Operator:

Good day! And welcome to the Molina Healthcare Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference to Jeffrey Geyer, Head of Investor Relations. Please go ahead, sir.

Joseph Zubretsky :

Thank you, Jeff, and good morning. Today, we will provide you with updates on our reported financial results for the second quarter highlighted by $5.86 of earnings per share, which was in line with our expectations. An update on our full year 2024 guidance, which we reaffirm at $38 billion of premium revenue and at least $23.50 in earnings per share, and our growth initiatives and strategy for sustaining profitable growth. Let me start with our second quarter performance. Last night, we reported adjusted earnings per share of $5.86 a $9.4 billion of premium revenue. Our 88.6% consolidated MCR reflects disciplined medical cost management despite experiencing some modest medical cost pressure. We produced a 4.6% adjusted pre-tax margin or 3.5% after-tax, a very strong result that is in the middle of our long-term target range. Year-to-date, our consolidated MCR is also 88.6%, and our adjusted pre-tax margin is 4.5%, both within our long-term target ranges. Our well-balanced portfolio of businesses and focusing on managing medical costs continue to produce results in line with our expectations. In Medicaid, the business produced a second quarter MCR of 90.8%, above our long-term target range. This quarter included a one-time prior year retroactive premium item in our California business. Excluding this one-time item, the second quarter MCR was 90.1%, elevated by higher MCRs from our new store additions, a dynamic consistent with the first quarter. It also reflects slightly higher than expected medical costs in the legacy Medicaid portfolio, attributable to the ongoing acuity shift of redeterminations. We continue to have risk- corridor protection in many geographies and expect that this medical cost pressure will be adequately captured by known rate adjustments in the second half of 2024. We expect our Medicaid results to improve in the second half of the year. Several data points indicate we are well on track in this regard. First, the California retro rate item will not repeat. Second, our new store addition results will continue to improve as they did in the second quarter. Third, we received rates in many states for the second half of 2024 that were in line with first half developing cost trends. Approximately 35% of our Medicaid premium revenue renews in the second half. Combined with several off-cycle adjustments, these account for the expected legacy Medicaid MCR improvement through the remainder of the year. Then, with approximately 55% of our Medicaid premium revenue scheduled to renew on January 1, our rate cycle cadence is well timed for early 2025. Providing upside to our outlook for the balance of the year would be continued success with rate advocacy initiatives that could provide positive off-cycle rate adjustments. Turning to Medicare, our second quarter reported MCR was 84.9%, representing better than expected performance across all our Medicare products, primarily due to favorable risk adjustment results as well as benefit adjustments implemented for 2024. Our newly acquired Bright business in California is performing in line with expectations, and we remain confident in ultimately delivering the full one-rate accretion of $1 per share. Our strategy of leveraging our existing Medicaid footprint to serve high-acuity, low-income Medicare beneficiaries is working well. In Marketplace, the second quarter MCR was 71.6%. This business performed better than our expectations, even as we saw higher special enrollment period membership gains from redeterminations. Our mix of renewing members, prior year pricing actions, and improved risk adjustment results position us well to continue to profitably grow this book of business. Turning now to our guidance for the full year. We remain confident in delivering our full year adjusted earnings per share guidance of at least $23.50, or 13% year-over-year growth. Strong net investment income and known rates will offset the one-time retro premium item and the second quarter pressure experienced in Medicaid. Performance in our core business remains strong, and we expect second half improvements to be driven by known on and off-cycle rate increases and new store MCRs reverting to target. Our guidance also includes our Florida and Virginia contracts extending through year end. Our full year premium revenue remains unchanged at approximately $38 billion or 17% year-over-year growth. Our 2024 revenue and earnings per share guidance provide a strong foundation for profitable growth in 2025 and beyond, and the building blocks to get there remain intact. Now some comments on our growth initiatives. Our business is well positioned to capitalize on unique long-term growth opportunities in all three segments. First, a few comments on our recently announced acquisition of ConnectiCare from EmblemHealth. ConnectiCare currently serves approximately 140,000 members with $1.4 billion in annual premium revenue. This is a well-diversified government sponsored healthcare play, which serves primarily Marketplace and Medicare membership in Connecticut. Historically, our strategy has been to establish these core product lines only in our pre-existing Medicaid footprint to leverage our Medicaid infrastructure. While that option is not available to us in Connecticut, a Medicaid fee-for-service state, we believe this is a great opportunity to execute the time-tested Molina M&A playbook. Acquire a stable revenue stream in our core products, deploy capital efficiently, and improve the assets' performance in the proven and reliable Molina way. We expect this acquisition to provide earnings accretion of $1 in earnings per share, which is now added to our embedded earnings. Our M&A pipeline remains full of many actionable opportunities. In Medicaid, we remain confident in winning new and renewal business contracts. Some comments on recent developments. In Florida, we were recently awarded a contract that successfully retains our foothold in the state. We will retain our 52,000 Medicaid members in the Miami-Dade region. In addition, by agreement, we will grow to approximately 90,000 members through preferential auto assignment. We estimate the annual premium revenue of $500 million. In Wisconsin, we successfully defended our LTSS position as the state announced its intent to award Molina a contract to provide services in Region 5, the first of a series of regional reprocurements. Additionally, we were just re-awarded our sole contract position in the IRIS Self Directed Personal Care program. In Georgia, while we await the award announcement, we remain confident as to our prospects and believe that we are well positioned to serve that state's Medicaid population. Finally, there was significant market opportunity out for bid over the next three years. This includes the Texas STAR Kids RFP, which represents a meaningful opportunity in a state where we have demonstrated recent success. In Medicare, we remain sharply focused on further penetration of low-income, high-acuity dual-eligible populations and on our high-acuity MAPD population in California. The new CMS rules on Medicare and Medicaid integration position us well to attract dual-eligible members over the coming years, as our footprint combines both products in most of our states, enabling a fully integrated member experience. We are in the process of further developing our suite of integrated duals products, and we will soon be establishing a new dedicated organization to lead this effort. In Marketplace, we are positioned to grow organically in underpenetrated markets, given the stabilized risk profile and margins we've achieved. We believe our rate filings for 2025 make us very competitive in underpenetrated geographies and position us well to grow. As a reminder, our growth outlook in this business can be simply stated as grow at a rate that allows us to sustain mid-single digit pre-tax margins. We are confident in our ability to grow organically, win new state contracts, and execute our M&A strategy. These remain consistent pillars of our growth strategy, and we expect to meet our target of $46 billion of premium revenue in 2026. With our 2024 earnings per share guidance of at least $23.50 reaffirmed, and with our embedded earnings outlook of $5, we remain committed to delivering on our long-term earnings per share growth targets. As Mark will describe shortly, the building blocks to get there are intact. In summary, we are pleased with our second quarter 2024 financial performance. The Medicare and Marketplace businesses significantly outperformed, while Medicaid is on track to improve in the second half of the year through known rate increases and continuing new store MCR improvements. In the meantime, we continue to focus on executing on the fundamentals, which has been the hallmark of our financial performance. The unprecedented redetermination process, which will be a 24-month journey from beginning to end, has presented some challenges that we have successfully navigated. But nothing has occurred during this period that changes our view that these are attractive businesses for the near and long-term, and profitable growth can and will be sustained. In fact, our results demonstrate that the principle of rate soundness works in that Molina's unique rate corridor position protects against transient quarter-to-quarter fluctuations of rates and medical costs. Finally, we look forward to updating you on our outlook for sustaining profitable growth at an Investor Day event on Friday, November 8th in New York City. As in past years, we will provide you with our detailed playbook for achieving our growth targets and maintaining industry-leading margins. We will outline our long-term goals and how we will achieve them with the transparency and specificity that you have come to expect from us. With that, I will turn the call over to Mark for some additional color on the financials.

Operator:

Yes, thank you. [Operator Instructions]. The first question comes from A.J. Rice with UBS.

