Ohio, effective January 2013. Under the new state contract, Buckeye will operate statewide through Ohio's three newly aligned regions (West, Central/Southeast, and Northeast). The award remains subject to ongoing legal proceedings from other managed care organizations that were not awarded a contract. At June 30, 2012, we continued to carry goodwill and intangible assets of $42.8 million associated with Buckeye pending final resolution of the award.


•	In June 2012, our Kansas subsidiary, Sunflower State Health Plan, was awarded a statewide contract to serve members in the state's KanCare program, which includes TANF, ABD non-duals, long-term care and CHIP beneficiaries. Operations are expected to commence in the first quarter of 2013.


•	In May 2012, we announced the Governor and Executive Council of New Hampshire had given approval for the Department of Health and Human Services to contract with our subsidiary, Granite State Health Plan, to serve Medicaid beneficiaries in New Hampshire. Operations are currently expected to commence in the first quarter of 2013.

MEMBERSHIP

From June 30, 2011 to June 30, 2012, we increased our at-risk managed care membership by 817,000, or 51.7%. The following table sets forth our membership by state for our managed care organizations:



	June 30,		December 31,
	2012	2011	2011
Arizona	24,000	22,800	23,700
Florida	204,100	190,600	198,300
Georgia	313,300	303,100	298,200
Illinois	17,800	700	16,300
Indiana	205,000	206,700	206,900
Kentucky	143,500	—	180,700
Louisiana	168,700	—	—
Massachusetts	41,400	32,900	35,700
Mississippi	30,100	30,800	31,600
Ohio	166,800	159,900	159,900
South Carolina	87,800	82,800	82,900
Texas	919,200	470,400	503,800
Wisconsin	75,800	79,800	78,000
Total at-risk membership	2,397,500	1,580,500	1,816,000
Non-risk membership	—	10,400	4,900
Total	2,397,500	1,590,900	1,820,900

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



	June 30,		December 31,
	2012	2011	2011
Medicaid	1,848,500	1,172,400	1,336,800
CHIP & Foster Care	222,600	211,400	213,900
ABD & Medicare	269,900	156,300	218,000
Hybrid Programs	48,100	35,500	40,500
Long-term Care	8,400	4,900	6,800
Total at-risk membership	2,397,500	1,580,500	1,816,000
Non-risk membership	—	10,400	4,900
Total	2,397,500	1,590,900	1,820,900

The following table provides supplemental information of other membership categories:



	June 30,		December 31,
	2012	2011	2011
Cenpatico Behavioral Health:
Arizona	159,900	173,200	168,900
Kansas	44,300	45,000	46,200

The following table identifies the Company's dual eligible membership by line of business. The membership table above includes these members.



	June 30,		December 31,
	2012	2011	2011
ABD	62,000	33,000	45,400
Long-term Care	7,600	4,600	6,200
Medicare	3,600	3,000	3,200
Total	73,200	40,600	54,800

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RESULTS OF 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, 2012 and 2011, 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, 2012 and 2011 is as follows ($ in millions):



