News Column

CENTENE CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.

February 21, 2014

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 known and unknown risks and uncertainties, including those set forth under Part I, Item 1A."Risk Factors" of this Form 10-K. OVERVIEW Our subsidiary, Kentucky Spirit Health Plan (KSHP), ceased serving Medicaid members in Kentucky as of July 6, 2013. Accordingly, the results of operations for KSHP are classified as discontinued operations for all periods presented in our consolidated financial statements. The following discussion and analysis, with the exception of cash flow information, is presented in the context of continuing operations unless otherwise identified.



Our financial performance for 2013 is summarized as follows:

• Year-end at-risk managed care membership of 2,723,200, an increase of

298,700 members, or 12.3% over 2012. • Premium and service revenues of $10.5 billion, representing 37.0% growth year over year.



• Health Benefits Ratio of 88.6%, compared to 89.6% in 2012.

• General and Administrative expense ratio of 8.8%, compared to 8.8% in 2012.

• Total operating cash flows of $382.5 million, or 2.3 times net earnings.

• Diluted net earnings per share of $2.87, compared to $1.65 in 2012.

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

• AcariaHealth. In April 2013, we completed the acquisition of

AcariaHealth, a specialty pharmacy company, for $142.5 million. The

transaction consideration was financed through a combination of Centene

common stock and cash on hand.



• California. In November 2013, our California subsidiary, California

Health and Wellness Plan (CHWP), began operating under a new contract with the California Department of Health Care Services to serve Medicaid beneficiaries in 18 rural counties under the state's Medi-Cal Managed Care Rural Expansion program. Also in November 2013, CHWP began operating under a new contract to serve Medi-Cal beneficiaries in Imperial County.



• Florida. In August 2013, our Florida subsidiary, Sunshine Health, began

operating under a contract with the Florida Agency for Health Care Administration to serve members of the Medicaid managed care LTC program. Enrollment began in August 2013 and will be implemented by region and continue through March 2014. • Kansas. In January 2013, our subsidiary, Sunflower State Health Plan, began operating under a statewide contract to serve members in the



state's KanCare program, which includes TANF, ABD (dual and non-dual),

foster care, LTC and CHIP beneficiaries. • Louisiana. In February 2012, Louisiana Healthcare Connections (LHC), began operating through a joint venture 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 November 2012, the covered services provided by LHC expanded to include pharmacy benefits. During the fourth quarter of 2012, we acquired the ownership interest of our joint venture partner, bringing our ownership to 100%.



• Massachusetts. In July 2013, our joint venture subsidiary, Centurion,

began operating under a new contract with the Department of Corrections

in Massachusetts to provide comprehensive healthcare services to individuals incarcerated in Massachusetts state correctional facilities. Centurion is a joint venture between Centene and MHM Services Inc. • Mississippi. In December 2012, our subsidiary, Magnolia Health Plan, began operating under an expanded contract to provide managed care services statewide to Medicaid members as well as providing behavioral health services. 32



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• Missouri. In July 2012, our majority owned 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. • New Hampshire. In December 2013, our subsidiary, New Hampshire Healthy



Families, began operating under a new contract with the Department of

Health and Human Services to serve Medicaid beneficiaries.



• Ohio. In July 2013, our Ohio subsidiary, Buckeye Community Health Plan

(Buckeye), began operating under a new and expanded contract with Ohio Department of Job and Family Services (ODJFS) to serve Medicaid members statewide through Ohio's three newly aligned regions (West, Central/Southeast, and Northeast). Buckeye also began serving members under the ABD Children program in July 2013.



• Tennessee. In September 2013, our joint venture subsidiary, Centurion,

began operating under a new contract to provide comprehensive healthcare services to individuals incarcerated in Tennessee state correctional facilities.



• Texas. In March 2012, we 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.



• Washington. In July 2012, we began operating under a new contract with

the Washington Health Care Authority to serve Medicaid beneficiaries in

the state, operating as Coordinated Care.

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

• We expect to realize the full year benefit in 2014 of business commenced during 2013 in California, Florida, Massachusetts, New Hampshire, Ohio, and Tennessee as discussed above.



• In February 2014, our Mississippi subsidiary, Magnolia Health Plan, was

awarded a statewide managed care contract to continue serving members

enrolled in the Mississippi Coordinated Access Network (MississippiCAN)

program, as one of two contractors. Under the new contract, Magnolia will continue providing outpatient, behavioral health, pharmacy, vision and dental services, and will also begin providing non-emergency transportation as of July 1, 2014. • In January 2014, we acquired a majority interest in U.S. Medical Management, LLC, a management services organization and provider of



in-home health services for high acuity populations, for approximately

$200.0 million. The transaction consideration was financed through a

combination of cash on hand and 2,243,217 shares of Centene common

stock



• In January 2014, we began serving members enrolled in Health Insurance

Marketplaces in certain regions of 9 states: Arkansas, Florida, Georgia, Indiana, Massachusetts, Mississippi, Ohio, Texas and Washington. • In January 2014, our CeltiCare subsidiary began operating under a new contract with the Massachusetts Executive Office of Health and Human Services to participate in the MassHealth CarePlus program in all five regions.



• In January 2014, Centurion began operating under a new agreement with

the Minnesota Department of Corrections to provide managed healthcare

services to offenders in the state's correctional facilities. • In December 2013, we signed a definitive agreement to purchase a majority stake in Fidelis SecureCare of Michigan, Inc. (Fidelis), a



subsidiary of Fidelis SeniorCare, Inc. The transaction is expected to

close in the fourth quarter of 2014, subject to certain closing conditions including regulatory approvals, and will involve cash purchase price payments contingent on the performance of the plan over the course of 2015. Fidelis was recently selected by the Michigan Department of Community Health to provide integrated healthcare



services to members who are dually eligible for Medicare and Medicaid

in Macomb and Wayne counties. Enrollment is expected to commence in the fourth quarter of 2014. 33



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• In November 2013, our South Carolina subsidiary, Absolute Total Care, was selected by the South Carolina Department of Health and Human Services to serve dual-eligible members as part of the state's pilot



program to provide integrated and coordinated care for individuals who

are eligible for both Medicare and Medicaid. Operations are expected to

commence in the second half of 2014.