Mark Keim :

Great. Hey, good morning, A.J. I'll take the first one and Joe will pick up the second one. On risk adjustment, let's touch on Marketplace and Medicare. On Marketplace, some of you have seen from the CMS files, we recognize about $20 million of additional risk adjustment benefit from the prior year between first and second quarter. Remember, we have insights on the development of that through the weekly service and other things, but across the first half, about $20 million from the prior year. So, first half revenue is about $1.2 billion. You do the math, a little bit less than 20 basis points in our first half, first and second quarter MLRs for Marketplace. Just for reference, it was about the same a year ago. So the year-over-year as compared, it's about the same, about 20 basis points of benefit.

A.J. Rice :

Just on the...

A.J. Rice :

Okay, thanks a lot.

Andrew Mok :

Hi, good morning. Just a question on the underlying Medicaid pressure in the same-store portfolio. I don't remember you calling out pressure in Q1, but it sounds like that may have developed slightly worse. Is that correct? And can you clarify when core Medicaid pressure started to materialize this year? Thanks.

Andrew Mok :

Got it. But did Q1 also come in worse than what you had expected when you actually saw the claims?

Andrew Mok :

Okay. And then secondly, it sounds like you are describing a more modest pressure relative to peers. So I just wanted to better understand that experience. How much pressure was offset by the risk corridor buffer? And do you see modest pressure across most states or concentrated pressure in a few states? Thanks.

Andrew Mok :

Great. Thanks for the color.

Ryan Langston :

Hey, good morning. Following up on Medicaid, we've heard some commentary just from some peers that there's this pull-through effect when folks are receiving their enrollment loss information and then they might be utilizing more services before they actually use it. I guess, are you seeing that same kind of experience? And then maybe further, do you have any sense of what the utilization profile actually looks like for folks who actually are able to re-enroll once being redetermined off? Is that any different than sort of the normal population? Thanks.

Mark Keim:

Ryan, I’ll just build on that. What we've been citing and what many others are seeing, is that of the folks that get redetermined, they lose their eligibility, 70% are for procedural reasons. That means they just didn't fill out the paperwork or weren't aware. So that certainly argues against any kind of last minute usage, when in fact they weren't aware they were losing coverage. I think you also asked about the reconnects, when they come back in. Yes, very often for the first month we'll see a little bit of higher utilization. And think about it, somebody lost their eligibility. They might not know they lost it until two or three months later when they go to the drug store to fill out a script. At that point they are utilizing and that first month might be a little bit higher. But typically they are going to quickly resolve to the portfolio average. So we're not seeing any meaningful impact there.

Operator:

Thank you. The next question comes from Josh Raskin with Nephron Research.

Joseph Zubretsky:

I'll take the last part of that first Josh on marketplace. Clearly running at 72 for the first half and predicting 78 for the back half seems to be a push. But be mindful of the fact that SEP membership is quite high and those members are coming in at higher utilization rates than the existing membership. And then of course you have the natural seasonality of the business. Now, you are absolutely right. Last year, we actually invested margin in growth and we grew at $1 billion to $1.2 billion of revenue this year. Where we're running this year, we think we're at par. We think we're right in the single-digit land, but we could. You could see us be a little more aggressive on growth next year and try to grow this business as we did in 2024 over ‘23. So the margin position is solid. And again, our growth rate is going to be determined by our ability to produce mid-single-digit margins, just given the inherent volatility that exists in the business itself.

Josh Raskin :

Okay, so target margin, but this year not terribly off from target margins, right? Sort of towards the lower end maybe of the turn. Okay, perfect.

Josh Raskin :

Thank you.

Kevin Fischbeck :

Great, thanks. I guess we're having a hard time kind of reconciling your view about where MLR is in Medicaid versus what a lot of your peers are doing. So I guess, your comment seems to be that your risk corridors are allowing you to kind of offset a lot of this pressure. Can you give us a sense of on a gross basis then what’s the MLR pressure? Are you saying you had 200 basis points of risk corridor and now it's only 100? And then there's another 10 or 20 in the core net because of payables not completely matching everything. Like just kind of size it for us. It seems like everybody else seems to be saying somewhere between 100 and 150 basis points of MLR pressure and just to hear 10 or 20 in the core, it’s hard to reconcile. And then, I guess you mentioned you expect people to be coming back as the year goes on. Shouldn't that be a pressure on MLR in the back half of the year? It didn't seem like you were building anything in for rejoiners putting up a pressure on MLR in your bridge from one half to two half. Thanks.

Mark Keim:

And Kevin, just a couple more thoughts. Since our last guidance in the first quarter, we probably see trend across our business for the year, up 150 basis points, 1.5% higher trend than we thought before. That's capturing what we saw in the second quarter and what we're expecting for the third and fourth. And of course, to your point, that includes the dynamic for the rejoiners and just as importantly what we're actually jumping off in the second quarter. So we're seeing a higher trend than we previously thought of 1.5%. Now, as we detailed, we've got known rate adjustments in the second half, both on cycle and off cycle, which defray about 1% across the full year of that trend. The other 50 bips is picked up by corridors. So we feel pretty insulated from a higher trend here, both on known rates and as Joe mentioned, this very important corridor dynamic we bring to the table. So yeah, we've been carrying 200 bips over the last couple of years within our reported MCR. It'll be lower this year, but that'll be a function of actual rates and the ultimate trend.

Operator:

Thank you. And the next question comes from Justin Lake with Wolfe Research.

Joseph Zubretsky:

On the PYD point -- I'll kick it to Mark, but the first point to make before which lines of business did it affect. Most of it, if not nearly all of it, was picked up by prior year corridors. Mark, do you want to take it?

Joseph Zubretsky:

And your question related to the exchanges, everybody's got models. We see models in the industry. We have our own models in terms of what would happen if the enhanced subsidies are in fact, do expire. And there's industry estimates we have our own. You look at the level of subsidies, you look at your FPL cohorts, and you can argue that 10%, 20% of membership could be affected and priced out of your silver product, but then again, you have a lower priced bronze product, perhaps sitting right next to it. So how many of those are going to recapture into one of your bronze products, a little priced hard to say. But we've seen industry estimates of 10% to 20%, and then the wild card is if you have a bronze product sitting alongside your silver product in a certain geography, will you recapture some of that in bronze?

Stephen Baxter :

Hi, thanks. Just a couple of follow-ups on the Medicaid discussion. I guess, can you provide us specifically the first half number that's comparable to the 200 basis points of the typical corridor expense that you cite? And then can you also update us on what percentage of your premiums have some level of protection here versus your more directly exposed to whatever the underlying performance in the Medicaid book is? And then just trying to understand the rate update process. I think you suggested, obviously the states want to operate on hard data and not theories. But it does seem like a lot of this deterioration is happening in the second quarter, which is not fully developed at this point. So is this largely because maybe the acuity adjustment compensated the lower level of disenrollment [inaudible] your conversation? I'm just trying to understand why the states would be compelled to act, kind of on a more recently developing trend. Thanks.

Stephen Baxter :

Yes. The 200 basis points of typical corridor expense that you cite, I would just like to know specifically in the first half of the year if you could give us a comparable metric there. And then when we think about the percentage of your Medicaid premiums that have some level of protection from those corridors versus are more directly exposed to the underlying performance of the business, like is it 50%, is it 75%? How should we think about that?

Joseph Zubretsky:

And Stephen, we have very detailed models. We have an entire accounting system on NIM and MLR and corridor tracking. And one of the reasons we don't give specific numbers generally is if 50% or 75% of your premium has a corridor, you say, well, it's protected. Well, it's only protected if that's where the medical cost deterioration happens. And so looking at the gross number can just be very, very misleading. We have our arms around it. We know where we're protected. We know where we have upside opportunity and some geographies there's upside opportunity depending on where you are in the corridor. So we generally don't like to give specific numbers on how much premium is protected, because I think it gives a false positive.

Sarah James :

Thank you. I appreciate you reiterating the 2026 premium guidance. I was hoping that you could refresh the bridge a little bit. When you laid it out at I-Day [ph] off of the 23 base, you were talking about $4.5 billion of M&A and $2.5 billion of strategic initiatives. Is that still the mix that you see? And then when you think about M&A, how do you think about the mix between Medicaid and exchange that could play out through 2026 or that exists in your pipeline?

