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, 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 Securities and Exchange Commission ("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 government agencies. 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 for the periods ended September 30, 2009 include:

• Membership of approximately 1,778,000 as of September 30, 2009. Risk membership increased 13.9%, or approximately 216,000 members, from September 30, 2008 to September 30, 2009;

• Total revenues of $1.3 billion for the third quarter of 2009, an 18.8% increase over the third quarter of 2008;

• Health benefits ratio ("HBR") of 87.5% of premium revenues for the third quarter of 2009 compared to 82.0% in the third quarter of 2008;

• Selling, general and administrative expense ("SG&A") ratio of 6.3% of total revenues for the third quarter of 2009 compared to 10.2% in the third quarter of 2008;

• Cash flow from operations was $106.6 million for the nine months ended September 30, 2009;

• Unregulated cash and investments of $277.2 million as of September 30, 2009;

• We repaid the remaining $18.0 million of outstanding debt under our Credit and Guaranty Agreement ("the Credit Agreement") during the three months ended September 30, 2009, decreasing our debt to total capital ratio to 19.8%;

• We repurchased approximately 1,416,000 shares of common stock for $34.3 million during the third quarter of 2009.

Our financial results for the three and nine months ended September 30, 2009 have been significantly impacted by several factors, including increased membership and elevated medical costs. Membership has increased over the prior comparable periods as a result of our entry into new markets and growth in existing markets because of the growth in the Medicaid eligible populations due to, we believe, the increase in unemployment as a result of macroeconomic conditions. While the additional membership has increased our gross premium revenue, the Company believes that the increase in membership has contributed to an increase in outpatient costs since experience indicates that the Company's new members generally utilize more services during the first two quarters of enrollment.

Our medical costs have been elevated over the prior comparable periods in excess of our growth in premium revenues thereby increasing our health benefits ratio over such periods. The elevated costs are primarily due to increases in outpatient costs, for both new and existing members, related to both increased utilization and intensity of services in emergency room services, ambulatory surgery and physician services. More recently, outpatient costs have remained elevated as a result of what the Company believes is an early onset of a severe flu season related to the H1N1 virus. The rate of increase in health benefits expense as it compares to premium revenue has been higher than our experience in recent years. As such, it is difficult to predict at this time whether outpatient costs will remain at the current elevated levels or abate in future periods.

We are continually evaluating our operations and contracting arrangements with our providers in order to more effectively manage medical costs and we are working with the government agencies with which we contract to pursue appropriate rate increases when possible. Our ability to obtain adequate rate increases to match the increases in our medical costs is likely to be challenging in the near term because the government agencies with whom we contract continue to face potential budgetary shortfalls and there can be no assurance that we will attain adequate rate increases. If our medical costs approach a level at which we believe it is probable that expected claims and administrative expenses will exceed future premiums and investment income on existing medical insurance contracts, we would be required to record a premium deficiency reserve as a component of medical claims payable in the period such determination is made.

Our SG&A ratio decreased due both to administrative efficiencies gained through the management of costs, increased premium revenue and decreased levels of variable compensation accruals due to our financial performance.

Market Updates

Tennessee

The State of Tennessee received approval from the Centers for Medicare and Medicaid Services to expand its Medicaid managed care program to long-term care recipients. The expansion program is offered through amendments to existing Medicaid managed care contracts and is anticipated to commence in early 2010. The amendments are subject to final rate adjustments and a finalized start date. We can make no assurance that we will enter into this business or that such business will be favorable to our results of operations, financial position or cash flows in future periods.

New Jersey

On October 23, 2009, we and our subsidiary, AMERIGROUP New Jersey, Inc., settled litigation with Centene Corporation and its wholly-owned subsidiary, University Health Plans, Inc. ("UHP"), regarding AMERIGROUP New Jersey, Inc.'s termination of an agreement to purchase certain of UHP's assets. Pursuant to the terms of the confidential settlement, the parties will dismiss the litigation with prejudice and the asset purchase agreement has been reinstated. The parties will move forward with the transactions contemplated by the asset purchase agreement, as modified in connection with the settlement, and expect the transactions, which are subject to regulatory approval and other closing conditions, to close in the first quarter of 2010. Costs associated with the transaction are not expected to be material to our results of operations, financial position or cash flows.

Ohio

On October 15, 2009, our Ohio subsidiary, AMERIGROUP Ohio, Inc., notified the State of Ohio of its intent to exit the Aged, Blind and Disabled ("ABD") program in the Southwest Region, effective in the first quarter of 2010 due to the inability to obtain actuarially-sound reimbursement in that product. We will continue to provide services to members in the Southwest and West Central regions for the Temporary Aid to Needy Families ("TANF") Medicaid population. Costs to exit this program are not expected to be material to our results of operations, financial position or cash flows in future periods.

