ModivCare Inc.

Good morning, everyone, and thank you for joining us this morning for Providence’s conference call and webcast to discuss financial results for the second quarter, ended June 30, 2012. The press release was issued last night.

If anyone wants to be added to an e-mail list just give me a call at Cameron Associates at (212) 554-5469.

Before we begin, please note that we have arranged for a replay of this call. The replay will be available approximately one hour after the call’s conclusion, and will remain available until August 16.

Replay number is (888) 286-8010 with the pass code 30949683.

This call is also being webcast live with the replay available. To access the webcast, go to www.provcrop.com, and look under the events calendar on the IR page.

Before we get started, I’d like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today’s conference call as well.

During the course of this call, the company may make projections or other forward-looking statements regarding future events of the company’s beliefs about its financial results for 2012 and beyond. We wish to caution you that any statements are just predictions and involve risks and uncertainties.

Actual results may differ materially. Factors which may affect actual results are detailed in the company’s filings with SEC including company’s 10-K for the year-ended December 31, 2011.

The company’s forward-looking statements are dynamic and subject to change, therefore these statements speak only as of the date of this webcast, August 9, 2012. The company may choose from time-to-time to provide updates, and if they do, we'll disseminate the updates to the investing public.

I’d now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead Fletcher.

Alison, thank you very much. Good morning, everyone.

Here at Houston with Michael Deitch, our CFO; and Craig Norris, our Chief Operating Officer, and also on the line from Atlanta, Herman Schwarz, the CEO, LogistiCare. We’re going to keep our scripted remarks relatively brief, and we expect to have a lot of questions this morning.

Our extraordinary growth and win record continue to create short-term earnings challenges for us in the quarter and in the back half as we ramp up some of the largest contracts ever awarded in this phase. It’s critical to us that every launch be successful as many of the recent wins, especially New York City and Texas, are prototypical, with additional regions available that we do well.

We have seen competitors cut corners recently, and launching a few new states only to be removed within months. New York and Texas represent several hundreds of millions of dollars in new opportunity if we perform well and they expand statewide.

Craig will discuss the social services business at a macro level what in 2013 and beyond our opportunities that now have been enhanced by the recent Europe’s Supreme Court decision. A number of states have already announced implementation plans for Medicaid expansion, and to date, we’re only seeing 8 states out of the Medicaid expansion.

Florida, Iowa, Kansas, Louisiana, Nebraska, South Carolina, Texas and Wisconsin, all republican leaning states.

Now I’ll let Michael walk you through the quarter.

Good morning, everyone. In our second quarter of 2012 revenue totaled $278.9 million, up from $235.3 million for the second quarter of 2011, an 18.5% increase.

Second quarter operating income totaled almost $4.4 million, which was 1.6% of our revenue as compared with $9.9 million to 4.2% of revenue for the second quarter of last year. Second quarter net income totaled $1.4 million, which was 0.5% of our revenue, compared with almost $7.6 million and 3.2% of revenue for the second quarter of last year.

Net income for Q2 of last year included a $2.7 million bargain purchase gain related to an acquisition. Second quarter diluted earnings per share totaled $0.11 on approximately 13.4 million diluted shares outstanding, compared with $0.55 for the second quarter of last year.

Our tax rate for Q2 of this year was 43.3% and projecting our tax rate for Q3 and Q4 of this year to be approximately 43.1%.

In Q2 of this year, our LogistiCare subsidiary incurred approximately $1.3 million in start-up expenses to establish or enhance operations in Connecticut, Georgia, New York, South Carolina and Texas, combined with approximately $1.8 million, and start-up costs from last quarter, we had incurred approximately $3 million in start-up costs year-to-date.

For the 6 months ended June 30, 2012, we have spent $6.3 million on fixed asset additions, primarily technology-related, and mostly to support business growth and LogistiCare.

At the end of our second quarter, our days sales outstanding was 34 days and our management fee days sales outstanding was 78 days. Cash provided by operating activities was good in Q2, totaling almost $8 million, allowing us to report cash provided by operations of approximately $17 million for the first half of this year.

At the end of our second quarter, we had $50 million in cash in short-term and long-term debt obligations totaling approximately $145.5 million.