• In September 2013, the Florida Agency for Health Care Administration

provided notice of intent to award a contract to our subsidiary,

Sunshine Health, in 9 of 11 regions of the Managed Medical Assistance

(MMA) program. The MMA program includes TANF recipients as well as ABD and dual-eligible members. The award is subject to challenge and contract readiness periods, with enrollment expected to begin in the



second quarter of 2014 and continue through October 2014. In addition,

we were recommended as the sole provider under a contract award for the Child Welfare Specialty Plan (Foster Care), which is expected to commence in the second quarter of 2014. • In September 2013, we were awarded a contract in Texas from the Texas Health and Human Services Commission to expand our operations and serve STAR+PLUS members in two Medicaid Rural Service Areas. Enrollment is expected to begin in the second half of 2014.



• In November 2012, our Illinois subsidiary, IlliniCare Health Plan, was

selected, contingent upon successful completion of contract negotiations, to serve dual-eligible members in Cook, DuPage, Lake, Kane, Kankakee and Will counties (Greater Chicago region) as part of



the Illinois Medicare-Medicaid Alignment Initiative. Upon execution of

a contract and regulatory approval, enrollment is expected to begin in

2014. • In August 2012, we were notified by the ODJFS that Buckeye, our Ohio



subsidiary, was selected to serve Medicaid members in a dual-eligible

demonstration program in three of Ohio's pre-determined seven regions:

Northeast (Cleveland), Northwest (Toledo) and West Central (Dayton).

This three-year program, which is part of the state of Ohio's

Integrated Care Delivery System (ICDS) expansion, will serve those who

have both Medicare and Medicaid eligibility. Enrollment is expected to

begin in 2014. In March 2013, we were notified by the Arizona Health Care Cost Containment System (AHCCCS) that our Bridgeway Health Solutions of Arizona, LLC acute care contract was not renewed. As a result, our contract terminated on September 30, 2013. Bridgeway served 16,700 Medicaid acute care members in Yavapai County at September 30, 2013. MEMBERSHIP



From December 31, 2011 to December 31, 2013, we increased our at-risk managed care membership by 1,087,900, or 66.5%. The following table sets forth our membership by state for our managed care organizations:

December 31, 2013 2012 2011 Arizona 7,100 23,500 23,700 California 97,200 - - Florida 222,000 214,000 198,300 Georgia 318,700 313,700 298,200 Illinois 22,300 18,000 16,300 Indiana 195,500 204,000 206,900 Kansas 139,900 - - Louisiana 152,300 165,600 - Massachusetts 22,600 21,500 35,700 Mississippi 78,300 77,200 31,600 Missouri 59,200 59,600 - New Hampshire 33,600 - - Ohio 173,200 157,800 159,900 South Carolina 91,900 90,100 82,900 Tennessee 20,700 - - Texas 935,100 949,900 503,800 Washington 82,100 57,200 - Wisconsin 71,500 72,400 78,000 Total 2,723,200 2,424,500 1,635,300 34



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

December 31, 2013 2012 2011

Medicaid 2,054,700 1,877,100 1,202,300 CHIP & Foster Care 275,100 235,200 210,600 ABD & Medicare 305,300 274,600 175,100 Hybrid Programs 19,000 29,100 40,500 LTC 37,800 8,500 6,800 Correctional Services 31,300 - - Total 2,723,200 2,424,500 1,635,300



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

December 31, 2013 2012 2011 ABD 71,700 62,600 34,400 LTC 28,800 7,700 6,200 Medicare 6,500 5,100 3,200 Total 107,000 75,400 43,800 At December 31, 2013, we also served 156,600 members under our behavioral health contract in Arizona, compared to 157,900 members at December 31, 2012. From December 31, 2012 to December 31, 2013 our membership increased as a result of: •operations commencing in California, Kansas and New Hampshire; •geographic expansion in Ohio; •growth in Washington; and, •the commencement of correctional services contracts in Massachusetts and Tennessee. From December 31, 2011 to December 31, 2012 our membership increased as a result of the commencement of operations in Louisiana, Missouri and Washington as well as the geographic expansion in Texas. 35



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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 each of the three years ended December 31, 2013, prepared in accordance with generally accepted accounting principles in the United States ($ in millions): % Change % Change 2013 2012 2011 2012-2013 2011-2012 Premium $ 10,153.4$ 7,568.9$ 4,948.1 34.1 % 53.0 % Service 372.6 112.7 103.8 230.5 % 8.7 % Premium and service revenues 10,526.0 7,681.6 5,051.9 37.0 % 52.1 % Premium tax 337.3 428.7 159.6 (21.3 )% 168.6 % Total revenues 10,863.3 8,110.3 5,211.5 33.9 % 55.6 % Medical costs 8,994.7 6,781.1 4,191.3 32.6 % 61.8 % Cost of services 326.9 87.7 78.1 272.8 % 12.3 % General and administrative expenses 931.1 677.2 577.9 37.5 % 17.2 % Premium tax expense 333.2 428.4 160.4 (22.2 )% 167.1 % Impairment loss - 28.0 - (100.0 )% n.m. Earnings from operations 277.4 107.9 203.8 156.9 % (47.0 )% Investment and other income, net (8.5 ) 14.8 (15.5 ) (157.3 )% 195.9 % Earnings from continuing operations, before income tax expense 268.9 122.7 188.3 119.0 % (34.8 )% Income tax expense 107.1 47.4 70.7 125.8 % (32.9 )% Earnings from continuing operations, net of income tax 161.8 75.3 117.6 114.7 % (35.9 )% Discontinued operations, net of income tax expense (benefit) of $2.3, $(47.7), and $(4.2) respectively 3.9 (86.7 ) (9.3 ) 104.5 % n.m. Net earnings (loss) 165.7 (11.4 ) 108.3 n.m. (110.4 )% Noncontrolling interest 0.6 (13.2 ) (2.9 ) 104.7 % (360.7 )% Net earnings attributable to Centene Corporation $ 165.1$ 1.8$ 111.2 n.m. (98.3 )% Amounts attributable to Centene Corporation common shareholders: Earnings from continuing operations, net of income tax expense $ 161.2$ 88.5$ 120.5 82.1 % (26.5 )% Discontinued operations, net of income tax expense 3.9 (86.7 ) (9.3 ) 104.5 % n.m. Net earnings $ 165.1$ 1.8$ 111.2 n.m. (98.3 )% Diluted earnings (loss) per common share attributable to Centene Corporation: Continuing operations $ 2.87$ 1.65$ 2.30 73.9 % (28.3 )% Discontinued operations 0.07 (1.62 ) (0.18 ) 104.3 % n.m. Total diluted earnings per common share $ 2.94$ 0.03$ 2.12 n.m. (98.6 )% n.m.: not meaningful.