Sarah James :

Thank you.

Michael Hall :

All right, thank you. So a quick clarification and then my real question. I was surprised to see no cash flow from Ops so far, first half of the year. I know you called out special timing, corridor payments, CMS receipts, etc. I was wondering if you could break out some of the amounts of the larger pieces to help bridge us back to what maybe normalized cash flow from Ops would look like. And then the real question on MA risk adjustment benefit. Wondering if you could just – how much specifically did you benefit from it for your 2Q MA MLR? And generally, isn’t it true that, yes, the risk adjustment fleets tend to result in some slight favorability, but also from my understanding, plans generally don't see a huge benefit, because they simply accrue to whatever the risk adjustment was in their early 1Q payments. So my question is, how did you recognize such a large benefit? Was there something unique going on with BrightHealth's MA assets where maybe you took a more conservative approach on the risk adjustment accrual? So more color on that would be great. Thank you.

Operator:

Thank you. The next question comes from Scott Fidel with Stephens.

Mark Keim:

Sure. On the second half of OCF, a normal relationship is a little bit ahead of net income. So, think a relationship of 1.1, 1.2, 1.3, something like that. I would expect a more normalized relationship in the second half of the year. Again, looking over the two years in total, so much of that year-over-year comparison was about things unique to last year or unique to this year. Looking at ‘23, ‘24 combined, you'll get a very normal relationship between OCF and net income that'll certainly normalize in the second half of this year.

Scott Fidel :

Okay. Thank you.

George Hill :

Hey, good morning guys. And thanks for sneaking me in. I hope I have two quick ones here. I guess you talked about the example where you have acuity getting worse and states are cutting rates. Well I guess, talk to us about how confident you'll be that you'll kind of get rate in that percentage of the book going forward. Just increasingly as we're hearing like, we hear about actuarial soundness, but when we talk to some state regulators, we hear actual soundness is kind of with the phrase, ‘subject to budget.’ So kind of worried about the timing and the mismatch there. And then on the 200 basis points in the risk quarter that we discussed, I guess, can you talk about your confidence in the risk quarter, like the contributions. It'll suck up some utilization in the back half of this year, but I guess, can you talk about like how much was sucked up in Q2 and like how should we think about like the risk quarter – the decrease in risk quarter contributions in Q2 and kind of how that varies through the back half of the year? Thank you.

A - Joseph Zubretsky:

And George, maybe it's best to give a couple of examples. So we have Texas is a September 1 renewal. Things were running a little hot in Texas. Acuity shift, etc. We had a high – the market got a high single digit rate increase. That will have impact to the second year, it's known. We have it in draft form. Draft rates never decline. They can go up, but we're very confident in it. Another example is a really interesting one. It actually explains some of the trend inflection we talked about that's very localized, and the rate actions that are taken in Kentucky. Due to the pandemic, the regulators asked the market to suspend UM on outpatient behavioral. We did, as did the market. What happens? Cost goes up. The market then approaches the state, presents the actual data, mid cycle rate increase because the behavioral program was underfunded. So the conversations with our state regulators, our customer are very productive. They are databased, and they are taking very reasonable positions, whether something is program related or whether it's an acuity shift that can be actually supported.

Operator:

Thank you. This concludes both the questions session as well as the event itself. Thank you so much for attending today's presentation. You may now disconnect your lines.

Operator:

Hello, and welcome to the Molina Healthcare First Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to your host today, Jeffrey Geyer. Please go ahead.

Joseph Zubretsky:

Thank you, Jeff, and good morning. Today, I will cover our traditional quarterly topics, our reported financial results for the first quarter, which were in line with our expectations, highlighted by $5.73 of earnings per share. An update on our guidance, which we reaffirm at $38 billion of premium revenue and at least $23.50 in earnings per share and an update on our growth initiatives, which in the quarter were mixed, but we are maintaining our $4 per share estimate of embedded earnings and our long-term growth outlook.

Mark Keim:

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on our first quarter performance, the balance sheet, our 2024 guidance and thoughts on embedded earnings. Beginning with our first quarter results. For the quarter, we reported approximately $10 billion in total revenue and $9.5 billion of premium revenue with adjusted EPS of $5.73. Our first quarter consolidated MCR was 88.5% and reflect continued strong medical cost management.

Operator:

[Operator Instructions] And today's first question comes from Kyle Sternick with JPMorgan.

Joseph Zubretsky:

Okay. We are clearly saying that if we have a revenue loss in the third and fourth quarters due to the contract losses and the related earnings, the strength of the core business will produce enough earnings power to offset that. And it's no one thing. It's just general performance of all our portfolios. The loss ratios in our Medicaid and Medicare business get better as the year progresses for a variety of reasons.

Kyle Kristick:

Got it. And then I wanted to ask about the SNP regs as well. Specifically, how does that change your strategic thinking about M&A. I mean, I think the bright deal is really the first big Medicare asset begun purchased. Does this change the way you think about whether you'd be more biased towards MA or Medicaid? Or is it really just more motivation to sort of double down on the organic growth? .

Operator:

The next question comes from Josh Raskin with Nephron Research.

Joseph Zubretsky:

I'll kick it to Mark for the question on the Florida and Virginia earnings. Go ahead.

Joseph Zubretsky:

Josh,and your second question related to Bright now that we've owned the business for a full quarter, we are very optimistic and confident in the $1 of ultimate accretion. The way to think about that business is actually very simple. Operationally breakeven in year 1 with a slight earnings drag related to the carrying costs, breakeven in your -- operationally breakeven in year 2. And full $1 accretion in year 3 and we get there by -- we inherited a 95% MCR in the business. We've managed it to 87%. We inherited a 13% G&A ratio in the business. We managed to 8%, that's 1,300 basis points of turnaround, which on $1.6 billion of revenue would show you how we get to the full accretion.

Operator:

And the next question comes from Stephen Baxter with Wells Fargo.

Joseph Zubretsky:

Stephen, I'll answer the first question first and then kick it to Mark on the Medicaid MCR. The Medicaid MCR of 89.7% in the quarter was as expected and heavily influenced by 20% of the member month volume in the quarter was on new business, either new business that came in from California and Nebraska on [ 11 ] or our -- second half of our Iowa contract from 2023 in the My Choice acquisition. That new business runs in the '90s. So you can do the math. That created pressure on the Medicaid MCR in the first quarter.

Mark Keim:

Stephen, I'd just add to that. A year ago, our Medicaid MCR was 88.4%. This quarter, the legacy NCR was very close to that. So as Joe mentioned, coming out at 89.7% is a function of that new store MCR, which comes in hot. And recall, we said that this year, margins and earnings were a little bit back-end loaded consistent with our expectations. We came out really right where we expected. On the deal pipeline, I wouldn't say it slowed down. It's always fits and starts. What's most important to Joe and I is we constantly have a pipeline of advanced stage discussions.

Operator:

The next question comes from Kevin Fischbeck with Bank of America.

Joseph Zubretsky:

I'll start off and then I'll kick it to Mark, but just to recap the entire redetermination process from start to finish. We estimate that at the high of the PHE, we have grown 1 million members due to the pause in the redetermination process. We are now projecting to lose 600,000 of those, 550,000 lost to date, another 50,000 in the second quarter. we have been experiencing a 30% reconnect rate. And once the redetermination process stops, that reconnect rate will continue on into the late spring and perhaps even into the summer.

Mark Keim:

Yes. If you look at our marketplace, we reported 346,000 members in the first quarter. We'll go to 370,000 per our original guidance. That's unchanged. And that's on the continued strength of folks coming in from redeterminations, which is obviously an anomaly this year. Remember, Marketplace always had normal lapses through the year. So typically, marketplace volumes declined through the year. in this case, will increase through the year to our guidance of 370,000.I think you asked about the reconnect rate. We're still seeing 30% on reconnects coming back in. And both the folks coming in to marketplace as well as the reconnects, we're not seeing an anomaly on the MORs that would really change our outlook for the year. So pretty much right on track, Kevin, right where we want to be. .