With that I’ll turn the call over to Craig Norris, our COO.

Thank you, Michael. For the quarter, our direct client census, on the social services side, was approximately 53,000 clients.

This is a decrease from the prior year quarter of roughly 6,000 clients. We have continued to see census pressure resulting from reductions in our workforce and job training programs in Canada and select markets in the United States.

The NET segment had approximately 13.6 million individuals eligible to receive services under our LogistiCare division, an increase of approximately 4 million eligible members compared to the same quarter in 2011.

All direct and indirect clients have been served from 527 local offices and 43 states. The District of Columbia and Canada combined between our owned and managed entities are approximately 11,000 employees serving 895 contracts.

For the quarter, operations performed close to plan overall, excluding the unusual spike in healthcare claims, which we do not believe at this time will continue at these recent historical levels. In addition, we have made some planned design changes to our health insurance program, effective July 1, that will reduce overall costs.

In the social services segment we're seeing some challenges and a few of our workforce job training operations that are in the middle of system design changes. Additionally, we're still transitioning in a few markets that are undergoing managed care initiatives.

These are not necessarily unusual changes, but it does require adapting to the new operating environments and compliance standards.

In the social services segment, recently we've seen significant RFP success by winning contract in the Midwest and likely our largest single RFP awarded in the social service segment in the southwestern state. Both awards will be going into negotiation soon, but we do not want to discuss further details at this time at the request of the contracting entities.

Now I'll hand over to Herman to more detailed on LogistiCare.

Thank you, Craig, good morning, everyone. NET segment revenue was up 33% from the same quarter last year, growing from a $141.9 million in 2011 to $188.8 million this year.

Second quarter revenue also represented an increase of nearly 15% over the first quarter of this year. The growth over the last year continues to be driven from the implementation of state contracts in Wisconsin and Missouri during the second half of 2011.

The first quarter 2012 expansion of the state contract in South Carolina, and during the second quarter of the addition of new regions to the state programs in Connecticut and Georgia, as well as the start of the Texas contract for the Dallas region, and the start-up of the first phase of the contract to manage the New York City program.

We also continue to experience positive revenue comparisons as a result of increased presence in Florida, Hawaii, Louisiana, Michigan and New York, through new managed care contracts.

While we’re pleased and proud of the efforts to secure all of this new business, we do recognize that it has come at a short-term price to our margins. We have discussed in previous calls the price pressure that occurred in 2011, with competitors aggressively trying to take our market leading share.

We successfully backed these challenges with debt reduced rate and several incumbent contracts and chose to bid to win on new contract opportunities. The reduction in rate, combined with significant start-up costs and unexpectedly high utilization, negatively impacted margins in Q2 and the first half.

Our transportation expense is running at 81.8% of revenue year-to-date in 2012 versus a comparable 78.5% in 2011. On a positive note, our non-transportation expense as a percent of revenue has remained relatively flat year-to-year in spite of the significant start-up expenses and the addition of the large administrative service-only contract in New York City, which requires the same operating expense on a lower recognized revenue base.

We’re taking steps to improve the margins in a variety of ways. Those states where utilization has increased substantially and we have a good argument for price adjustment.

We’re actively engaged in negotiations.

In some states we are also pursuing policy changes, which will have the effect of reducing or at least stemming utilization trends. These policy changes must also be negotiated with the client and then communicated over a reasonable timeframe to allow for the change and behavior.

Finally, despite relatively high fuel costs, we are adjusting trip assignments in renegotiating provider rates in several markets in order to reduce trip costs.

In terms of the sales pipeline, 2 states, Alabama and Maine, which are new to the broker model, have recently released RFPs. We are reviewing the RFPs and assessing the attractiveness of each opportunity.

Given the pressure on our margins, we will not willingly enter into contracts where the potential risks far outweigh the possible rewards. Frankly, based on what we know today, we believe one of these states enjoy significant underutilization and underreporting of NET costs in this current program.

We are attempting to highlight these concerns in the question-and-answer sessions, but may ultimately decide this is not a good opportunity to pursue.

I’ll now turn the call back over to Fletcher.