Revenues and Revenue Recognition

Our health plans generate revenues primarily from premiums we receive from the states in which we operate. We generally receive a fixed premium per member per month pursuant to our state contracts. We generally receive premium payments and recognize premium revenue during the month in which we are obligated to provide services to our members. In some instances, our base premiums are subject to an adjustment, or risk score, based on the acuity of our membership. Generally, the risk score is determined by the state analyzing submissions of processed claims data to determine the acuity of our membership relative to the entire state's membership. Some contracts allow for additional premiums associated with certain supplemental services provided such as maternity deliveries. 36



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Our contracts with states may require us to maintain a minimum health benefits ratio or may require us to share profits in excess of certain levels. In certain circumstances, our plans may be required to pay a rebate to the state in the event profits exceed established levels. We recognize reductions in revenue in the current period for these programs. Other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue. For performance-based contracts, we do not recognize revenue subject to refund until data is sufficient to measure performance. Revenues are recorded based on membership and eligibility data provided by the states, which is adjusted on a monthly basis by the states for retroactive additions or deletions to membership data. These eligibility adjustments are estimated monthly and subsequently adjusted in the period known. We continuously review and update those estimates as new information becomes available. It is possible that new information could require us to make additional adjustments, which could be significant, to these estimates. Our specialty services generate revenues under contracts with state programs, healthcare organizations, and other commercial organizations, as well as from our own subsidiaries. Revenues are recognized when the related services are provided or as ratably earned over the covered period of services. Premium and service revenues collected in advance are recorded as unearned revenue. Premium and service revenues due to us are recorded as premium and related receivables and are recorded net of an allowance based on historical trends and our management's judgment on the collectibility of these accounts. As we generally receive payments during the month in which services are provided, the allowance is typically not significant in comparison to total revenues and does not have a material impact on the presentation of our financial condition or results of operations. Some states enact premium taxes, similar assessments and provider and hospital pass-through payments, collectively, premium taxes, and these taxes are recorded as a component of revenues as well as operating expenses. We exclude premium taxes from our key ratios as we believe the premium tax is a pass-through of costs and not indicative of our operating performance. The Centers for Medicare and Medicaid Services (CMS) deploys a risk adjustment model that retroactively apportions Medicare premiums paid according to health severity and certain demographic factors. The model pays more for members whose medical history indicates they have certain medical conditions. Under this risk adjustment methodology, CMS calculates the risk adjusted premium payment using diagnosis data from hospital inpatient, hospital outpatient, physician treatment settings as well as prescription drug events. The Company estimates the amount of risk adjustment based upon the diagnosis and pharmacy data submitted and expected to be submitted to CMS and records revenues on a risk adjusted basis. Operating Expenses Medical Costs Medical costs include payments to physicians, hospitals, and other providers for healthcare and specialty services claims. Medical costs also include estimates of medical expenses incurred but not yet reported, or IBNR, and estimates of the cost to process unpaid claims. We use our judgment to determine the assumptions to be used in the calculation of the required IBNR estimate. The assumptions we consider include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to Medicaid fee schedules, and the incidence of high dollar or catastrophic claims. Our development of the IBNR estimate is a continuous process which we monitor and refine on a monthly basis as claims receipts and payment information becomes available. As more complete information becomes available, we adjust the amount of the estimate, and include the changes in estimates in medical expense in the period in which the changes are identified. Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management's judgment, to determine the assumptions to be used in the calculation of our liability for medical costs. 37



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While we believe our IBNR estimate is appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. Accordingly, we cannot assure you that medical costs will not materially differ from our estimates.

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.



Cost of Services

Cost of services expense includes the pharmaceutical costs associated with our pharmacy benefit manager and specialty pharmacy's external revenues and certain direct costs to support the functions responsible for generation of our service revenues. These expenses consist of the salaries and wages of the professionals who provide the services and associated expenses.



General and Administrative Expenses

General and administrative expenses, or G&A, primarily reflect wages and benefits, including stock compensation expense, and other administrative costs associated with our health plans, specialty companies and centralized functions that support all of our business units. Our major centralized functions are finance, information systems and claims processing. G&A expenses also include business expansion costs, such as wages and benefits for administrative personnel, contracting costs, and information technology buildouts, incurred prior to the commencement of a new contract or health plan. The G&A expense ratio represents G&A expenses as a percentage of premium and service revenues, and reflects the relationship between revenues earned and the costs necessary to earn those revenues.



Other Income (Expense)

Other income (expense) consists principally of investment income from cash and investments, earnings in equity method investments, and interest expense on debt.

Discontinued Operations

Our subsidiary, Kentucky Spirit Health Plan (KSHP), ceased serving Medicaid members in Kentucky as of July 6, 2013. Accordingly, the results of operations for KSHP are classified as discontinued operations for all periods presented in our consolidated financial statements. The following discussion and analysis is presented primarily in the context of continuing operations unless otherwise identified.



Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Premium and Service Revenues

Premium and service revenues increased 37.0% in the year ended December 31, 2013 over the corresponding period in 2012 as a result of the Texas, Mississippi, Louisiana and Florida expansions, pharmacy carve-ins in Texas and Louisiana, the additions of the Kansas, Missouri, Washington, California and New Hampshire contracts, commencement of the correctional healthcare contracts in Massachusetts and Tennessee, rate increases in several of our markets and the acquisition of AcariaHealth. During the year ended December 31, 2013, we received premium rate adjustments which yielded a net 2.7% composite increase across all of our markets. Premium Tax Revenue Premium tax revenue decreased 21.3% in the year ended December 31, 2013 over the corresponding period in 2012. This is as a result of one of our states paying us approximately $180 million in 2012 to pay to specified providers. 38



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Table of Contents Operating Expenses Medical Costs The table below depicts the HBR for our membership by member category for the year ended December 31,: 2013 2012 Medicaid and CHIP 87.5 % 88.8 % ABD and Medicare 90.4 90.7 Specialty Services 85.4 92.0 Total 88.6 89.6 The consolidated HBR for the year ended December 31, 2013, of 88.6% was a decrease of 100 basis points over the comparable period in 2012. The 2013 HBR reflects performance improvement in Texas and our individual insurance business from 2012. Cost of Services



Cost of services increased by $239.2 million in the year ended December 31, 2013, compared to the corresponding period in 2012. This was primarily due to the additional volume resulting from the acquisition of AcariaHealth.