Albert Rice:

Thanks. Hi, everybody. Maybe just to follow on that last train of thought, but a little different focus. Obviously, as we move into next year, you'll have given the redeterminations will subside as we get through the summer. you'll have the full impact of whatever change on the acuity risk pool there is, for legacy, people to stay on the Medicaid. When you sort of look at that at this early date, you got -- you signaled that you got these decent rate increases proactively in 17 states this year. Do you need a second year, do you think, of above-average rate increases when that acuity is fully reflected in the run rate for all of next year?

Joseph Zubretsky:

Let me recap where we are in the rate environment, and then I'll kick it to Mark for some more color. We couldn't be more pleased with the way our state customers have responded to having rates be commensurate with normal cost trends and trends that have been influenced by the acuity shift. We received acuity-related adjustments in 19 states, representing 95% of our revenue. We had 5 retroactive rate adjustments, and we're actually anticipating perhaps 4 more. So the states have been very responsive and rates have been actual really sound.

Joseph Zubretsky:

Sure. A.J., the small silver and stable strategy was a short-term reaction to having to re-position the business to maintain a profile of single digit -- mid-single digit pretax margins. That was a temporal way to look at the business. we invested about 300 basis points of what call excess margin from last year into the business this year, and that's why we're growing membership at 30% and premium revenues are growing at 20%. So we like the nice steady progression of the business. We do expect to grow it. But being in the insurance business as long as I have, you never try to grow any portfolio organically that quickly because when underwriting isn't allowed, which -- that's what this product is, you have to be very wary of where you're bidding against the market, who else is in the market and where your results are coming out for the prior year. So we're going to be cautious. But the nice steady growth we saw this year feels really good to us. We're able to maintain a profile of high single-digit pretax margins and grow at this rate I think that's what to expect.

Justin Lake:

A couple of questions here. First, last quarter, Joe, you mentioned an expectation that the company had visibility to grow EPS at the low end of your 15% to 18% outlook for 2025. Is that still the expectation? And then secondly, Joe, you mentioned that you're assuming in Texas or it looks like you're assuming in Texas that you get an average amount of share of the state from your new wins meaning there's 4 plants in a region, you get 25%.

Joseph Zubretsky:

Yes. Justin, the -- last quarter, we gave you the building blocks for an outlook into 2025, and we have not changed our view of those building blocks. Obviously, embedded earnings still at $4, we have actually changed the composition of that and how those emerge in upcoming years has changed slightly. But the building blocks haven't changed. We continue to harvest earnings out of our existing footprint. We talked about operating leverage, talk about embedded earnings. Obviously, there likely will be a natural headwind from interest rate declines into next year. So the building blocks haven't changed, and that's still our forward look for 2025, again, not guidance, but an outlook. On Texas, we don't know. We used very conservative estimates of what our market share would likely to be in the 7 regions that we won and use kind of the average portfolio margins. I don't think there's anything more to read into it than that. We think it's a conservative and reasonable estimate of what that business will produce.

Joseph Zubretsky:

I don't -- it's far too early, and we don't want to get ahead of our customer on that. So we'll wait and see until we have more visibility into how membership will be allocated. I think that's the prudent thing to do here.

Nathan Rich:

I wanted to ask on Florida. Joe, I think you talked about the protests and the ultimate outcome could be different. I guess I'd be curious to get your view, Florida kind of shifted to more of a comprehensive care model in the state. And in your view, does that create, I guess, more friction than normal for the appeals process and potential changes there? And then as a follow-up, I wanted to ask if you had an updated view on the $46 billion revenue target by 2026.

Joseph Zubretsky:

In, on Florida, we're not making a prediction on how the process will unfold. We're citing historical precedent. Historical precedent would suggest that this is not the end, it's sort of the beginning of the end of the process. that there's more discussions that will take place. So I don't want to, again, get ahead of the state on this. But if you look at the past 2 procurements in Florida, there have been extended conversations and there are regions in Florida that still do not have maximum awards given. So again, just citing historical precedent. On the $46 billion of revenue, but we have a $60 billion new contract pipeline. Kansas and Georgia are sitting out there currently live and in process. as I mentioned, Texas STAR Kids. We have great momentum in the State of Texas.

Operator:

The next question comes from Gary Taylor with TD Calin.

Joseph Zubretsky:

Not significant. We're still analyzing it. We're obviously aware of it. We're analyzing it. lots of different features to it, many of which incept over very extended periods of time. So there's nothing to immediately react to. But nothing in that guideline changes of the long-term trajectory of the business. As I've said many times, I often asked, is there any political legislative or judicial environmental issue that causes you major concern on the viability of the businesses you're in. And the answer is no. The way the election comes out, whether Congress is split, whether things can get done vis-a-vis the 60 votes in the Senate needed to do something fundamental, the reconciliation process, et cetera. We don't -- we think the legislative and political scenarios are pretty neutral for the sustainability of the businesses we're in.

Operator:

The next question comes from George Hill, Deutsche Bank.

Joseph Zubretsky:

Yes. Well, our target for our Medicare business is mid-single-digit pretax. I wasn't sure whether you're referring to pretax or after tax, our NCR range for the products we're in is 87% to 88%. As we said, we hope to get -- not hope. We're projecting to get right down to 87% here over the next couple of years. So we still target mid-single-digit pretax margins in this business.

Mark Keim:

George, the only thing I'd add is it's really hard to compare a Molina book of business to some of our big competitors in Medicare. Remember, we skew really heavily to the dual eligibles. So we've got an awful lot of our book in the high teens to $2,000 PMPMs, which are high acuity. If you're very good at managing medical costs -- there's a big opportunity on those high-dollar members to get to the margins that Joe talked about, even in the presence of some headwinds. So I think it's really hard to make that comparison to others.

Scott Fidel:

Two questions. The first one, just if you've gotten the scoring results yet from Florida and have been able to start to develop the factual points that may be the basis of your appeal in Florida is definitely interested in your thoughts on that? And then just second, on the HICS side, just if you want to refresh us at this point after seeing results so far, what you're expecting for full year MLR and pretax margin offer 2024 for the HICS business.

Scott Fidel:

Okay. Got it. So reaffirming the initial guidance you gave us for the exchange MLR margin?

Andrew Mok:

I think I heard you say that you're prudent in your reserves due to change. Was there any favorable PYD in the quarter? And if so, did you reestablish that into your reserves?

Andrew Mok:

Was there any P&L impact in the quarter from the PYD?

Operator:

And the next question comes from Sarah James with Cantor Fitzgerald.

Joseph Zubretsky:

I'll answer the second question first. We have a really nicely laddered renewal pattern in our portfolio, which is great from a risk management perspective. of our revenue renews on January 1. 21% renews in the fall. The rest of it is [indiscernible] so the renewal pattern is nicely better throughout the year. Right now, given our guidance, we know 82% of rates, we know the rates on 82% of our revenue for this year's revenue guide, which leaves us very little rate risk to our forecast. That's the -- that's how we have great visibility. And as Mark said, if you get pressure, cost pressure, in the second half of the year. In fact, at 52% of the revenue then cycles into January 1, or we capture that nicely. Your other question was?

Joseph Zubretsky:

Yes. I think that's nothing has caused us to change that outlook. I mean it's a very high-level outlook and more of it comes from M&A, that's fine. When you're buying the properties with the capital efficiency, we buy them at which we buy them. But that actual mix could change, but that's probably the way to think about it. That is the way we think about it. But again, if the mix changes, we have more contract wins and more M&A. It's all very accretive and as long as we're refilling the bucket of embedded earnings, we feel good about it.