Thank you, Herman. As you now know from our release, audit committee has elected to sustain the guidance.

We have a number of moving targets that are impacting earnings, but are not necessarily predictable.

We are now running the business focused on short-term results and encourage investors to look at the macro trend. The impact of the Supreme Court decision, the new movement, as Craig discussed, in children services outsourcing and the continued expense in the NET privatization.

We expect 2 more quarters of start-up expense in New York City, and our agreement with Herman is to assure that all 5 of our start-ups are incredibly successful, and that our payers remain satisfied. We are investing in brand loyalty here, and we know that state Medicaid directives are some of our best referral sources when it comes to new business.

As Herman mentioned, 2 new states have released RFPs to outsource transportation. Simultaneously, we have 6 social services based in Canada that should be announced within the next couple of months and have just been awarded the largest contract ever in social services in southwestern state.

Medicaid opportunities, we believe, will increase significantly, especially in line with the recent Supreme Court decision that affirm the expansion of Medicaid enrollment but will allow some states to opt out. Until we know what states intend to expand enrollment, we cannot predict the impact to the company revenue and earnings.

Kathryn will now open the line for questions.

The first question I had was, do you have the breakdown of what the expenses were that were tied directly to New York City in the quarter?

Let me get back to you, Nick.

Okay, fine. Just in terms of the $500,000 in startup costs that you’re expecting in the second half, should we expect that to be pretty even over the next 2 quarters or do you think you will see more of that in the third quarter as opposed to the fourth quarter?

Actually, Nick, most of those costs will be the fourth quarter. The way the New York City is working has phased in program and starting January 1, 2013, at least as of today, as the scheduled date is, the move of the managed care population in New York City, should get moved into the state contract, that is a huge population.

So in mid-October, all of November, December, we will be hiring and training up another 80 or so people, and that’s the bulk of that start-up.

Got you, okay.

Nick, got the number for you, 700,000.

700,000, okay. All right, perfect.

I guess just one more from me in general, when do you guys expect to start seeing some of the benefits from the increases in Medicare enrollment? I mean is it something we’re expecting just to slowly ramp up and hopefully take off or is it something where you could see a pretty significant impact right away, and I guess a little bit of the timing in that?

We wouldn’t expect to see the census related to that until the back half of ‘13, you’re seeing in many states play in for that and begin to talk about strategies they will implement that. We made the bidding activity, but in terms of actual revenue, it would be in the back half of ‘13.

Fletcher, on those 8 states that you mentioned, that pulled out of Medicaid expansion, what percentage of our revenue does that currently represent?

We’d have to get back to you on that. Remember, this is all expanded revenues that wouldn’t impact any of our current book of business.

All right. I mean, just in terms of your current base of business, how much do those base represent exposure?

They’re all relatively small. Florida is probably the largest of those 8.

We can do a little research for you. This, from our perspective, is ideological.

The way the Medicaid expansion program is going to work is if you opt in, the Federal government will pay 100% of those costs to take you from 100% of property to 133% property. Arizona, as you know, very shrewdly recently, retracted back to 100%, we were at 133% in Arizona and now if the state does spring forward to the new enrollment the Feds will pay all of that.

So you have seen republican presidential candidate and a number of republican governors express their desire to repeal this legislation, so you do have some partisan issues that have crept into Medicaid and Medicaid expansion, we expect that very few states will actually opt out.

And then, I guess this question is for Herman, on the LogistiCare contracts that came up for rebid and you had to cut price on, just to get a sense of the competitive landscape, what percentage of those contracts does inform a contractor you have to reduce price on, I’m not sure how much, just, what percentage of overall contracts?

What percentage of the contracts that we have to reduce?

Yes.

I doubt, I’ll be guessing, I probably had that I mean I can tell you like Virginia, which was our second largest contract, we had to reduce price in order to keep that contract.

But was it fairly widespread or was it more concentrated?

It was almost across the board. We had, before 2011, we were typically seeing 2 or 3 competitors come into the marketplace and compete on different RFPs and we were by far the largest competitor to all those competitors.

In 2011, we had 2 very large corporate entity, divisions of large entities with deep pockets, got very aggressive and want to break into the space. So they came in and aggressively priced down.