General & Administrative Expenses

General and administrative expenses, or G&A, increased by $254.0 million in the year ended December 31, 2013, compared to the corresponding period in 2012. This was primarily due to expenses for additional staff and facilities to support our membership growth, AcariaHealth transaction costs, as well as performance based compensation. The consolidated G&A expense ratio for the years ended December 31, 2013 and 2012 was 8.8% and 8.8% respectively. The G&A expense ratio reflects an increase in performance based compensation expense in 2013 as well as AcariaHealth transaction costs, offset by the benefits of leveraging of expenses over higher revenue in 2013 and our efforts to control costs.



Other Income (Expense)

The following table summarizes the components of other income (expense) for the year ended December 31, ($ in millions):

2013 2012 Investment income $ 18.5$ 15.9 Gain on sale of investments - 1.5 Gain on sale of investment in convertible note - 17.9 Interest expense (27.0 ) (20.5 ) Other income (expense), net $ (8.5 )$ 14.8



Investment income. The increase in investment income in 2013 primarily reflects an increase in investment balances over 2012.

Gain on sale of investments. During 2012, we recognized $1.5 million in net gains primarily as a result of the liquidation of $75.5 million of investments held by the Georgia health plan in order to meet short term liquidity needs due to delays in premium receipts from the state.



Gain on sale of investment in convertible note. During 2012, we executed an agreement with a third party borrower whereby the borrower agreed to pay us total consideration of $50.0 million for retirement of $30.0 million of outstanding notes and equity ownership conversion features in certain Medicaid and Medicare related businesses. As a result, we recorded a pre-tax gain of $17.9 million in other income representing the fair value of the total consideration in excess of the carrying value of the loans on the balance sheet.

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Interest expense. Interest expense increased during the year ended December 31, 2013 by $6.5 million reflecting the addition of $175 million of Senior Notes in the fourth quarter of 2012. Income Tax Expense Excluding the effects of noncontrolling interests, our effective tax rate for the year ended December 31, 2013 was 39.9% compared to 34.9% in 2012. The increase in the income tax rate over 2012 resulted from a tax benefit in 2012 resulting from the clarification by a state taxing authority regarding a state income tax calculation, partially offset by a non-deductible goodwill impairment in 2012. Segment Results



The following table summarizes our operating results by segment for the year ended December 31, (in millions):

% Change 2013 2012 2012-2013 Premium and Service Revenues Managed Care $ 9,781.8$ 7,212.0 35.6 % Specialty Services 2,932.5 2,107.0 39.2 % Eliminations (2,188.3 ) (1,637.4 ) (33.6 )% Consolidated Total $ 10,526.0$ 7,681.6 37.0 % Earnings from Operations Managed Care $ 197.8$ 62.9 214.7 % Specialty Services 79.6 45.1 76.4 % Consolidated Total $ 277.4$ 108.0 156.9 % Managed Care Premium and service revenues increased 35.6% in the year ended December 31, 2013, due to the Texas, Mississippi, Louisiana and Florida expansions, pharmacy carve-ins in Texas and Louisiana, the additions of the California, Kansas, Missouri, New Hampshire and Washington contracts and rate increases in several of our markets. Earnings from operations increased $134.9 million in the year ended December 31, 2013, primarily due to improvements in the performance of the Texas business from 2012. Specialty Services Premium and service revenues increased 39.2% in the year ended December 31, 2013, due to the carve-in of pharmacy services in Texas and Louisiana, growth in our Medicaid segment and the associated services provided to this increased membership, the acquisition of AcariaHealth and the additions of the Centurion contracts in Massachusetts and Tennessee. Earnings from operations increased $34.5 million in the year ended December 31, 2013. This reflects improvement in our individual health insurance business in 2013 and the impact of a $28.0 million impairment loss in 2012 in our individual insurance business.



Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

Premium and service revenues increased 52.1% in the year ended December 31, 2012 over the corresponding period in 2011 as a result of the additional revenue from our Illinois, Louisiana, Mississippi, Missouri and Washington contracts, Texas and Arizona expansions, pharmacy carve-ins in Texas and Ohio, and organic membership growth. During the year ended December 31, 2012, we received premium rate adjustments which yielded a net 2.6% composite increase across all of our markets. 40



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Table of Contents Operating Expenses Medical Costs The table below depicts the HBR for our membership by member category for the year ended December 31,: 2012 2011 Medicaid and CHIP 88.8 % 82.0 % ABD and Medicare 90.7 90.1 Specialty Services 92.0 86.2 Total 89.6 84.7 The consolidated HBR for the year ended December 31, 2012, of 89.6% was an increase of 490 basis points over the comparable period in 2011. The increase compared to last year primarily reflects (1) a high level of medical costs in the March 1, 2012 expansion areas in Texas, (2) a high level of medical costs in our individual health business, especially for policies issued to members who converted in the first quarter of 2012 and (3) a high level of flu costs during the fourth quarter of 2012.



General and Administrative Expenses

General and administrative expenses, or G&A, increased by $99.3 million in the year ended December 31, 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 years ended December 31, 2012 and 2011 was 8.8% and 11.4% 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 approximately 60 basis points.



Impairment Loss

During 2011, the Company completed its annual goodwill and intangible asset impairment testing and concluded that the fair value of all reporting units with material amounts of goodwill was substantially in excess of the carrying value as of our impairment testing date. Specifically, the Company tested its Celtic reporting unit under a quantitative model which included anticipated financial performance for new business to be converted in 2012. Under the quantitative model, the testing revealed that the carrying value exceeded fair value of the Celtic reporting unit by approximately 190%. During 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 during 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 Marketplace product. As a result of these factors, our expectations for future growth and profitability were lower than previous estimates and we conducted an impairment analysis of the identifiable intangible assets and goodwill of the Celtic reporting unit. The impairment analysis resulted in goodwill and intangible asset impairments of $28.0 million, recorded as an 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; $26.6 million of the impairment loss is not deductible for income tax purposes. 41



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Investment and Other Income, Net

The following table summarizes the components of other income (expense) for the year ended December 31, ($ in millions):

2012 2011 Investment income $ 15.9$ 13.0 Gain on sale of investments 1.5 0.3 Gain on sale of investment in convertible note 17.9 - Debt extinguishment costs - (8.5 ) Interest expense (20.5 ) (20.3 ) Other income (expense), net $ 14.8$ (15.5 )



Investment income. The increase in investment income in 2012 primarily reflects higher investment balances in 2012.