Operator:

Good morning, and welcome to the Molina Healthcare Fourth Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Standing in for Joe Krocheski today is Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Joe Zubretsky:

Thank you, Jeff, and good morning. Today, I will discuss several topics. Our financial results for the fourth quarter and full year 2023, our growth initiatives and our strategy for sustaining profitable growth, our 2024 premium revenue and earnings guidance and an affirmation of our long-term growth targets. Let me start with our fourth quarter performance. Last night, we reported adjusted earnings per diluted share of $4.38 on $8.4 billion of premium revenue. Our fourth quarter results and performance metrics demonstrated strong medical cost management and operating cost discipline. Medicaid continued to perform well, withstanding the impacts of the unprecedented redetermination process. Medicare experienced higher than target medical costs, consistent with prior quarters and Marketplace performed very well despite the late in-year medical cost seasonality typically experienced. Our fourth quarter completes a strong year of operating and financial performance. Full year adjusted earnings per share of $20.88 represents 17% year-over-year growth, squarely in line with our long-term target range of 15% to 18% and 6% above our initial 2023 guidance of at least $19.75. Our full year premium revenue of $32.5 billion represents 5% year-over-year growth, and our pretax margin of 4.8% is at the high end of our long-term target range heading into 2024. In Medicaid, our flagship business representing over 80% of revenue, we reported an 88.7% MCR for the full year, which is within our long-term target range. Throughout the redetermination process, we have managed through a number of factors that shape Medicaid's performance, all to land the full year result at a solid jump-off point into 2024. These factors included medical cost utilization, various state corridors and MLR minimums and prospective rate changes. In Medicare, the full year MCR was 90.7%. While the business is profitable, we did not meet our performance expectations due to higher utilization of supplemental benefits, in-home services and high-cost drugs. I am confident that our 2024 bid strategy, adjustments to benefit design and various operational improvements will return the business to target margins in 2024. In Marketplace, we reported a 75.3% MCR for the full year, below the low end of our target range, which reflects the successful execution of our small, silver and stable strategy. This business is now positioned to grow at a rate, which allows us to sustain mid-single-digit margins. In addition to delivering strong financial results, in 2023, we continued to execute on our profitable growth strategy. To recap the growth milestones achieved in 2023. In January, we successfully reprocured our contract in Texas for the state's STAR+PLUS program, retaining all eight regions and likely growing market share. In July, we successfully launched our Iowa Medicaid plan following the RFP, which we had won in a highly competitive process in late 2022. In August, we announced that we were awarded a contract to once again serve Medicaid beneficiaries in the state of New Mexico. In September, we closed on the My Choice Wisconsin acquisition, further expanding our market-leading LTSS franchise. In June, we agreed to acquire Bright Health's California Medicare business, which we have now closed effective January 1, 2024. Also effective January 1 and after another win in a highly competitive bid process, we successfully launched our Nebraska health plan. And finally, on January 1, we launched our expanded California platform, including Los Angeles County, which doubled the size of our business in the state. Collectively, these acquisitions and RFP successes represent $7 billion of annual premium revenue, a portion of which was in our 2023 results, most of which is in our 2024 guidance and all of which will be fully realized in 2025. To say we are pleased with the execution of our 2023 growth initiatives would be an understatement. But the growth story doesn't stop there. The pipeline of opportunities, fueling our future growth trajectory is extremely strong. Let me begin with reprocurements. We have submitted our RFP responses for contract renewals in Florida, Virginia and Michigan. We are proven partners with all three of these states, and we are confident in our ability to retain and grow these relationships. With regard to new state opportunities, including the Florida opportunity just described, there is over $50 billion of total premium revenue opportunity, active or near term, up for bid in several states over the coming years. We have already submitted bids in the states of Kansas and Georgia. With our demonstrated capabilities and referenceable track record, we remain confident in our ability to continue to win new state contracts. With respect to our M&A initiatives, our acquisition pipeline remains robust with actionable opportunities and we are confident in our ability to deliver growth from this key component of our strategy. Since 2019, we have completed eight transactions having acquired over $11 billion of premium for which we paid 22% of revenue. This capital allocation to M&A will continue to be a value driver. Turning now to our 2024 guidance. We project 2024 premium revenue of approximately $38 billion, which is consistent with our previous outlook and represents 17% year-over-year growth. We project 2024 adjusted earnings per share of at least $23.50, representing 13% year-over-year growth. Mark will take you through the detailed guidance build in a few minutes. But in the meantime, let me offer some high-level commentary. Our projected premium revenue growth to $38 billion represents a well-balanced combination of new contract wins, acquisitions and growth in our current footprint, partially offset by the impact of Medicaid redeterminations. With respect to earnings guidance in the core business, in Medicaid, our guidance fully considers the impact of the redetermination process. From a margin perspective, this is playing out as we have predicted. The impact of acuity shifts is real, but not significant. The risk corridors acted as a financial buffer and rates prospective and retrospective are largely capturing the trend impact. On a same-store basis, we are projecting the 2024 Medicaid MCR to be within our long-term range. We expect Medicare to return to mid-single-digit profitability in 2024 as a result of our bid strategy, adjustments to benefit design and operational improvements in the legacy business. Our Marketplace product has been priced right, is competitively positioned and the risk pool has stabilized. We expect the business to achieve mid to high single-digit margins, membership to grow over 30% and revenue to grow 17%. On top of our 2024 earnings per share guidance of at least $23.50, we now have $4 per share of new store embedded earnings, which, as you may recall, represents the expected accretion produced by our new store growth. Mark will review the components of the updated $4 per share in his remarks. Our confidence in our 2024 guidance starts with a high-quality 2023 earnings baseline and then takes a thorough account of all the various factors, exogenous and company-specific, that could impact earnings in 2024. Now, a few comments on our longer-term trajectory. Our 2024 guidance picture is one more data point that validates our long-term targets of 13% to 15% premium growth and 15% to 18% adjusted earnings per share growth. We committed to these targets at our Investor Day last May, and we reaffirm that commitment today. With the majority of the $4 of new store embedded earnings expected to emerge in 2025, we already see a clear outlook to achieving the low end of our long-term EPS growth target in 2025, even before considering the execution of additional growth initiatives and driving growth from our current footprint. In summary, we are very pleased with our 2023 performance, our trajectory to deliver the growth and profitability inherent in our 2024 guidance and the embedded earnings outlook we provided for 2025. Our confidence in continuing to achieve our long-term targets is data-driven as demonstrated by the following historical fact set. We have reprocured approximately $12 billion in existing revenue. We have added approximately $7 billion of new revenue through wins of new or expanded contracts in seven states. From 2020 to 2023, we achieved 21% annual premium growth and 25% annual earnings per share growth. 2024 guidance, 17% premium revenue growth year-over-year, 13% earnings per share growth year-over-year. And for 2025, and we expect to harvest the majority of our $4 per share of embedded earnings. Our strategy is clear and simple. We are in the business of providing access to high-quality health care for individuals relying on government assistance. Our business model is also clear and simple. We take on capitated risk, take or make rates that are commensurate with medical cost trends, and manage those trends to consistently achieve our target margins while maintaining higher standards of quality. The execution of our strategy and business model has been and will continue to be strong which is why we look to the future with a great deal of confidence. In conclusion, I want to extend my special thanks to our 19,000 associates who are dedicated to delivering access to high-quality healthcare to our members. It is my privilege to serve with such a committed and capable group of professionals. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Operator:

[Operator Instructions] The first question today comes from A.J. Rice with UBS. Please go ahead.

Joe Zubretsky:

Sure, A.J. With respect to the Medicare MLR question, we have three components of medical costs that ran higher than expectations. One was LTSS hours on the Medicaid side of the MMP business. Second, high-cost drugs. And third, supplemental benefits, vision, dental, cash card, over the counter was a little too richly designed in 2023 to be honest. We pulled back on those benefits in our 2024 product design and bids. We reshaped some of the allowance-based benefits to be more managed, and we're confident that that cost category will come back into line. On LTSS hours on the Medicaid side of the MMP benefit, we know where, we know why, and those corrective actions are in place. And it's not unusual in a soft economy for in-home service hours to increase. So we are very confident in the restoration of our MCRs back to the top end of the range in Medicare to 88% in 2024. You also asked about the Medicaid MLR. And let me frame it this way, and then I'll turn it to Mark. The re-determination process actually unfolded exactly as we had planned and as we had predicted. The acuity shift was noticeable, but it was -- it wasn't dramatic and it wasn't significant, but it was noticeable. And that began to happen as the redetermination process began. We then said, and it occurred, that the first financial cushion would be the corridors, the payments into the corridors that existed in the latter half of 2023. That acted as a financial buffer. In the meantime, as the acuity shift became noticeable to our state partners, they began to introduce rate adjustments to account for the acuity shift. So going into 2024, the rate actions completely compensated for what we call [poor] (ph) medical trend, completely compensated for any acuity shift, and that's why we're able to print an MCR in Medicaid at the high end of the range at 89%, which includes a little bit of pressure from the new business that we put on the books.