For instance, in Wisconsin, which we won that bid, we were the highest price bidder, but we still had to bid it probably lower than what we would have preferred to do just because of the competitive environment.

Okay, and then I think it's my last question on that is, but the policy change, which is going to implemented or going to be implementing to get some of the pricing back, how long is that going take to roll through?

Well, every state’s a little bit different, Jack, unfortunately, because some cases they have to do it through community-wide meetings where they announce it, explain it, in other places they can just execute, because it’s effective immediately. Even if they can do it immediately there is always the kind of transition period where we work with the client, to try to educate the beneficiaries versus just cutting them off at the knee.

In some cases we think that some of these policy changes can be fairly immediate in the next couple of months and others that are probably take till 2013 before we start seeing an impact.

I think I have a couple questions on social services first. I guess normally see in the social services segment, there is I think a sequential decline in revenues from the second quarter to the third quarter due to normal seasonality, and I think that’s usually anywhere between $3-$4 million and it tends to rebound in the fourth quarter.

Should we expect the same pattern this year or not because of the softness in the quarter?

This is Craig. I still think you’ll see that phenomenon, because the school summer programs are selling a lot less than when regular school is in session.

So I think you’ll see that rebound effect similar to years past. When school -- regular school season starts.

Okay, and then on the direct client, since it’s down about 10% year-over-year, I guess if you can give us a little commentary there on the main cause?

Sure. Most of the volume of the central’s drop is, as I said in my scripted remarks is coming from the workforce development program.

Canada specifically had a huge drop in census. Canada is going through, what they called a ‘system transformation’ where they’re combining federal and provincial funding and changing these programs.

And this transformation has some delays and that has affected contracts, has affected census. I’m hoping they get back on schedule there, but that’s been part of the delay over there.

The other area we had decline was workforce contract. We got out of in El Paso.

We got out of that for rate reasons and that was a fairly high census program, but the rates were just not attractive and to move forward, those really are the 2 big drivers in census change.

Okay and then I guess, Herman, I’ve a couple of LogistiCare-related questions. When we look at the cost, NET services as a percent of total revenue, we’ve seen a tick up from the first quarter to second quarter.

So given the expectations for the continue start up costs, should we assume that that it’s approximately the same in the second half or should it improve some from the first half run rate?

When you say cost of NET services, you mean in total, you are not talking about specific of transportation? Well, what you’re going to see is typically the third quarter is a challenging quarter for us because of the seasonality that’s inherent in back-to-school and programs and people taking their kids to doctor before school starts.

So we typically do see the third quarter as being a lower margin quarter. What’s going to happen this year because of those start-up costs, and as I mentioned earlier, primarily those are going to hit us in the fourth quarter, you’re going to see the third and fourth quarters be about the same.

So it’s going to even out over the second half and then hopefully as we get past these start-up costs, we’ll start see in the back to the normal of seasonality that we enjoy in the business.

Okay. And then also for modeling purposes, if we’re to assume, say, no new contract wins, at what point do you think that we should start to expect to see the current start-up cost moderate and reach more, I guess, normalized level?

We do not have any more start-up or any more contract wins than the massive start-up costs that we have experienced to-date are not going to be evident at all. Typically, we win a few managed care contracts.

They don’t typically involve the same kind of start-up expense that a state contract does, because we’re not having to go open a facility and hire new, it’s usually just a ramp-up of some staffing to handle the call. So again, if we don’t win either the Alabama or main RFPs, if we choose to go after them then you really shouldn’t see any of these big significant start-up costs coming through after the fourth quarter.

Now if New York is delayed, again, as I just mentioned earlier, the start-up New York is delayed that population gets delayed beyond January 1 and they tell us soon enough, then it might delay us incurring those start-up costs into 2013, and not having to incur them in the fourth quarter. The real negative could be what happened to us in the second quarter, which is where we had to incur start-up costs, and then at the last minute, the state delayed the phase-up that was scheduled to start on July 1 and moved it to August 1.