Florida

On July 31, 2009, AMERIGROUP Florida, Inc. notified the Florida Agency for Health Care Administration of its intent to exit Lee County, effective November 1, 2009, in which it served approximately 17,000 members as of September 30, 2009. On August 28, 2009, AMERIGROUP Florida, Inc. notified the Florida Agency for Health Care Administration of its intent to exit Broward County, effective December 1, 2009, in which it served approximately 20,000 members as of September 30, 2009. The decision to exit these counties was made due to the inability to obtain actuarially-sound rates. Costs to exit these counties are not expected to be material to our results of operations, financial position or cash flows in future periods.

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 its 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 Statements of Operations, for the nine months ended September 30, 2009. 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 September 30, 2009, we served approximately 56,000 members in Nevada.

New Mexico

On August 1, 2008, our New Mexico subsidiary, AMERIGROUP New Mexico, Inc., began serving individuals in New Mexico's Coordination of Long-Term Services ("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 Northwest region and in April 2009 the final phase of the statewide rollout was completed to include the Southeast and Northeast regions. We are one of two organizations that provide coverage to New Mexico's approximately 38,000 CoLTS members. As of September 30, 2009, we served approximately 20,000 members in New Mexico.

We can make no assurance that the impacts of the changes to our markets noted above will be favorable to our results of operations, financial position or cash flows in future periods.

Reclassifications

To improve presentation and comparability, we have made certain reclassifications to our statement of operations format. Amounts previously reported in our Condensed Consolidated Statements of Operations 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 is more useful to the users of our Condensed Consolidated Statements of Operations 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 and nine months ended September 30, 2008.

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            Nine Months Ended
                                                               September 30,                 September 30,
                                                             2009           2008           2009          2008

Premium revenue                                                 99.6 %        98.4 %          99.4 %       98.2 %
Investment income and other                                      0.4           1.6             0.6          1.8

Total revenue                                                  100.0 %       100.0 %         100.0 %      100.0 %

Health benefits(1)                                              87.5 %        82.0 %          85.7 %       82.8 %
Selling, general and administrative expenses                     6.3 %        10.2 %           7.6 %       10.1 %
Income (loss) before income taxes                                2.7 %         5.7 %           3.6 %       (1.9 )%
Net income (loss)                                                1.7 %         3.5 %           2.9 %       (2.8 )%

(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 and Nine Months Ended September 30, 2009 Compared to Three and Nine Months
Ended September 30, 2008

Summarized comparative financial information for the three and nine months ended
September 30, 2009 and September 30, 2008 are as follows (Dollars 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        Nine Months
                                            Three Months                 Nine Months               Ended               Ended
                                                Ended                       Ended              September 30,       September 30,
                                            September 30,               September 30,             % Change            % Change
                                         2009          2008          2009          2008          2009-2008           2009-2008

Revenues:
Premium                                $ 1,299.0     $ 1,080.4     $ 3,801.3     $ 3,228.7               20.2 %              17.7 %
Investment income and other                  5.3          17.6          24.2          58.7              (69.8 )%            (58.8 )%

Total revenues                           1,304.3       1,098.0       3,825.5       3,287.4               18.8 %              16.4 %
Expenses:
Health benefits                          1,136.4         885.8       3,258.9       2,672.2               28.3 %              22.0 %
Selling, general and administrative         82.2         112.2         288.9         332.1              (26.7 )%            (13.0 )%
Premium tax                                 38.3          23.9         101.1          68.1               60.4 %              48.5 %
Depreciation and amortization                8.4           8.8          26.4          26.5               (4.2 )%              0.0 %
Litigation settlement                          -             -             -         234.2                  *                   *
Interest                                     3.9           5.1          12.4          16.1              (22.7 )%            (23.0 )%

Total expenses                           1,269.3       1,035.8       3,687.7       3,349.1               22.5 %              10.1 %

Income (loss) before income taxes           34.9          62.2         137.8         (61.7 )            (43.8 )%                *
Income tax expense                          12.4          24.3          28.7          30.8              (48.9 )%             (6.8 )%

Net income (loss)                      $    22.5     $    37.9     $   109.1     $   (92.5 )            (40.5 )%                *

Diluted net income (loss) per share    $    0.43     $    0.71     $    2.07     $   (1.75 )            (39.4 )%                *

* Not meaningful.

Revenues

Premium revenue

Premium revenue for the three months ended September 30, 2009 increased $218.6 million, or 20.2%, to $1.3 billion from $1.1 billion for the three months ended September 30, 2008. For the nine months ended September 30, 2009, premium revenue increased $572.6 million, or 17.7%, to $3.8 billion from $3.2 billion for the nine months ended September 30, 2008. The increase in both periods 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 significantly to revenue growth primarily from increases in full-risk membership driven by a surge in Medicaid eligibility, which we believe was driven by high unemployment and general adverse economic conditions. We expect membership increases to continue for at least the remainder of 2009.

