Forward-looking Statements

This Quarterly Report on Form 10-Q, and other information we provide from time-to-time, contains certain "forward-looking" statements as that term is defined by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding our expected future financial position, membership, results of operations or cash flows, our continued performance improvements, our ability to service our debt obligations and refinance our debt obligations, our ability to finance growth opportunities, our ability to respond to changes in government regulations and similar statements including, without limitation, those containing words such as "believes," "anticipates," "expects," "may," "will," "should," "estimates," "intends," "plans" and other similar expressions are forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors:

• local, state and national economic conditions, including their effect on the rate increase process and timing of payments;

• the effect of government regulations and changes in regulations governing the healthcare industry;

• changes in Medicaid and Medicare payment levels and methodologies;

• liabilities and other claims asserted against us;

• our ability to attract and retain qualified personnel;

• our ability to maintain compliance with all minimum capital requirements;

• the availability and terms of capital to fund acquisitions and capital improvements;

• the competitive environment in which we operate;

• our ability to maintain and increase membership levels;

• demographic changes;

• increased use of services, increased cost of individual services, pandemics, epidemics, the introduction of new or costly treatments and technology, new mandated benefits, insured population characteristics and seasonal changes in the level of healthcare use;

• our ability to enter into new markets or remain in our existing markets;

• our inability to operate new products and markets at expected levels, including, but not limited to, profitability, membership and targeted service standards;

• changes in market interest rates or any disruptions in the credit markets;

• catastrophes, including acts of terrorism or severe weather; and

• the unfavorable resolution of new or pending litigation.

Investors should also refer to our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 24, 2009, and Part II - Other Information - Item 1A. - "Risk Factors" for a discussion of risk factors. Given these risks and uncertainties, we can give no assurances that any forward-looking statements will, in fact, transpire, and therefore caution investors not to place undue reliance on them.

Overview

We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly sponsored programs, including Medicaid, Children's Health Insurance Program ("CHIP"), Medicaid expansion programs and Medicare Advantage. We believe that we are better qualified and positioned than many of our competitors to meet the unique needs of our members and the government agencies with whom we contract because of our focus solely on recipients of publicly sponsored healthcare, our medical management programs and community-based education and outreach programs. We design our programs to address the particular needs of our members, for whom we facilitate access to healthcare benefits pursuant to agreements with applicable state and Federal governments. We combine medical, social and behavioral health services to help our members obtain quality healthcare in an efficient manner. Our success in establishing and maintaining strong relationships with government agencies, providers and members has enabled us to obtain new contracts and to establish and maintain a leading market position in many of the markets we serve. We continue to believe that managed healthcare remains the only proven mechanism that improves health outcomes for our members while helping our government customers manage the fiscal viability of their healthcare programs.

Summary highlights of our first quarter of 2009 include:

• Total revenues of $1.2 billion, a 14.7% increase over the first quarter of 2008;

• Health benefits ratio ("HBR") of 83.7% of premium revenues;

• Selling, general and administrative expense ratio of 9.0% of total revenues;

• Cash flow from operations was $36.1 million for the three months ended March 31, 2009;

• Unregulated cash and investments of $279.7 million as of March 31, 2009;

• Began providing Medicaid managed care services to Temporary Assistance to Needy Families ("TANF") and CHIP populations in Nevada effective February 1, 2009;

• The Company completed the third phase of New Mexico's Coordination of Long-Term Services ("CoLTS") program rollout. The Company serves approximately 15,000 members in that market as of March 31, 2009. This program constitutes one of the Nation's first comprehensive programs to coordinate long-term care for individuals;

• On March 1, 2009, the Company closed the transaction to sell the contract rights of its South Carolina health plan; and

• The Company repurchased approximately 258,000 shares of its common stock for $6.4 million.