So we had to carry the labor that we had hired in late May and paid for in June that we thought we’re going to start generating revenue on in July. We didn’t start generating revenue on until August, and we carried that cost through July, so that will have a negative impact on the third quarter.

So I mean, again, you got to understand, we’re dealing with state governments here, there’s a lot of unpredictability, we do the best we can in terms of estimating and dealing with it. But as Fletcher mentioned earlier, the most important part for us is making sure these implementations go well and that we’re working with the client, because in the long run, we believe we’ll get it back.

Okay, so let's say theoretically in the fourth quarter, with all those things cost related that there’s no new wins or anything like that and we normalize in the fourth quarter...

I mean, you’ll have $500,000 of start-up costs in the fourth quarter that we should not experience going forward.

Okay. So how should we think about the total cost of NET services to be as a percent of LogistiCare’s revenues at that point if those things happen or I guess...

Well, I mean, as we’ve said, I guess consistently, we expect NET to generate an EBITDA in that 6% to 6.5% range, and we would expect that once all these new start-ups are in place, and we got everything under control, we will be generating about that level.

It's not margin where we're struggling and trying to focus, it's all of the things that are impacting margin as it relates to new account depreciation and we have to add significant capital, start-up costs now in at least 2 contracts that we know, we have one possible start-up contracts and significant other, so it’s just made it impossible for us to have an intelligent conversation with our board on how to forecast all that. What we didn't want to do is to pick a number and then miss, so we think the most prudent thing for us to do is to just spend guidance, try and get our arms around, some of these kind of things and then you should begin to see, make some sense out of all this for 2013, so there is no real significant impact to operating margins, other than these kind of extraordinary external events that are affecting the margins.

And it’s probably good to clarify what I mean by start-up costs, for the most part, we have that FTE expense, and we have to hire staff, rent an office, furnish and supply office, training people and that's our pre-revenue dollars. In the New York City, they're bringing up one of each of the 5 boroughs, one at a time, so that's why we got a continual start-up challenges there as we bring up one borough after another, it's almost like I’m going to have 5 separate startup contracts under that one agreement.

Let me just interject it. The other big piece of it is certainly have to uses the communication part of it, which is either having to do a mailing to all of the beneficiaries in that market end or getting out and meeting all of the medical facilities and communicating the new programs.

So for instance, in New York, with each phase, we have to have teams, 5 to 8 teams of 2 people each out in the marketplace calling on all the medical facilities, handing out documents, teaching them how to fill out forms and how to now order trips for their patients, which is a little bit different than how they’ve done under the state program. Well we don’t have, frankly we don’t have 8 teams of people sitting in New York ready to go, so that requires travel cost and sending in experienced people from other places.

So as Fletcher indicated, each one of these is like a new implementation. If the New York City contracts were on a capitated basis and measured from a revenue perspective like the rest of our businesses, it would be basically the equivalent of our $200 million to $220 million contract, which all by itself would be close to 20%, 25%, 30% of our business.

So it is a massive contract, I mean, we will have, by the time we’re done implementing, close to 300 people working on the New York City program, that will be 15% of our headcount will be in New York City. So this is a huge program, the state is extremely nervous about it, the hospital association in New York is very strong, and the state is very sensitive to making sure that things go well.

And so they have requested, and we have obliged, to make sure that we put the resources in place to make sure that it goes well so that it can be a long-term healthy relationship for both sides. So that’s really what’s caused a lot of this expenditure during 2012.

Yes, I have number of questions just on LogistiCare side for Herman, the New York City start-up costs that we’re talking about in the back half of the year, you and I have talked about the start-up costs in the past and we thought that largely be behind us by now through the mid-point of the year. So I guess what’s changed?

It feels like the states are mandating changes that aren’t consistent with what you signed up for, and my concern is we’re not getting the compensation for that on the revenue of that on the other side. Again, I think you guys have said you’re targeting EBITDA margins of 6% to 6.5%, by the way in the past it was 6.5%, so, we’re hedging down, and that’s after the program’s up and running.

So I thought we’re supposed to be absorbing this and still getting overall over the duration of the contract, 6.5% operating margins and now it’s like we’re eating the upfront cost and then the reward is, we will get 6% to 6.5% after we eat the upfront cost, that doesn’t incorporate returns for that. What’s really changed?