Gain on sale of investments. During the year ended December 31, 2012, we recognized $1.5 million in net gains primarily as a result of the liquidation of $75.5 million of investments held by the Georgia health plan in order to meet short term liquidity needs due to delays in premium receipts from the state. Gain on sale of investment in convertible note. Between July 2008 and October 2011, we made an investment of $30.0 million in secured notes receivable to a third party as part of an investment in certain Medicaid and Medicare related businesses. The notes included a feature to convert the note balance into an equity ownership in the underlying businesses. In September 2012, we executed an agreement with the borrower whereby the borrower agreed to pay us total consideration of $50.0 million for retirement of the outstanding notes and equity ownership conversion feature. As a result, during the third quarter of 2012, we recorded a pre-tax gain of $17.9 million in other income representing the fair value of the total consideration in excess of the carrying value of the loans on the balance sheet. Interest expense. Interest expense increased during the year ended December 31, 2012 by $0.2 million reflecting the issuance of an additional $175 million in Senior Notes in November 2012, partially offset by the refinancing of our $250 million Senior Notes and execution of the associated interest rate swap agreement in May 2011.



Income Tax Expense

Excluding the effects of noncontrolling interests, our effective tax rate for 2012 was 34.9% compared to 37.0% in 2011. The tax rate for the year ended December 31, 2012, reflects a tax benefit resulting from the clarification by a state taxing authority regarding a state income tax calculation, partially offset by Celtic's non-deductible goodwill impairment. Segment Results



The following table summarizes our operating results by segment for the year ended December 31, (in millions):

% Change 2012 2011 2011-2012 Premium and Service Revenues Managed Care $ 7,212.0$ 4,636.2 55.6 % Specialty Services 2,107.0 1,190.5 77.0 % Eliminations (1,637.4 ) (774.8 ) (111.3 )% Consolidated Total $ 7,681.6$ 5,051.9 52.1 % Earnings from Operations Managed Care $ 62.9$ 161.9 (61.2 )% Specialty Services 45.1 41.9 7.6 % Consolidated Total $ 108.0$ 203.8 (47.0 )% Managed Care Premium and service revenues increased 55.6% in the year ended December 31, 2012, due to the addition of our Illinois, Louisiana, Mississippi, Missouri and Washington contracts, Texas expansion, pharmacy carve-ins in Texas and Ohio, and organic membership growth. Earnings from operations decreased $99.0 million in the year ended December 31, 2012, 42



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primarily due to higher medical costs in our Texas health plan specifically in the expansion areas and increased flu costs during the fourth quarter of 2012.

Specialty Services

Premium and service revenues increased 77.0% in the year ended December 31, 2012, due to (1) the carve-in of pharmacy services in Texas and Ohio, (2) Specialty Company revenue related to the growth in our Medicaid segment and the associated specialty services provided to this increased membership and (3) the Arizona expansion. Earnings from operations increased $3.2 million in the year ended December 31, 2012, reflecting growth in our pharmacy business and the associated specialty services provided to our increased Medicaid membership, partially offset by the impairment loss of $28.0 million recorded in 2012 and a high level of medical costs in Celtic Insurance Company, especially for members converted in the first quarter of 2012. LIQUIDITY AND CAPITAL RESOURCES



Shown below is a condensed schedule of cash flows for the years ended December 31, 2013, 2012 and 2011, used in the discussion of liquidity and capital resources ($ in millions).

Year Ended December 31, 2013 2012 2011



Net cash provided by operating activities $ 382.5$ 278.7$ 261.7 Net cash used in investing activities (342.1 ) (187.9 ) (129.1 ) Net cash provided by financing activities 153.7 179.5 6.9 Net increase in cash and cash equivalents $ 194.1$ 270.3$ 139.5

Cash Flows Provided by Operating Activities

Normal operations are funded primarily through operating cash flows and borrowings under our revolving credit facility.

Cash flows from operating activities for 2013 increased $103.8 million, or 37% compared to 2012 due to an increase in net earnings between years and growth in our business. Additionally, incentive compensation accruals increased from 2012 due to the performance of the Company. This accrual will be paid during the first and second quarter of 2014. Cash flows from operating activities for 2012 increased $17.0 million, or 6% compared to 2011 driven by lower net earnings that were partially offset by the growth in medical claims liabilities associated with business expansions. Cash flows from operations in each year were impacted by the timing of payments we receive from our states. States may prepay the following month premium payment, which we record as unearned revenue, or they may delay our premium payment, which we record as a receivable. We typically receive capitation payments monthly, however the states in which we operate may decide to adjust their payment schedules which could positively or negatively impact our reported cash flows from operating activities in any given period. The table below details the impact to cash flows from operations from the timing of payments from our states ($ in millions). Year Ended December 31, 2013 2012 2011



Premium and related receivables $ (143.0 )$ (116.6 )$ (11.3 ) Unearned revenue

2.7 24.7 (109.1 )



Net decrease in operating cash flow $ (140.3 )$ (91.9 )$ (120.4 )

Net cash provided by operating activities in 2011 was negatively impacted by the timing of payments from our states by $120.4 million. As of December 31, 2011, we had received all December 2011 capitation payments from our states and had not received any prepayments of January 2012 capitation. This was offset by an increase in medical claims liabilities related to the start up of our Mississippi, Illinois and Kentucky health plans, as well as expansion of our Texas health plan in 2011.