Adjustments Related to Adoption of New Accounting Standard

The December 31, 2008 Condensed Consolidated Balance Sheet has been adjusted to reflect the changes resulting from the January 1, 2009 adoption of Financial Accounting Standards Board Staff Position ("FSP") FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1"). The Condensed Consolidated Income Statement for the three months ended March 31, 2008 has also been adjusted to reflect changes resulting from the adoption of FSP APB 14-1.

Reclassifications

To improve presentation and comparability, we have made certain reclassifications to our income statement format. Amounts previously reported in the Condensed Consolidated Income Statements have been reclassified to conform to the current-year presentation.

• The experience rebate under our contract with the State of Texas has been reclassified out of selling, general and administrative expenses and is now reflected as a reduction to premium revenue.

• Premium tax has been reclassified out of selling, general and administrative expenses and is now reported on a separate line following selling, general and administrative expenses and before depreciation and amortization. By isolating premium tax, the impacts of changing business volumes on premium tax expense will become more apparent.

We believe this new presentation will be more useful to the users of our Condensed Consolidated Income Statements as the remaining selling, general and administrative expenses are more reflective of core operating expenses. The reclassifications do not affect net income for the three months ended March 31, 2008.

Revenue Growth

During the three months ended March 31, 2009, our premium revenue was $1.2 billion, an increase of $167.4 million or 15.9% compared to the three months ended March 31, 2008. This increase is primarily due to membership increases in new and existing markets and products, particularly from the commencement of the CoLTS program in New Mexico in August 2008 and entry into Nevada in February 2009 and premium rate increases.

Investment income and other decreased by $10.3 million to $12.3 million for the three months ended March 31, 2009 from $22.6 million for the three months ended March 31, 2008. The decrease in investment income and other was primarily due to decreased rates of return on our fixed income investments due to current market interest rates. Included in other revenue for the three months ended March 31, 2009, is the gain on the sale of the South Carolina contract rights, which is fully offset by the decrease in Administrative Services Only ("ASO") revenue from the West Tennessee contract termination on October 31, 2008.

Our investment portfolio is comprised of fixed income securities and cash and cash equivalents, which generated investment income totaling $6.4 million for the three months ended March 31, 2009. We anticipate that interest rates will remain at or below the current rates as of March 31, 2009 for the foreseeable future, which will result in reduced returns on our investment portfolio in future periods. The performance of our portfolio is interest rate driven, and consequently, changes in interest rates affects our returns on, and the market value of our portfolio. This factor or any further disruptions in the credit markets could materially adversely affect our results of operations or liquidity in future periods.

Operating Costs

Health benefits expenses

Expenses relating to health benefits for the three months ended March 31, 2009 increased $144.4 million, or 16.5%, to $1.0 billion from $874.9 million for the three months ended March 31, 2008. Our HBR was 83.7% for the three months ended March 31, 2009 versus 83.3% in the same period of the prior year. The increase in HBR for the three months ended March 31, 2009 from the HBR for the three months ended March 31, 2008, resulted primarily from our entry into the New Mexico and Nevada markets.

Additionally, during the first quarter of 2009, we established an estimate for pharmacy rebates which we expect to receive, associated with pharmaceuticals that have been dispensed to members. Previously, we recognized pharmacy rebates when payment was received. The receipt of rebate payments generally lags the period in which the pharmaceuticals were actually dispensed. With the more recent availability of stable historical information, we now believe that a reliable basis for estimation of the rebates exists. This change resulted in a one-time benefit to health benefits expense of $8.0 million, or $0.09 per diluted share net of the related income tax effect.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") were 9.0% of total revenues for the three months ended March 31, 2009 compared to 10.0% for the three months ended March 31, 2008. Total SG&A increased $3.6 million, or 3.4%, to $110.4 million for the three months ended March 31, 2009 from $106.7 million for the three months ended March 31, 2008 primarily as a result of increased salary and benefit expenses due to increased variable compensation accruals as a result of the Company's operating results during the three months ended March 31, 2009. Our SG&A ratio decreased in the current period, primarily as a result of leverage gained through an

increase in premium revenue due to the commencement of the CoLTS program in New Mexico in August 2008, entry into Nevada in February 2009 and increased revenues due primarily to increases in membership in the majority of other markets served as of March 31, 2009.