A.J. Rice:

Okay, great. Thanks a lot.

Cal Sternick:

Yeah, thanks for the question. I wanted to ask about the Marketplace. It sounds like the book is running really well and I think you were a little bit more competitively priced this year than you were previously. So I guess first, is the expectation when we talk about mid-single digit to high single digit margins that you're within sort of that 5% to 7% range, do you expect to be towards the upper half of that, or maybe a bit above? And then second, how do you think about the market and the positioning for 2025? Do you think you're still going to maintain the current pricing position or do you expect to, I guess, be more competitive across your total footprint again?

Cal Sternick:

All right, great. Thanks.

Kevin Fischbeck:

All right, great. Thanks. Maybe two questions as I get in. I guess the first one on the Medicare side, I just want to make sure I understand your commentary around MLR because you're bringing in Bright with a PDR, but you're still saying you are going to be at the overall target margin. You're talking about the core business being at target margin, or even with Bright losing money you'll be at target margin on the consolidated book. And then thinking about the exchanges, I guess there was potentially some issue about redetermination to kick people off and then the sickest part of that population comes onto the exchanges. Are you seeing any of that or does the risk pool benefit of lower subsidies just kind of make that not really an issue? Thanks.

Mark Keim:

Yeah, fantastic. Good morning, Kevin. So Bright comes to us with a PDR in place. With that PDR, the benefit goes into the MLR line and effectively reduces the MLR. So on the bright component, which is a third of our book, you'll see an MLR that's below our target range at the moment. On the DSNP, which is another third of our business, we're seeing a trend of probably around 4%. But overall, we're able to offset that and pull that into our target range. And of course, on MMP, which is the third component of the book, the rates that we're getting from our state and CMS partners, we feel are quite adequate to bring us all told to that ADA in our MLR guidance.

Mark Keim:

Yeah, in the past, when we picked up SEP members, they put a little pressure on our MLR. What we're seeing in the third and fourth quarter in ‘23, and what I expect into ‘24 is they'll come over at more sustaining and normalized levels. That is, they won't put pressure on, because they're coming off normal using services. There's not pent-up demand. They're not new to the product. So I'm expecting to see a good pickup on SEP, as we did in Q3 and Q4, and not pressure on the MLR.

Josh Raskin:

Hi. Thanks. Good morning. Two for me as well. The health insurance exchange membership up 31%, but revenues up 17%. Is that state geography mix-related or is that reductions in prices and what's driving that versus a market that's generally raising prices? And then I'm still confused on Bright, how the target -- how the MLR for Bright that you're booking this year is below the target range, but you're actually increasing the embedded earnings by $0.50 to $1.50? Maybe just help us understand those two parts.

Josh Raskin:

So how does that impact -- I'm just trying to -- so it feels like with the PDR, you guys will sort of reverse that through the year. How does the embedded earnings go up? Right. I'm confused with how is Bright, MLR low, but they're losing more money?

Josh Raskin:

Okay. Got it. Thanks.

Justin Lake:

Thanks. Good morning. I just want to follow up on Bright. So a few things here. First, can you give me the PDR number that you put through there for 2024?

Justin Lake:

Okay, and so you're saying the -- I understand the PDR getting it to normal levels potentially, but how does the PDR get it below normal MLR levels?

Justin Lake:

Okay, so your point is that just thinking about the math of this, the MLR is going to go up next year because it's actually below normal and you're saying the SG&A will come down.

Justin Lake:

Okay. And you expect to get this full dollar back plus in 2025?

Justin Lake:

Got it. And then lastly, just on, there's a big RP as you know in Florida, I think a lot of anticipation there around when that might be communicated. My understanding is we're kind of into the second round in negotiations. I assume you can't tell us whether you're still kind of in the running there, but any idea given that given where you are today, any idea when you think that under normal conditions that MLR would be announced? Or should the RFP would be announced, not the MLR?

Justin Lake:

Thanks for the color.

Stephen Baxter:

Hi, thanks. I appreciate all the commentary on your Medicaid expectations for the year. I was hoping you could help us think about the bridge from your Medicaid MLR exit in the year to your same-store Medicaid MLR in 2024, around the midpoint of the range. I'm curious if you think that the [core] (ph) could kind of get there earlier in the year because some of the one-one rate adjustments that we've been focused on, or do you think that'll take some time to work through the business and then other seasonal factors play out? Thanks.

Mark Keim:

No, I think that's exactly right. As we look at the rates and the trend being roughly equal, our legacy book pretty much holds flat. As you know, we're bringing in a bunch of additional new business that puts a little more pressure in the first year, which rounds us out at the 89% that we have in guidance.

Nathan Rich:

Hi, good morning and thanks for the questions. I wanted to ask on the Marketplace MCR, I guess moving back to the low end of the long-term range. So up about 300 basis points year-over-year. Can you just talk about what's driving that increase year-over-year? Is that just a function of the membership growth that you saw? And then have you thought of -- how, I guess, are you thinking about maybe the long-term target for that business? Is 78% to 80% still the right range to use? And then just one clarifying question for Mark. I think you said quarterly EPS is weighted towards the back half of the year. I think usually the back half is about 45% of the total year. So does that mean this year will be over 50% or is that not the right way to interpret the comment that you made? Thank you.

Mark Keim:

Yeah, absolutely. Nathan, and good morning. Yeah, you got it right. We're normally 55-45 on the front half versus the second half of the year. I'd almost flip that around this year because the dynamics are a little bit different. One, we put on a lot of new business this year. As you can see in our revenue bridge, we got $5.7 billion of new revenue coming into the company, which always comes in just a little bit warmer in the first year, but in the first quarters in particular. So I'm expecting to get some momentum on MLRs in Medicaid and Medicare as we kind of grow into our new footprint there. So that'll change the dynamic a little bit. The other thing is, and I think Joe touched on this, very often, Marketplace has attrition throughout the year such that Marketplace declines during the year. This year is a little bit different. With all the members rolling off on redet and us expecting to pick up our fair share of them in Marketplace as they convert, we'll see a growing book in Marketplace. And as you know, we've got some confidence on the margins given that we really prioritize margin over volume in Marketplace. So for those two reasons, you're going to see a little bit more of a back-end loaded EPS trajectory this year. I think that should address your question.

Operator:

The next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Joe Zubretsky:

Hi, Sarah. I'll kick it to Mark for we have very detailed analysis of the changes in the risk adjustment rules and what it meant for our book. In answer to your second question, one of the reasons I articulated earlier the configuration of our book of business being somewhat different than what I call mainstream Medicare Advantage is that we have a low income, high acuity population. Our members are using services from the first day of the year to the last day of the year. They're chronic. They have comorbidities and are polychronic. And so the notion of discretionary utilization means far less to our business based on its mix than it might be to a mainstream population where discretionary or the pedic procedures are being done, screenings are taking place, perhaps, and up demand from the pandemic. In our book of highly chronic patients, high acuity members, that's less of a dynamic. And so the three cost categories that I articulated previously, LTSS hours, high cost drugs, GLP-1s, and the supplemental benefits were really the drivers in our book. Mark, do you want to take the risk adjustment question?

Sarah James:

That's helpful. And one more clarification if I could, just on your comment with the exchanges, I know you guys are guiding to a really favorable MLR for this year, but is there still a step-up in earnings as you mature this new book? I guess in other words, your year one is still slightly below target range, right, on new members? And then there would be an implied earnings lift as that book moves into the second year of operations?