Are they pushing things out, are they pushing requirements on you guys that wasn’t originally anticipated when you signed the contract? Clearly, as shareholders, we’re taking a beating here and I guess I want to understand why?

Well, Rick, I mean, the understanding was that we weren’t going to incur anymore of New York’s start-up costs to the year, that was a misunderstanding or miscommunication, because the thing was phased throughout the year, and every one of those phases was a new start-up, which required new staffing. Our plan has always been to staff as needed, not from all in place and then have them sitting around, waiting for the revenue to start now.

I mean the main difference is, I think, that from a standpoint of what we're talking about before Texas was out of the way, South Carolina was out of the way, Georgia was out of the way, Connecticut was out of the way in the first half of the year. So a lot of that start-up costs that Michael referred to also involve as well South Carolina, the other 5 or 6 states that we talked about.

New York was always scheduled to implement over phases and always had start-up costs associated with that. Has there been a change from what we expected?

Not drastically. As I indicated, I think the state as we get into it and we learn more about how their program is currently working and they expressed their nerves and what's going on there.

They may turn up the dial a little bit in terms of, as I mentioned, having to send in more teams to do the communication but I would say that the bulk of those start-up costs were expected and are built into our pro formas for that contract over time. If I'm hedging on this 6%, 6.5%, it’s not because of the start-up costs, it’s because of the utilization increases that have occurred across the board and the states are not as willing as they might once have been to just walk in and let us negotiate rate increases, because of their own concerns and budget problems.

So if there’s pressure in the market it’s that they have not been as reasonable as they might once have been in terms of granting rate increases when utilization spikes.

So with that in mind I mean it feels like you need to get them on the front end and if that means missing business that’s not going to be profitable, then as a shareholder, I don't mind foregoing that.

Well, that's what I just said, in terms of that one contract that we're looking at now, we believe that that might be the case and there is a high likelihood we won’t bid that contract for that reason.

Let’s get into the detail then. How many contracts do you have now that you are not making money on and that you are hoping to adjust the rate but you’re telling us the environment isn’t conducive to that?

If we can’t adjust the rate to a point where we are making a reasonable return and we have the ability to get out of that contract, we will.

But how many states are underwater in your business?

2 or 3.

And are they actively being pursued?

Yes.

And I know last time we spoke there were constructive discussions going, is that still true or not?

Yes.

Is it the utilization that you are not being compensated for and there...

Yes, and as we have talked about in the past, the compensation and the conversation about utilization there is usually a lag. We have to be able to walk in, present the data, make a case, and typically the state client has to go back to either their purchasing group or the governor’s office or wherever it may be and get approval for rate increase, that is not a task process, it takes time, it is in negotiations.

And then frankly, our model is built on us absorbing some of that utilization and if a state wants to play hard ball, their push back is going to be, that’s the risky take, particularly if they are under their own budget constraint. So that’s the dance we are doing now.

We fully anticipate getting rate increases in all 3 of the states that I just mentioned to you, not by name, but in generically, I don’t know how much yet and I expect that it will help us improve our economics as we get into the second half of the year and into 2013.

Herman, I can’t think of a single instance where we’ve asked for a rate relief and had the data that it was not granted. We’ve had some go on for as long as a year I remember, but I don't know that we have ever actually failed to the point where we thought about terminating account.

We have one, that's recently happened. In fact, that state will come out with a…

So generally, Rick, we're quite successful in bringing these issues to our payers. Remember, these are long-term, multiyear contracts.

We would invest, Michael said $1 million or $2 million in New York City, if it was an annual contract. So we see these as opportunities to invest upfront win multi years of business and if we do have issues, enter contracts, payers have always been pretty good about working with us.

So we continue to push Herman to that 6.5% or better, and as things settle out, I think you will see our margins improve probably above that, particularly, if we don't have the competitive energy that we had last year. We are not going to know that until we see who bids in Alabama, I’d be very surprised that we have the same level of competitive activity in those new bids.

So how is the, Herman, on the 4, 5 contracts that are new, that have come up, how are they operating, were there any timing issues on start times, that hurt us, we absorb more of the infrastructure that was there without revenues against it, did they come up on schedule I guess is one of the clarifications from….?