Market Updates

South Carolina

On March 1, 2009, our South Carolina subsidiary, AMERIGROUP Community Care of South Carolina, Inc., sold its rights to serve Medicaid members pursuant to the contract with the State of South Carolina for $5.8 million, or $3.5 million, net of the related tax effect and recorded a gain, which is included in investment income and other revenues in the accompanying Condensed Consolidated Income Statements. We have certain claims run-out and transition obligations that will continue into 2010. Additional costs recorded and to be recorded to discontinue operations in South Carolina are not expected to be material.

Nevada

On February 1, 2009, our Nevada subsidiary, AMERIGROUP Nevada, Inc., began serving TANF and CHIP members under a contract to provide Medicaid managed care services through June 30, 2011. We are one of two organizations that provide managed care services to approximately 100,000 members across the urban service areas of Washoe and Clark counties. As of March 31, 2009, we served approximately 49,000 members in Nevada.

New Mexico

On August 1, 2008, our New Mexico subsidiary, AMERIGROUP New Mexico, Inc., began serving individuals in New Mexico's CoLTS program in six counties in the Metro/Central region. In November 2008, the second phase of membership expanded coverage to include the Southwest region. In January 2009, the third phase expanded coverage to include the Northeast region with the final phases completing the statewide rollout beginning in April 2009. We were one of two organizations chosen to participate in New Mexico's CoLTS program that provide coverage to approximately 38,000 members statewide upon completion of the program roll-out beginning April 2009. As of March 31, 2009, we served approximately 15,000 members in New Mexico.

We can make no assurance that our entry into the Nevada and New Mexico markets will be favorable to our results of operations or financial condition in future periods.

Results of Operations

The following table sets forth selected operating ratios. All ratios, with the
exception of the HBR, are shown as a percentage of total revenues. We operate in
one business segment with a single line of business.


                                                         Three Months Ended
                                                              March 31,
                                                          2009          2008

        Premium revenue                                      99.0 %       97.9 %
        Investment income and other                           1.0          2.1

        Total revenue                                       100.0 %      100.0 %

        Health benefits(1)                                   83.7 %       83.3 %
        Selling, general and administrative expenses          9.0 %       10.0 %
        Income before income taxes                            4.8 %        5.1 %
        Net income                                            3.0 %        3.1 %

(1) The HBR is shown as a percentage of premium revenue because there is a direct relationship between the premium received and the health benefits provided.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Summarized comparative financial information for the three months ended
March 31, 2009 and March 31, 2008 is as follows ($ in millions, except per share
data). (Totals in the table below may not equal the sum of individual line items
as all line items have been rounded to the nearest decimal.):


                                                 Three Months Ended March 31,
                                                                          % Change
                                              2009           2008        2009-2008

     Revenues:
     Premium                               $   1,217.4     $ 1,050.0           15.9  %
     Investment income and other                  12.3          22.6          (45.4 )%

     Total revenues                            1,229.8       1,072.6           14.7  %
     Expenses:
     Health benefits                           1,019.3         874.9           16.5  %
     Selling, general and administrative         110.4         106.7            3.4  %
     Premium tax                                  28.1          22.0           27.7  %
     Depreciation and amortization                 8.3           8.8           (5.1 )%
     Interest                                      4.2           5.8          (26.8 )%

     Total expenses                            1,170.4       1,018.3           14.9  %

     Income before income taxes                   59.4          54.4            9.3  %
     Income tax expense                           22.5          20.7            8.7  %

     Net income                            $      36.9     $    33.6            9.7  %

     Diluted net income per common share   $      0.69     $    0.62           11.3  %

Revenues

Premium revenue for the three months ended March 31, 2009 increased $167.4 million, or 15.9%, to $1.2 billion from $1.1 billion for the three months ended March 31, 2008. The increase was primarily due to the commencement of the CoLTS program in New Mexico in August 2008 and our entry into Nevada in February 2009. Additionally, our existing products and markets contributed further to revenue growth from increases in full-risk membership and premium rate increases. Total membership decreased 1.8% to approximately 1,657,000 as of March 31, 2009 from approximately 1,688,000 as of March 31, 2008. Excluding the approximate 168,000 members as of March 31, 2008 that were in our ASO contract in West Tennessee which was terminated on October 31, 2008, full-risk membership increased by approximately 137,000 or 9.0% from March 31, 2008 to March 31, 2009.