Sarah James:

Thank you.

George Hill:

Yeah, good morning guys. And I think Nate and Sarah kind of covered everything I wanted to hit on the exchange, but I'll try to bring up one more topic, which is I guess, can you talk about underlying utilization trends and kind of cost growth trends there because it sounds like you guys priced the book for growth in 2024 but the utilization is going to kind of continue to remain low. So I guess I'm trying to parse the spread between utilization trends and price growth for the margin expansion. Kind of any color on that would be helpful?

George Hill:

Yeah, Marketplace.

George Hill:

It does. And maybe if I can just sneak in a quick follow-up. I know it's a tiny piece of the business. Could you talk about kind of the expected disruption in PDP in 2025 given the changes from IRA?

George Hill:

Yeah, but like I said, I know it's a tiny part of the business, but we're expecting kind of PDP to be pretty disruptive or disrupted in 2025 because of the IRA changes. I know it's a tiny part of the book, but if you guys have any commentary on what you're saying would be helpful.

George Hill:

Thank you.

Scott Fidel:

Thanks. Right before the bell here. I just was interested if you could walk us through your preliminary analysis on the 2025 MA advance notice and whether you're able to parse that down between the legacy business impact and then what you're projecting will be the preliminary impact on the Bright book? Thanks.

Mark Keim:

Yeah, just to build on that, and a lot of this data is in the public domain at this point. On the effective benchmark rates in the advance notice and then risk or normalization, most folks are seeing across the entire market, the net of those at about zero, right? As Joe mentioned, we see a net of about a positive 50 bps. So we're a little bit better on the benchmark rate, and we're a little bit not so bad on the risk score normalization for some reasons I alluded to earlier. So we're seeing about a 50 BP benefit there, and obviously the rest of STARS impact and what ultimately everyone does with risk scores has yet to play out. But that's our initial point on the legacy book.

Mark Keim:

We're still working our way through that. There will be a couple things going on there. As I mentioned earlier, we're six weeks into owning it. We're working through those issues with the team there. There will also be a bunch of dynamics that happen this year. There are actually two entities there. One is Community Health Plan, and the other one, Brand New Day. There will be some issues between them on exactly how we balance the effects of all this between those two entities. So a little bit of work there and not ready to comment on that one.

Scott Fidel:

Okay. All right. Thank you.

Operator:

Good morning, and welcome to the Molina Healthcare Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President of Investor Relations. Please go ahead.

Joe Zubretsky:

Thank you, Joe, and good morning. Today, I will provide updates on several topics. Our financial results for the third quarter 2023, our full year 2023 guidance, Medicaid redeterminations, our growth initiatives and our strategy for sustaining profitable growth and our 2024 premium outlook. Let me start with our third quarter performance. Last night, we reported adjusted earnings per diluted share for the third quarter of $5.05 or 16% year-over-year growth on $8.2 billion of premium revenue. Our results reflect the continued execution of our strategy for sustaining profitable growth. Our third quarter 88.7% consolidated MCR and 4.6% adjusted pretax margin demonstrate continued strong medical and operating cost management. Our year-to-date consolidated MCR of 87.8% is squarely in line with our long-term target range and our 5.1% pretax margin is above the high end of the range. We note that investment income continues to bolster our year-over-year earnings growth and already a strong margin profile. Our Medicaid business performed as we expected. Our 88.8% MCR was within our long-term target range. Medical cost trend including the net effect of redetermination acuity shifts in corridors in several states was within our expectations. Medicare’s results came in below our expectations with a reported MCR of 92.4%. In the quarter, we continue to experience higher utilization of outpatient, professional and in-home services, all of which we believe we appropriately addressed in our 2024 bids. And finally, marketplace with a reported MCR of 78.9% continues to perform well. Medical cost trends are in line with our pricing assumptions, and our improved risk adjustment performance is meaningful. Our small silver stable strategy is working. In summary, our third quarter results build on our strong first half performance. Turning now to our 2023 guidance. Based on our third quarter results, we are affirming our full year 2023 adjusted earnings per share guidance of at least $20.75 or 16% growth year-over-year, consistent with our long-term earnings per share growth target of 15% to 18%. Our fourth quarter outlook takes full account of our year-to-date performance and considerations for seasonality and conservatism. Now a few words about Medicaid redeterminations. As of July, all our Medicaid states have begun disenrolling members. Despite the redetermination activity, our third quarter Medicaid membership was nearly unchanged from the second quarter. Growth driven by the initiation of the Iowa contract and the closing of the My Choice Wisconsin acquisition offset the $200,000 member decrease from the net impact of redeterminations and new enrollment. While many uncertainties remain on the ultimate impact of redetermination, we now believe it prudent to lower our retention assumption from 50% to 40%. Mark will address implications for revenue and our unchanged outlook for $38 billion in premium revenue for next year in his remarks. Although, the medical cost profile of members who have left the Medicaid roles continues to be more favorable than the portfolio average. When combined with the impact of corridor offsets in several states, our overall Medicaid MCR was within our expectations. Mark will provide more color on redeterminations during his remarks. Turning now to an update on our growth initiatives and our strategy for sustaining profitable growth, beginning with our recent state wins. The implementation of our new California contract, which will nearly double the size of our current membership in the state and add approximately $2 billion in annual premium is proceeding as planned for a January 1, 2024 start date. In July, we finalized our contract for the Texas STAR+ program, retaining our entire existing footprint. With numerous new entrants likely attracting low share, we expect our share of membership in the state to grow, driving incremental annual premium revenue of approximately $400 million. Also in July, we successfully launched our Iowa health plan serving approximately 180,000 members, consistent with our expectations. Our Nebraska implementation is tracking to a successful launch on January 1, 2024, and will contribute estimated annual premium of $600 million. In August, we announced that we will once again be serving Medicaid beneficiaries in the state of New Mexico. We expect the new contract to begin mid-2024 and produce approximately $500 million in annual premium revenue. In Indiana, the state deemed us not to have met the readiness requirements for a Medicaid contract due to our Medicare DSNP product becoming available in the state on January 1, 2025, and not by January 1, 2024, as required. We are proud to have won the initial award as testimony to our proposal skills, but disappointed we did not meet that one readiness requirement. Our growth agenda is in full gear. Even with the development in Indiana and changing assumptions for redetermination retention, all of these new contract wins and reprocurements combined keep us on track to approximately $38 billion of premium revenue in 2024, as previously forecasted. Shifting to our M&A activity. In early September, we announced the closing of the My Choice Wisconsin acquisition. Recall, this transaction adds approximately 40,000 mostly MLTSS members and approximately $1 billion in annual premium revenue. The regulatory approval process for the Bright Medicare acquisition is proceeding as planned. We continue to work with Bright management on satisfying the remaining closing conditions and continue to expect to close by the first quarter of 2024. Now looking ahead to 2024. Assuming a timely close of the Bright Medicare acquisition, we remain confident that all of the known building blocks provide line of sight to approximately $38 billion of premium revenue in 2024, which represents 19% year-over-year growth, even before executing on additional strategic initiatives. While there are many positive earnings catalysts going into next year, which Mark will speak to in a moment. There are also some factors, which has not yet fully developed. As is customary, we will provide our specific earnings guidance with you in February. Recall that at our Investor Day earlier this year, we announced our long-term financial targets, the centerpiece of which is a long-term earnings per share compound annual growth rate of 15% to 18%. With the visibility we have into our earnings trajectory, we are comfortable in reaffirming our commitment to that compound annual growth rate target over the next three years. As always, I would like to thank our management team who worked tirelessly every day to deliver these results. Our team has evolved to keep pace with our growth and to execute each stage of our strategy. Recall that most recently, we promoted both Jim Woys and Mark Keim to the position of Senior Executive Vice President with Jim adding the title of Chief Operating Officer. In further shaping our lineup under Jim and Mark, two Molina veterans, Executive Vice President, Deb Bacon; and Dave Reynolds will now lead our flagship Medicaid business. We are also adding additional management talent in our Medicare and Marketplace businesses and scaling up our integration platform, all to support our substantial growth. Marc Russo will be leaving the company with our thanks for his service. Not only our executive team, but all of our colleagues throughout the enterprise and across the nation are vital to our success. I want to extend my special thanks to our nearly 18,000 associates who are dedicated to deliver access to high quality healthcare to our members. It is my privilege to serve with such a committed and capable group of professionals. In summary, we are very pleased with our performance this quarter. We have maintained our attractive margin profile during this unprecedented industry-wide redetermination process, while continuing to generate double digit growth. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Operator:

Thank you. [Operator Instructions] Our first question comes from Josh Raskin from Nephron Research. Please go ahead.