I mentioned New York did not, the second phase of New York did not start on schedule, it was pushed back 30 days, so we carried that cost for 30 days. All the rest, I believe, do start-up when they’re expected to, but again, we incur the costs prior to the revenue being recognized.

And frankly, the other thing that’s going on here is we have so many of one’s historically we have been able to absorb some of these start-up costs in our base business, because we usually only have one going on at a time. Wisconsin, we talked about last year was an unusual one, because of some additional costs that came in.

And frankly, if it’s not something that when we were a private company, ever was a big issue, because the timing of the costs incurred and the revenues being reported didn’t matter that much. It is a little bit more sensitive, obviously, as a public company, because we do incur the costs upfront and we make the revenue back later.

So if we have a lot of them going on like we have this year, we are incurring expense ahead of the revenue, it takes a while to bring enough revenue in to cover that.

I know the weather, we talked about weather last quarter impacting utilization, this quarter you can’t blame it on weather, right? So what’s actually going on there?

I guess I’m a little concerned that this increased communication in bringing the awareness to the beneficiaries of the service might be contributing to the increased utilization. How many states are experiencing increased utilization and what are you attribute it to?

Well, look, I mean communication is always the sensitive topic. We obviously do not go out and communicate and try to encourage people to utilize the service; however, we do have an obligation contractually and morally to provide transportation when it’s requested and when it’s an eligible service.

And as part of our contract, at times we are required to send out mailings and do different things, so that is something we try not to over-communicate, I don’t want to give the impression that we’re out there trying to sell the service. But we do have an obligation to make sure people understand how to use it.

I attribute the utilization increase to the fact that the economy in many cases has not gotten better for a lot of people that we are doing a good job in many of these states where we’ve come in and taken over regions and we are better than our competitors and people talk, it is a word of mouth community in terms of the Medicaid beneficiaries, and they hear about it or they tell their neighbors and more and more people called. It’s also a function of the fact that the populations themselves are not growing like they did in ‘09 and ‘10 in terms of more people coming on to the Medicaid role.

So if the population is staying flat, therefore, our revenue on a monthly basis is staying flat, even a slight tick in utilization is going to compress margins. So I attribute it to the fact that that’s kind of a natural progression, but what happens in these programs over time is that utilization ticks up, I do think the economy and fuel prices have exacerbated that.

I mean, I understand that and I wasn’t advocating for trying to snooker the Medicaid population. I guess, I just think if that’s a fact of life, you need to be compensated for it, because you’re not in a not-for-profit business, and it’s starting to feel like a not-for-profit business.

Well, Rick, I mean you’re right. And it’s a touchy subject for these states in terms of when they are struggling as to how much their vendors should be making.

So we do walk a fine line. I will tell you, Wisconsin, which has higher utilization than we might have imagined -- you've seen the news, all of you have, and they don't quite know what side of the political spectrum they are on, conservative or liberal, so you’ve got a conservative governor, trying to hold down costs and you’ve got a nearly split in terms of a liberal community, that has a lot of advocates for the folks out there, pushing hard.

That is one state where our utilization is higher than we would have expected and that's one state that we are working on all the things I indicated there, policy changes, rate negotiations, trip cost, everything. So if we can get that one in line, then we’ll go a long way towards turning the corner.

Kathryn, thank you, thank you, everyone and if we didn’t get to your question, please call Michael and I back. I think the important message from us today is to give us a little patience as we work through these growing pain kind of issues.

We've spent $0.15 a share out of this year investing in new contracts that were probably worth over $200 million of revenue annually in the out years. We wouldn't be having this conversation except for that is kind of where we think it's worthwhile investment and it's clearly trumped our competitors, given the energy that we’ve put into this space.

And we remain optimistic about the out years, very bullish on how we fit in with the whole Medicaid reform and continue to do the best work we possibly can on behalf of these payers, so thank you very much.

We have some conference schedules coming up late summer, in the fall, and we are happy to visit with anyone that wants to see us. And again, if you have a question, please give us a call.

Thank you very much.