	Three Months Ended June 30,								Six Months Ended June 30,
	2012			2011			% Change 2011-2012		2012			2011			% Change 2011-2012
Premium	$	2,034.5		$	1,248.6		62.9	%	$	3,669.4		$	2,401.4		52.8	%
Service	27.1			29.4			(8.1	)%	55.7			55.8			(0.3	)%
Premium and service revenues	2,061.6			1,278.0			61.3	%	3,725.1			2,457.2			51.6	%
Premium tax	49.1			37.0			32.8	%	97.8			74.2			31.9	%
Total revenues	2,110.7			1,315.0			60.5	%	3,822.9			2,531.4			51.0	%
Medical costs	1,890.4			1,059.1			78.5	%	3,333.1			2,037.7			63.6	%
Cost of services	21.9			20.3			7.4	%	45.2			40.5			11.5	%
General and administrative expenses	168.0			143.0			17.5	%	331.2			284.1			16.6	%
Premium tax expense	49.1			37.2			32.1	%	97.9			74.7			31.2	%
Impairment loss	28.0			—			—	%	28.0			—			—	%
Earnings (loss) from operations	(46.7		)	55.4			(184.5	)%	(12.5		)	94.4			(113.3	)%
Investment and other income, net	(0.7		)	(10.9		)	(93.6	)%	(0.2		)	(12.8		)	(98.4	)%
Earnings from operations, before income tax expense	(47.4		)	44.5			(206.6	)%	(12.7		)	81.6			(115.6	)%
Income tax expense (benefit)	(8.6		)	16.4			(152.4	)%	3.5			30.7			(88.7	)%
Net earnings (loss)	(38.8		)	28.1			(238.4	)%	(16.2		)	50.9			(131.9	)%
Noncontrolling interest	(3.8		)	(0.3		)	1,132.5	%	(5.2		)	(1.2		)	322.4	%
Net earnings (loss) attributable to Centene Corporation	$	(35.0	)	$	28.4		(223.3	)%	$	(11.0	)	$	52.1		(121.1	)%
Diluted earnings (loss) per common share attributable to Centene Corporation	$	(0.68	)	$	0.54		(225.9	)%	$	(0.21	)	$	1.00		(121.0	)%

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Premium and Service Revenues

Premium and service revenues increased 61.3% in the three months ended June 30, 2012 over the corresponding period in 2011 as a result of the additions between years of our Illinois, Kentucky and Louisiana contracts, Texas and Arizona expansion, pharmacy carve-ins, and membership growth.

While the Mississippi plan began operating January 1, 2011, the contract effectiveness provision wasn’t amended until the second quarter of 2011 and, accordingly, revenue, medical costs and related earnings for January 1, 2011 through March 31, 2011 were recorded during the second quarter of 2011. As a result, the recognition of $52.8 million of premium and service revenue related to the first quarter of 2011 was recognized during the second quarter of 2011.

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:



	2012		2011
Medicaid and CHIP	92.3	%	81.3	%
ABD and Medicare	92.7		90.7
Specialty Services	97.1		88.7
Total	92.9		84.8

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The consolidated HBR for the three months ended June 30, 2012, of 92.9% was an increase over 84.8% in the comparable period in 2011. The increase compared to last year primarily reflects (1) increased medical costs in the March 1, 2012 expansion areas in Texas, (2) increased medical costs resulting from retroactive assignment of members and increased non-inpatient claims in Kentucky, and (3) a high level of medical costs in the individual health business, especially for recently issued polices related to members converted in the first quarter of 2012. Excluding the impact of these items, the second quarter 2012 HBR would have been 88.5%.

At June 30, 2012, a premium deficiency reserve analysis was completed for each insurance contract. For all contracts, premiums over the expected contract life are expected to support the estimated costs to service the policies. As a result, we did not record premium deficiency reserves.

General & Administrative Expenses

General and administrative expenses, or G&A, increased by $25.0 million in the three months ended June 30, 2012, compared to the corresponding period in 2011. This was primarily due to expenses for additional staff and facilities to support our membership growth, partially offset by a reduction in performance based compensation expense in 2012.

The consolidated G&A expense ratio for the three months ended June 30, 2012, and 2011 was 8.2%, and 11.2%, respectively. The year over year decrease in the G&A expense ratio reflects the leveraging of expenses over higher revenues in 2012 and a reduction in performance based compensation expense in 2012 which lowered the G&A expense ratio by 80 basis points. The G&A ratio in 2011 reflects a 50 basis point decrease resulting from the recognition of revenue in the second quarter of 2011 from our Mississippi contract for the period January 1, 2011 through March 31, 2011.

Other Income (Expense)

The following table summarizes the components of other income (expense) for the three months ended June 30, ($ in millions):



	2012			2011
Investment income	$	4.0		$	2.9
Debt extinguishment costs	—			(8.5		)
Interest expense	(4.7		)	(5.3		)
Other income (expense), net	$	(0.7	)	$	(10.9	)

The increase in investment income in 2012 reflects an increase in investment balances over 2011. Interest expense decreased during the quarter by $0.6 million reflecting the refinancing of our Senior Notes and execution of the associated interest rate swap agreement in 2011, as well as a reduction in borrowings on our revolver over the prior year.