Cash Flows Used in Investing Activities

Cash flows used in investing activities in 2013 primarily consisted of additions to the investment portfolio of our regulated subsidiaries, including transfers from cash and cash equivalents to long term investments, the acquisition of AcariaHealth and 43



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capital expenditures. We completed the acquisition of AcariaHealth in April 2013 for $142.5 million in total consideration. The transaction was financed through a combination of Centene common stock as well as $67.1 million cash on hand. During 2012 and 2011, our investing activities primarily related to additions to the investment portfolio of our regulated subsidiaries and capital expenditures. Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets within our guidelines. Net cash provided by and used in investing activities will fluctuate from year to year due to the timing of investment purchases, sales and maturities. As of December 31, 2013, our investment portfolio consisted primarily of fixed-income securities with an average duration of 2.9 years. These securities generally are actively traded in secondary markets and the reported fair market value is determined based on recent trading activity, recent trading activity in similar securities and other observable inputs. Our investment guidelines comply with the regulatory restrictions enacted in each state. We had unregulated cash and investments of $44.7 million at December 31, 2013, compared to $37.3 million at December 31, 2012. We spent $67.8 million, $82.1 million and $73.7 million in 2013, 2012 and 2011 respectively, on capital expenditures for system enhancements, a new datacenter and market expansions including $20.9 million in 2012 for land in close proximity to our corporate headquarters to support future growth.



Cash Flows Provided by Financing Activities

Our financing activities provided cash of $153.7 million, $179.5 million and $6.9 million in 2013, 2012 and 2011 respectively. Financing activities in 2013, 2012 and 2011 are discussed below. 2013. During 2013, our financing activities primarily related to borrowings under our revolving credit facility, the sale of $15.2 million of common stock to fund the escrow account for the acquisition of AcariaHealth and the repayment of a mortgage note. In May 2013, we entered into a new unsecured $500 million revolving credit facility and terminated our previous $350 million revolving credit facility. Borrowings under the agreement bear interest based upon LIBOR rates, the Federal Funds Rate or the Prime Rate. The agreement has a maturity date of June 1, 2018, provided it will mature 90 days prior to the maturity date of the 5.75% Senior Notes due 2017 if such notes are not refinanced (or extended) or certain financial conditions are not met, including carrying $100 million of unrestricted cash on deposit. As of December 31, 2013, we had $150.0 million in borrowings outstanding under our revolving credit facility, and we were in compliance with all covenants. 2012. In November 2012, pursuant to a shelf registration statement, we issued an additional $175 million of non-callable 5.75% Senior Notes due June 1, 2017 ($175 million Add-on Notes) at a premium to yield 4.29%. The indenture governing the $175 million Add-on Notes contains non-financial and financial covenants, including requirements of a minimum fixed charge coverage ratio. Interest is paid semi-annually in June and December. We used the net proceeds from the offering to make capital contributions to our regulated subsidiaries. 2011. In January 2011, we replaced our $300 million revolving credit agreement with a new $350 million revolving credit facility, or the revolver. The revolver was unsecured and had a five-year maturity with non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt to EBITDA ratios and minimum net worth. Borrowings under the revolver bore interest based upon LIBOR rates, the Federal funds rate, or the prime rate. There was a commitment fee on the unused portion of the agreement that ranges from 0.25% to 0.50% depending on the total debt to EBITDA ratio. In May 2011, we exercised our option to redeem the $175 million 7.25% Senior Notes due April 1, 2014 ($175 million Notes). We redeemed the $175 million Notes at 103.625% and wrote off unamortized debt issuance costs, resulting in a pre-tax expense of $8.5 million. In May 2011, pursuant to a shelf registration statement, we issued $250 million of non-callable 5.75% Senior Notes due June 1, 2017 ($250 million Notes) at a discount to yield 6%. The indenture governing the $250 million Notes contains non-financial and financial covenants, including requirements of a minimum fixed charge coverage ratio. Interest is paid semi-annually in June and December. We used a portion of the net proceeds from the offering to repay the $175 million Notes and call premium and to repay approximately $50 million outstanding on our revolving credit facility. The additional proceeds were used for general corporate purposes. In connection with the issuance, we entered into $250 million notional amount of interest rate swap agreements (Swap Agreements) that are scheduled to expire June 1, 2017. Under the Swap Agreements, we receive a fixed rate of 5.75% and pay a variable rate of LIBOR plus 3.5% adjusted quarterly, which allows us to adjust the $250 million Notes to a floating rate. We do not hold or issue any derivative instrument for trading or speculative purposes. 44



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Table of Contents Liquidity Metrics The $500 million revolving credit agreement contains non-financial and financial covenants, including requirements of minimum fixed charge coverage ratios, maximum debt-to-EBITDA ratios and minimum tangible net worth. We are required not to exceed a maximum debt-to-EBITDA ratio of 3.0 to 1.0. As of December 31, 2013, there were no limitations on the availability under the revolving credit agreement as a result of the debt-to-EBITDA ratio. We had outstanding letters of credit of $28.8 million as of December 31, 2013, which were not part of our revolving credit facility and bore interest at 0.51%. In addition, we had outstanding surety bonds of $102.6 million as of December 31, 2013. At December 31, 2013, we had working capital, defined as current assets less current liabilities, of $241.1 million, as compared to $176.5 million at December 31, 2012. We manage our short term and long term investments with the goal of ensuring that a sufficient portion is held in investments that are highly liquid and can be sold to fund short term requirements as needed. At December 31, 2013, our debt to capital ratio, defined as total debt divided by the sum of total debt and total equity, was 35.0%, compared to 36.1% at December 31, 2012. Excluding the $72.8 million non-recourse mortgage note, our debt to capital ratio is 32.4%, compared to 32.7% at December 31, 2012. We utilize the debt to capital ratio as a measure, among others, of our leverage and financial flexibility. We have a stock repurchase program authorizing us to repurchase up to four million shares of common stock from time to time on the open market or through privately negotiated transactions. We have 1.7 million available shares remaining under the program for repurchases as of December 31, 2013. No duration has been placed on the repurchase program. We reserve the right to discontinue the repurchase program at any time. We did not make any repurchases under this plan during 2013 or 2012.



During the year ended December 31, 2013, 2012 and 2011, we received dividends of $18.0 million, $29.0 million, and $69.1 million, respectively, from our regulated subsidiaries.

2014 Expectations

In January 2014, we acquired a majority interest in U.S. Medical Management, LLC, a leading management services organization and provider of in-home health services for high acuity populations, for approximately $200.0 million. The transaction consideration was financed through a combination of cash on hand and 2,243,217 shares of Centene common stock. In December 2013, we signed a definitive agreement to purchase a majority stake in Fidelis SecureCare of Michigan, Inc., a subsidiary of Fidelis SeniorCare, Inc. The transaction is expected to close in the fourth quarter of 2014, subject to certain closing conditions including regulatory approvals, and will involve cash purchase price payments contingent on the performance of the plan over the course of 2015.