Investment income and other decreased by $10.3 million to $12.3 million for the three months ended March 31, 2009 from $22.6 million for the three months ended March 31, 2008. The decrease in investment income and other was primarily due to decreased rates of return on fixed income securities due to current market interest rates. Included in other revenue for the three months ended March 31, 2009, is the gain on the sale of the South Carolina contract rights, which is fully offset by the decrease in ASO revenue related to the West Tennessee contract termination on October 31, 2008.

Membership

The following table sets forth the approximate number of members we served in
each state as of March 31, 2009 and 2008. Because we receive two premiums for
members that are in both the Medicare Advantage and Medicaid products, these
members have been counted twice in the states where we operate Medicare
Advantage plans.


                                                   March 31,
                                             2009            2008

                Texas                         453,000         441,000
                Florida                       253,000         210,000
                Georgia                       213,000         198,000
                Tennessee(1)                  189,000         355,000
                Maryland                      179,000         154,000
                New York                      111,000         112,000
                New Jersey                    109,000          99,000
                Ohio                           60,000          56,000
                Nevada                         49,000               -
                Virginia                       26,000          24,000
                New Mexico(2)                  15,000               -
                District of Columbia(3)             -          38,000
                South Carolina(4)                   -           1,000

                Total                       1,657,000       1,688,000

(1) Included in Tennessee membership in 2008 are approximately 168,000 members under an ASO contract. This contract terminated October 31, 2008.

(2) The contract in New Mexico began in January 2008 with a Medicare Advantage product. As of March 31, 2008, there were less than 1,000 members.

(3) The contract with the District of Columbia terminated June 30, 2008.

(4) The contract with South Carolina terminated March 1, 2009 concurrent with the sale of our rights under the contract.

As of March 31, 2009, we served approximately 1,657,000 members, reflecting a decrease of approximately 31,000 members compared to March 31, 2008. The decrease is primarily a result of the ASO contract termination in West Tennessee and the contract termination in the District of Columbia, both in 2008. These membership decreases were offset by membership growth in the majority of our other markets, the commencement of the CoLTS program in New Mexico in August 2008 and our entry into the Nevada market in February 2009.

The following table sets forth the approximate number of our members who receive benefits under our products as of March 31, 2009 and 2008. Because we receive two premiums for members that are in both the Medicare Advantage and Medicaid products, these members have been counted in each product.

                                                  March 31,
                 Product                    2009            2008

                 TANF (Medicaid)(1)(3)     1,147,000       1,203,000
                 CHIP(3)                     258,000         230,000
                 ABD (Medicaid)(2)           187,000         205,000
                 FamilyCare (Medicaid)        53,000          43,000
                 Medicare Advantage           12,000           7,000

                 Total                     1,657,000       1,688,000

(1) Membership includes approximately 127,000 members under an ASO contract in 2008 that terminated on October 31, 2008.

(2) Membership includes approximately 41,000 members under an ASO contract in 2008 that terminated on October 31, 2008.

(3) Reflects a reclassification from CHIP to TANF to coincide with State classifications.

Health benefits expenses

Expenses relating to health benefits for the three months ended March 31, 2009 increased $144.4 million, or 16.5%, to $1.0 billion from $874.9 million for the three months ended March 31, 2008. Our HBR was 83.7% for the three months ended March 31, 2009 versus 83.3% in the same period of the prior year. The increase in HBR for the three months ended March 31, 2009 from the HBR for the three months ended March 31, 2008, primarily results from our entry into the New Mexico and Nevada markets.