Income Tax Expense

Excluding the effects of noncontrolling interests, our effective tax rate for the three months ended June 30, 2012 was a benefit of 19.7% compared to an expense of 36.7% in the corresponding period in 2011. The change in the effective tax rate primarily relates to the impact of Celtic's non-deductible goodwill impairment resulting in a reduced tax benefit on a pre-tax loss.

Impairment Loss

During the second quarter of 2012, our subsidiary, Celtic Insurance Company, experienced a high level of medical costs for individual health policies, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012. Additionally, in June 2012, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act. The Affordable Care Act, among other things, limits the profitability of the individual health insurance business because of minimum medical loss ratios, guaranteed issue policies, and increased competition in the exchange market. As a result of these factors, our expectations for future growth and profitability are lower than previous estimates. We conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit, which encompasses Celtic Insurance Company, CeltiCare Health Plan of Massachusetts, Inc., and Novasys Health, Inc. The impairment analysis resulted in goodwill and intangible asset impairments of $28.0 million, recorded as impairment loss in the consolidated statement of operations. The impaired identifiable intangible assets of $2.3 million and goodwill of $25.7 million were reported under the Specialty Services segment, of which $26.6 million of the impairment loss is not deductible for income tax purposes.

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Segment Results

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



	2012			2011			% Change 2011-2012
Premium and Service Revenues
Medicaid Managed Care	$	1,865.9		$	1,116.2		67.2	%
Specialty Services	658.3			356.4			84.7	%
Eliminations	(462.6		)	(194.6		)	137.7	%
Consolidated Total	$	2,061.6		$	1,278.0		61.3	%
Earnings (Loss) from Operations
Medicaid Managed Care	$	(28.4	)	$	42.5		(166.9	)%
Specialty Services	(18.3		)	12.8			(243.4	)%
Consolidated Total	$	(46.7	)	$	55.3		(184.5	)%

Medicaid Managed Care

Premium and service revenues increased 67.2% in the three months ended June 30, 2012, due to the addition of our Illinois, Kentucky and Louisiana contracts, Texas expansion, pharmacy carve-ins, and membership growth. Earnings from operations decreased $70.9 million in the three months ended June 30, 2012, primarily due to higher medical costs in our Kentucky and Texas health plans.

Specialty Services

Premium and service revenues increased 84.7% in the three months ended June 30, 2012, due to growth in our Medicaid segment and the associated specialty services provided to this increased membership as well as the Arizona expansion and carve-in of pharmacy services in Texas and Ohio. Earnings from operations decreased $31.1 million in the three months ended June 30, 2012, reflecting the impairment loss of $28.0 million and a high level of medical costs in our individual health insurance business, especially for recently issued policies related to members converted from another insurer throughout the first quarter of 2012, partially offset by growth in our pharmacy business and the associated specialty services provided to our increased Medicaid membership.

Earnings (Loss) Per Share and Shares Outstanding

Our earnings (loss) per share calculation for the three months ended June 30, 2012 reflects lower diluted weighted average shares outstanding resulting from the exclusion of the effect of outstanding stock awards which would be anti-dilutive to earnings per share.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Premium and Service Revenues

Premium and service revenues increased 51.6% in the six months ended June 30, 2012 over the corresponding period in 2011 as a result of the additions between years of our Illinois, Kentucky and Louisiana contracts, Texas and Arizona expansion, pharmacy carve-ins, and membership growth. During the six months ended June 30, 2012, we received premium rate adjustments which yielded a net 0% composite change across all of our markets.

Operating Expenses

Medical Costs



	2012		2011
Medicaid and CHIP	90.2	%	82.7	%
ABD and Medicare	91.1		89.4
Specialty Services	94.0		87.0
Total	90.8