We expect to make capital contributions to our insurance subsidiaries of approximately $350 million during 2014 associated with our growth and spend approximately $95 million in additional capital expenditures primarily associated with system enhancements and market expansions. These capital contributions are expected to be funded by unregulated cash flow generation in 2014 and borrowings on our revolving credit facility.

Based on our operating plan, we expect that our available cash, cash equivalents and investments, cash from our operations and cash available under our credit facility, along with the issuance of shares of Centene common stock in connection with the acquisition of U.S. Medical Management, LLC discussed above will be sufficient to finance our general operations, planned acquisition of U.S. Medical Management, LLC and capital expenditures for at least 12 months from the date of this filing. 45



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CONTRACTUAL OBLIGATIONS The following table summarizes future contractual obligations. These obligations contain estimates and are subject to revision under a number of circumstances. Our debt consists of borrowings from our senior notes, credit facility, mortgages and capital leases. The purchase obligations consist primarily of software purchases and maintenance contracts. The contractual obligations and estimated period of payment over the next five years and beyond are as follows (in thousands): Payments Due by Period Less Than 1-3 3-5 More Than Total 1 Year Years Years 5 Years Medical claims liability $ 1,111,709$ 1,111,709 $ - $ - $ - Debt and interest 775,385 31,180 62,331 600,725 81,149 Operating lease obligations 126,186 25,350 50,073 31,963 18,800 Purchase obligations 51,549 28,404 19,424 2,732 989 Other long term liabilities 1 - - - - - Total $ 2,064,829$ 1,196,643$ 131,828$ 635,420$ 100,938



________________________________

1 Our Consolidated Balance Sheet as of December 31, 2013, includes $60,015 of other long term liabilities. This consists primarily of long term deferred income taxes, liabilities under our deferred compensation plan, and reserves for uncertain tax positions. These liabilities have been excluded from the table above as the timing and/or amount of any cash payment is uncertain. As of December 31, 2013, reserves for uncertain tax positions totaled $3,274. See the "Income Taxes" footnote for additional information regarding our deferred tax positions and accruals for uncertain tax positions. Other long term liabilities also include $6,888 separate account liabilities from third party reinsurance that will not be settled in cash. REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS Our operations are conducted through our subsidiaries. As managed care organizations, these subsidiaries are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to us. Generally, the amount of dividend distributions that may be paid by a regulated subsidiary without prior approval by state regulatory authorities is limited based on the entity's level of statutory net income and statutory capital and surplus. Our subsidiaries are required to maintain minimum capital requirements prescribed by various regulatory authorities in each of the states in which we operate. As of December 31, 2013, our subsidiaries, including Kentucky Spirit Health Plan, had aggregate statutory capital and surplus of $1,279.7 million, compared with the required minimum aggregate statutory capital and surplus requirements of $686.4 million. During the year ended December 31, 2013, we contributed $426 million of statutory capital to our subsidiaries. We estimate our Risk Based Capital, or RBC, percentage to be in excess of 350% of the Authorized Control Level. The National Association of Insurance Commissioners has adopted rules which set minimum risk-based capital requirements for insurance companies, managed care organizations and other entities bearing risk for healthcare coverage. As of December 31, 2013, each of our health plans was in compliance with the risk-based capital requirements enacted in those states. RECENT ACCOUNTING PRONOUNCEMENTS



For this information, refer to Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, included herein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with GAAP. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere herein. Our accounting policies regarding medical claims liability and intangible assets are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management. As a result, they are subject to an inherent degree of uncertainty. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors. 46



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Table of Contents Medical Claims Liability Our medical claims liability includes claims reported but not yet paid, or inventory, estimates for claims incurred but not reported, or IBNR, and estimates for the costs necessary to process unpaid claims at the end of each period. We estimate our medical claims liability using actuarial methods that are commonly used by health insurance actuaries and meet Actuarial Standards of Practice. These actuarial methods consider factors such as historical data for payment patterns, cost trends, product mix, seasonality, utilization of healthcare services and other relevant factors. Actuarial Standards of Practice generally require that the medical claims liability estimates be adequate to cover obligations under moderately adverse conditions. Moderately adverse conditions are situations in which the actual claims are expected to be higher than the otherwise estimated value of such claims at the time of estimate. In many situations, the claims amounts ultimately settled will be different than the estimate that satisfies the Actuarial Standards of Practice. We include in our IBNR an estimate for medical claims liability under moderately adverse conditions which represents the risk of adverse deviation of the estimates in our actuarial method of reserving. We use our judgment to determine the assumptions to be used in the calculation of the required estimates. The assumptions we consider when estimating IBNR include, without limitation, claims receipt and payment experience (and variations in that experience), changes in membership, provider billing practices, healthcare service utilization trends, cost trends, product mix, seasonality, prior authorization of medical services, benefit changes, known outbreaks of disease or increased incidence of illness such as influenza, provider contract changes, changes to fee schedules, and the incidence of high dollar or catastrophic claims. We apply various estimation methods depending on the claim type and the period for which claims are being estimated. For more recent periods, incurred non-inpatient claims are estimated based on historical per member per month claims experience adjusted for known factors. Incurred hospital inpatient claims are estimated based on known inpatient utilization data and prior claims experience adjusted for known factors. For older periods, we utilize an estimated completion factor based on our historical experience to develop IBNR estimates. The completion factor is an actuarial estimate of the percentage of claims incurred during a given period that have been received or adjudicated as of the reporting period to the estimate of the total ultimate incurred costs. When we commence operations in a new state or region, we have limited information with which to estimate our medical claims liability. See "Risk Factors - Failure to accurately predict our medical expenses could negatively affect our financial position, results of operations or cash flows." These approaches are consistently applied to each period presented. Additionally, we contract with independent actuaries to review our estimates on a quarterly basis. The independent actuaries provide us with a review letter that includes the results of their analysis of our medical claims liability. We do not solely rely on their report to adjust our claims liability. We utilize their calculation of our claims liability only as additional information, together with management's judgment, to determine the assumptions to be used in the calculation of our liability for claims. Our development of the medical claims liability estimate is a continuous process which we monitor and refine on a monthly basis as additional claims receipts and payment information becomes available. As more complete claims information becomes available, we adjust the amount of the estimates, and include the changes in estimates in medical costs in the period in which the changes are identified. In every reporting period, our operating results include the effects of more completely developed medical claims liability estimates associated with previously reported periods. We consistently apply our reserving methodology from period to period. As additional information becomes known to us, we adjust our actuarial models accordingly to establish medical claims liability estimates. The paid and received completion factors, claims per member per month and per diem cost trend factors are the most significant factors affecting the IBNR estimate. The following table illustrates the sensitivity of these factors and the estimated potential impact on our operating results caused by changes in these factors based on December 31, 2013 data: 47