During the first quarter of 2009, we established an estimate for pharmacy rebates which we expect to receive, associated with pharmaceuticals that have been dispensed to members. Previously, we recognized pharmacy rebates when payment was received. The receipt of rebate payments generally lags the period in which the pharmaceuticals were actually dispensed. With the more recent availability of stable historical information, we now believe that a reliable basis for estimation of the rebates exists. This change resulted in a one-time benefit to health benefits expense of $8.0 million, or $0.09 per diluted share net of the related income tax effect.

Selling, general and administrative expenses

SG&A for the three months ended March 31, 2009 increased $3.6 million, or 3.4%, over the three months ended March 31, 2008, primarily as a result of increased salary and benefit expenses due to increased variable compensation accruals as a result of the Company's operating results during the three months ended March 31, 2009. Our SG&A to total revenues ratio was 9.0% and 10.0% for the three months ended March 31, 2009 and 2008, respectively. This decrease in the ratio is a result of leverage gained through increased revenues due to the commencement of the CoLTS program in New Mexico in August 2008, entry into Nevada in February 2009 and increased revenues due primarily to increases in membership in the majority of other markets served as of March 31, 2009.

Premium taxes

Premium taxes were $28.1 million and $22.0 million for the three months ended March 31, 2009 and March 31, 2008, respectively. The commencement of the CoLTS program in New Mexico in August 2008 and the entry into Nevada in February 2009 account for $3.4 million of the increase. The remaining increase of $2.7 million is due to a premium tax rate increase in Ohio, as well as, increased premium revenues in the markets where premium tax is levied. As of March 31, 2009, premium tax rates range from 2% to 5.5% or are calculated on a per member per month basis.

Depreciation and amortization expense

Depreciation and amortization expense decreased approximately $0.5 million or 5.1% from $8.8 million for the three months ended March 31, 2008 to $8.3 million for the three months ended March 31, 2009.

Interest expense

Interest expense was $4.2 million and $5.8 million for the three months ended March 31, 2009 and March 31, 2008, respectively. The decrease in interest expense in the three months ended March 31, 2009, compared to the three months ended March 31, 2008 is a result of a reduction in the outstanding balance under our Credit and Guaranty Agreement ("the Credit Agreement") as a result of scheduled and voluntary principal payments as well as fluctuating interest rates for borrowings under the Credit Agreement.

Provision for income taxes

Income tax expense for the three months ended March 31, 2009 was $22.5 million with an effective tax rate of 37.9% compared to $20.7 million of income tax expense with an effective tax rate of 38.1% for the three months ended March 31, 2008. The decrease in the effective tax rate for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008 is attributable to a decrease in the blended effective state income tax rate partially offset by a decrease in Federal tax exempt interest income.

Significant income tax uncertainties

On August 13, 2008, we finalized the settlement of qui tam litigation for a cash payment of $225.0 million without any admission of wrongdoing by us or our subsidiaries or affiliates plus approximately $9.2 million to the relator for his legal fees. This non-recurring litigation settlement payment had a significant impact on tax expense and the effective tax rate for fiscal year 2008 due to the fact that a portion of the settlement payment is not deductible for income tax purposes. We have requested a pre-filing agreement with the IRS regarding the tax treatment of the 2008 non-recurring qui tam settlement payment. As we work to resolve this issue with the IRS, it is possible that there will be changes to the tax benefit associated with this settlement that will have a material favorable or unfavorable impact on tax expense and the effective tax rate in 2009 or future accounting periods.

Liquidity and capital resources

We manage our cash, investments and capital structure so we are able to meet the short- and long-term obligations of our business while maintaining financial flexibility and liquidity. We forecast, analyze and monitor our cash flows to enable prudent investment management and financing within the confines of our financial strategy.

Our primary sources of liquidity are cash and cash equivalents, short- and . . .