Membership

The following table sets forth the approximate number of members we served in
each state as of September 30, 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.


                                               September 30,
                                           2009            2008

                   Texas(1)                498,000         462,000
                   Florida                 270,000         228,000
                   Georgia                 236,000         201,000
                   Tennessee(2)            192,000         352,000
                   Maryland                188,000         161,000
                   New Jersey              117,000         103,000
                   New York                112,000         111,000
                   Ohio                     59,000          56,000
                   Nevada                   56,000               -
                   Virginia                 30,000          24,000
                   New Mexico               20,000           7,000
                   South Carolina(3)             -           9,000

                   Total                 1,778,000       1,714,000

(1) Included in Texas membership are approximately 13,000 members under an Administrative Services Only ("ASO") contract in 2009.

(2) Included in Tennessee membership are approximately 165,000 members under an ASO contract in 2008. This contract terminated October 31, 2008.

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

As of September 30, 2009, we served approximately 1,778,000 members, reflecting an increase of approximately 64,000 members, or 3.7%, compared to September 30, 2008. The increase is primarily a result of membership growth in the majority of our markets, our entry into the Nevada market in February 2009 and the commencement of the CoLTS program in New Mexico in August 2008. These membership increases were offset by the ASO contract termination in West Tennessee on October 31, 2008 and the sale of our rights under the contract with South Carolina on March 1, 2009.

The following table sets forth the approximate number of our members who receive benefits under our products as of September 30, 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.

        Product                                    2009            2008

        TANF (Medicaid)(1)(3)                    1,245,000       1,205,000
        CHIP(3)                                    259,000         241,000
        Aged Blind or Disabled (Medicaid)(2)       202,000         218,000
        FamilyCare (Medicaid)                       58,000          41,000
        Medicare Advantage                          14,000           9,000

        Total                                    1,778,000       1,714,000

(1) Membership includes approximately 124,000 members under an ASO contract in 2008 that terminated on October 31, 2008.

(2) Membership includes approximately 13,000 members under an ASO contract in Texas in 2009 and approximately 41,000 members under an ASO contract in Tennessee in 2008 that terminated on October 31, 2008.

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

Investment income and other

Investment income and other decreased by $12.3 million to $5.3 million for the three months ended September 30, 2009 from $17.6 million for the three months ended September 30, 2008, and decreased $34.5 million to $24.2 million for the nine months ended September 30, 2009 from $58.7 million for the nine months ended September 30, 2008. The decrease in investment income and other was primarily due to decreased investment income from decreased rates of return on fixed income securities due to current market interest rates.

Our investment portfolio is comprised of fixed income securities and cash and cash equivalents, which generated investment income totaling $4.7 million for the three months ended September 30, 2009 compared to $11.7 million for the three months ended September 30, 2008. We anticipate that our effective yield will remain at or below the current rate as of September 30, 2009 for the foreseeable future, which will result in similar or reduced returns on our investment portfolio in future periods. The performance of our investment portfolio is interest rate driven, and consequently, changes in interest rates affect our returns on, and the market value of, our portfolio which could materially adversely affect our results of operations or liquidity in future periods.

Included in other revenue for the nine months ended September 30, 2009 is the approximate $5.8 million gain on the sale of the South Carolina contract rights. Included in other revenue for the three and nine months ended September 30, 2008 is the ASO revenue from the West Tennessee contract which terminated on October 31, 2008. Revenues from this contract totaled approximately $5.6 million and $17.1 million for the three and nine months ended September 30, 2008, respectively.

Health benefits expenses

Expenses relating to health benefits for the three months ended September 30, 2009 increased $250.6 million, or 28.3%, to $1.1 billion from $885.8 million for the three months ended September 30, 2008. Our HBR was 87.5% for the three months ended September 30, 2009 compared to 82.0% in the same period of the prior year. For the nine months ended September 30, 2009, expenses related to health benefits increased $586.7 million, or 22.0%, to $3.3 billion from $2.7 billion for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, and 2008, our HBR was 85.7% and 82.8%, respectively. The increase in health benefits expenses as it compares to premium revenue for the three and nine months ended September 30, 2009 resulted primarily from increased outpatient costs experienced across the majority of our markets and membership base. We believe these increased outpatient costs are related to increased utilization and intensity of services. The primary drivers of the increase in outpatient costs were emergency room services, ambulatory surgery and physician services. Health benefits expenses increased commensurate with the significant increase in our membership and was also negatively impacted by higher utilization of services during the initial periods of member eligibility by

these new members, consistent with historical patterns. We believe that outpatient costs will remain elevated for at least the remainder of 2009. Additionally, our 2009 results reflect a significant increase in flu-related costs. We believe this increase is directly related to the onset of a more severe flu season due significantly to the H1N1 virus, which has been noted to be particularly virulent among children, pregnant women, and other high-risk populations, all of whom together represent a significant portion of our . . .