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Table of Contents Completion Factors (1): Cost Trend Factors (2): Increase Increase (Decrease) (Decrease) in (Decrease) (Decrease) in Increase Medical Claims Increase Medical Claims in Factors Liabilities in Factors Liabilities (in thousands) (in thousands) (2.0 )% $ 137,100 (2.0 )% $ (36,800 ) (1.5 ) 102,300 (1.5 ) (27,700 ) (1.0 ) 67,800 (1.0 ) (18,500 ) (0.5 ) 33,800 (0.5 ) (9,200 ) 0.5 (33,500 ) 0.5 9,200 1.0 (66,500 ) 1.0 18,700 1.5 (99,100 ) 1.5 28,000 2.0 (131,600 ) 2.0 37,300



Reflects estimated potential changes in medical claims liability caused by (1) changes in completion factors.

Reflects estimated potential changes in medical claims liability caused by (2) changes in cost trend factors for the most recent periods.

While we believe our estimates are appropriate, it is possible future events could require us to make significant adjustments for revisions to these estimates. For example, a 1% increase or decrease in our estimated medical claims liability would have affected net earnings by $7.0 million for the year ended December 31, 2013. The estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our providers and information available from other outside sources. The change in medical claims liability is summarized as follows (in thousands): Year Ended December 31, 2013 2012 2011 Balance, January 1, $ 815,161$ 518,840$ 456,765 Incurred related to: Current year 9,072,867 6,836,177 4,256,645 Prior years (78,226 ) (55,096 ) (65,377 ) Total incurred 8,994,641 6,781,081 4,191,268 Paid related to: Current year 7,975,367 6,024,720 3,744,475 Prior years 722,726 460,040 384,718 Total paid 8,698,093 6,484,760 4,129,193 Balance, December 31, $ 1,111,709$ 815,161$ 518,840



Claims inventory, December 31 622,200 619,200 432,200 Days in claims payable 1

42.4 38.5 43.4



________________________

1 Days in claims payable is a calculation of medical claims



liability

at the end of the period divided by average expense per



calendar day

for the fourth quarter of each year. Medical claims are usually paid within a few months of the member receiving service from the physician or other healthcare provider. As a result, the liability generally is described as having a "short-tail," which causes less than 5% of our medical claims liability as of the end of any given year to be outstanding the following year. We believe that substantially all the development of the estimate of medical claims liability as of December 31, 2013 will be known by the end of 2014.



Changes in estimates of incurred claims for prior years are primarily attributable to reserving under moderately adverse conditions. In addition, claims processing initiatives yielded increased claim payment recoveries and coordination of benefits

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related to prior year dates of service. Changes in medical utilization and cost trends and the effect of medical management initiatives may also contribute to changes in medical claim liability estimates. While we have evidence that medical management initiatives are effective on a case by case basis, medical management initiatives primarily focus on events and behaviors prior to the incurrence of the medical event and generation of a claim. Accordingly, any change in behavior, leveling of care, or coordination of treatment occurs prior to claim generation and as a result, the costs prior to the medical management initiative are not known by us. Additionally, certain medical management initiatives are focused on member and provider education with the intent of influencing behavior to appropriately align the medical services provided with the member's acuity. In these cases, determining whether the medical management initiative changed the behavior cannot be determined. Because of the complexity of our business, the number of states in which we operate, and the volume of claims that we process, we are unable to practically quantify the impact of these initiatives on our changes in estimates of IBNR.



The following are examples of medical management initiatives that may have contributed to the favorable development through lower medical utilization and cost trends:

• Appropriate leveling of care for neonatal intensive care unit hospital

admissions, other inpatient hospital admissions, and observation admissions, in accordance with Interqual or other criteria.



• Tightening of our pre-authorization list and more stringent review of

durable medical equipment and injectibles.

• Emergency department, or ED, program designed to collaboratively work

with hospitals to steer non-emergency care away from the costly ED setting (through patient education, on-site alternative urgent care settings, etc.)



• Increase emphasis on case management and clinical rounding where case

managers are nurses or social workers who are employed by the health

plan to assist selected patients with the coordination of healthcare

services in order to meet a patient's specific healthcare needs. • Incorporation of disease management which is a comprehensive,



multidisciplinary, collaborative approach to chronic illnesses such as

asthma. • Prenatal and infant health programs utilized in our Start Smart For Your Baby outreach service.



Goodwill and Intangible Assets

We have made several acquisitions that have resulted in our recording of intangible assets. These intangible assets primarily consist of customer relationships, purchased contract rights, provider contracts, trade names and goodwill. At December 31, 2013, we had $348.4 million of goodwill and $48.8 million of other intangible assets.

Intangible assets are amortized using the straight-line method over the following periods: Intangible Asset Amortization Period Purchased contract rights 5 - 15 years Provider contracts 4 - 15 years Customer relationships 5 - 15 years Trade names 7 - 20 years Our management evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of goodwill and other identifiable intangible assets. If the events or circumstances indicate that the remaining balance of the intangible asset or goodwill may be impaired, the potential impairment will be measured based upon the difference between the carrying amount of the intangible asset or goodwill and the fair value of such asset. Our management must make assumptions and estimates, such as the discount factor, future utility and other internal and external factors, in determining the estimated fair values. While we believe these assumptions and estimates are appropriate, other assumptions and estimates could be applied and might produce significantly different results. Goodwill is reviewed annually during the fourth quarter for impairment. In addition, an impairment analysis of intangible assets would be performed based on other factors. These factors include significant changes in membership, state funding, medical contracts and provider networks and contracts. The fair value of all reporting units with material amounts of goodwill was substantially in excess of the carrying value as of our annual impairment testing date. 49



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