Joe Zubretsky:

Josh, when it comes to the exchange business in the special enrollment period, we are seeing an increase in special enrollment, monthly special enrollment. It was averaging 8,000 to 9,000 a month until the redetermination process happened, and it’s increased to 12,000 a month and growing. So we are getting membership flow into the Marketplace from Medicaid redeterminations, not only from our book of business, but from competitors’ book of business. We do have a product and every place we have a Medicaid footprint. But in many cases that product isn’t as competitive – competitively priced as competitors. So where we’re competitively priced we’re getting Medicaid membership from other competitors, and we’re getting Medicaid – Marketplace membership from our own book of business. So we’re pretty pleased that we did not forecast Marketplace membership growth. We continued it upside to our membership case and we’re seeing a nice result there. Mark, anything to add?

Joe Zubretsky:

The second part of your question, Josh, you asked about the retention percentage. We just followed the data and with 300,000 membership losses to date, the first thing we say is it’s ill-advised to extrapolate any current result. Many of our states front loaded the process and by front loading we mean they specifically targeted members more likely to lose eligibility. And the fact that 70% of the terminations were procedural means that the reconnect rate has been high averaging 25% and now moving to 30% of those members who have lost eligibility. So we just followed the data and we originally said we would lose 400,000 of the 800,000 members we gained during the pandemic, and now that number has increased to 480,000. And I suppose that would mean that it is likely that whatever we’re seeing in terms of Marketplace pickup would likely increase as well.

Operator:

The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Joe Zubretsky:

On the Medicaid MLR, I’ll kick it to Mark here for more color. But as we’ve always said and we made a big point of this at Investor Day. On the pre-COVID minimum MLRs and corridors that set sort of an industry benchmark of medical margin performance. We have routinely outperformed those benchmarks, which gives rise to a payback to the state in the form of a liability in many of our states. And some of those corridors we’re deep into them, meaning that we’re in the 100% tier. So with that having been said, if performance deteriorates during the year for any reason, whether it’s an acuity shift for redetermination, whether it’s a trend inflection, whether it’s flu or COVID for whatever reason that liability acts as sort of the first financial cushion to absorb it before rates pick up, meaning the acuity adjustments, trend assumptions, always being baked into rates, fulfilling the concept of actuarial soundness. And we’ve said that from the beginning of this process that this is developing exactly as planned. We knew there’d be an acuity shift, manageable and modest as it is, and would put pressure on the underlying MCR. Our corridor liabilities would act as the first point of financial cushion until the rate process takes full credit of the acuity shift and trend. And that’s exactly what’s happening today.

Joe Zubretsky:

Kevin, the second part of your question was on the Medicare MCR, which admittedly ran hot in the quarter at 92.4% and was running in the high 80s earlier in the year. We’re still on target to produce 2.5% to 3% pre-tax margins in that business. It should be twice that, our target is 5% to 6% pre-tax. And yes, we saw some trend inflections in the third quarter that were higher than we observed in the first part of the year. But we’re conservative pricers. We caught some of these trends early in the year, whether outpatient, professional services, screenings and PCP visits are back both on the medical side and on the behavioral side. And LTSS hours, the hours assigned to the frail members who are getting in-home services increased slightly in the quarter. All in, we believe we captured a conservative view of medical cost trend, which right now is running at 7% year-over-year higher than we had expected, but we believe we’ve captured that in our 2024 bids and fully expect our Medicare business to be back to 5% to 6% pre-tax margins in 2024.

Operator:

The next question comes from Nathan Rich from Goldman Sachs. Please go ahead.

Joe Zubretsky:

Sure, Nathan. I’ll provide the framing and then kick it to Mark. And I think Mark gave some of the building blocks in his prepared remarks. First and foremost, we’re very confident in the $38 billion revenue outlook for next year. That’s 19% year-over-year growth in a year where we’re still producing best-in-class margins. First, I would say we’re starting with a very high quality solid 2023 earnings baseline. We generally grow organically in our footprint, embedded earnings of $5.50 a share of both new store, both M&A and new contract wins is certainly a catalyst into next year. Those implementation costs of $0.75 reverse. We believe interest rates will continue to be high. Bear in mind that half our investible base is in intermediate term bonds, so they’re locked in, and then the rates on the short-term portfolio are going to fluctuate with what the Fed does. But our outlook there is that interest rates will remain high going into next year, even to the end of next year. The three variables that we need to see more of before giving a specific earnings per share forecast for 2024 is how does redetermination experience emerge in the fourth quarter? To date, it has been completely in line with our expectation. We did increase our ultimate loss assumption as spoken. And we’d like to see how the rates develop on our 60% of our Medicaid revenue for next year. We know about rates on 40% of our Medicaid revenue next year. Those rates have been actuarially sound. We’ve been satisfied with the acuity adjustments. As Mark said, those acuity adjustments were resident in 10 out of the 12 rates that we already know about. But we want to see how the rates develop on 60% of the book. So those are the variables going into next year. As you cited at the beginning of your question, we are confident and committed to the 15% to 18% long-term earnings per share growth rate off the 2023 baseline, which means that 2026 earnings per share will be 52% to 64% higher than 2023 of $20.75. Mark, anything to add?

Nathan Rich:

Thank you very much.

Justin Lake:

Good morning. Sorry about that. Appreciate the question here. The – two things I wanted to touch on were – you had a fair amount of prior year development in the third quarter kind of abnormally high relative to previous. Just curious what segments of the business might have drove that and the potential impact to earnings there. And then secondly on, Joe, you mentioned investment income. I’m curious as you’re having these conversations with the states on rates. Just want to confirm, like historically my understanding is states didn’t really take when they set your margin – your rates actuarially sound with a margin target behind it. That margin target was before investment income. Are they looking at investment income and say, geez, maybe we could pay you a little bit less because your earnings are higher because of the investment income? Or is that still left outside of the calculation? Thanks.

Mark Keim:

That that’s exactly right, payment integrity has become such a fundamental part of our operations and we do it fairly well. That prior year amount that you pulled from the earnings release was largely offset by corridors. Now, more to the point when we see strong prior period development, it’s tempting to be concerned about current reserving. Did they somehow offset to make earnings, something like that? Look, I’d point to the strength of our current reserve position, 51 days, DCP the growth versus revenue. So I feel both good about our current reserving position, but the strength of this prior year exercise as well through our payment integrity function.

Calvin Sternick:

Yes. Thanks. Maybe just switching gears here a little bit. I’m curious what you’re seeing in the cohort of members who haven’t reconnected within that 90 to 120 day window, but realize afterwards that they’re still eligible for Medicaid. What are the membership additions looking like there relative to what you expected? And I know you’ve talked about in the past investing in quality initiatives to move up in the auto sign algorithms. So just wondering if you’re seeing those efforts bear fruit here or if it’s still too early to tell or just too much noise going on with redeterminations?

Mark Keim:

Yes. When we talk about reconnect, just to set the stage for everybody, we tend to think about two categories, most of them are what we call seamless that is within 90 to 120 days, they realized they lost coverage, contacted the agency and got back on as though they never lost coverage and we pick up the retro premium. Now as Joe mentioned, we’re only three, four, five months into this dynamic. So the people that are outside the 90 to 120 day window are only starting to emerge now. We call those reconnects with a gap. They will come in through the typical auto assign process. And through a number of algorithms, we’re getting better and better on auto-assigns in states. So I feel good about our recapture of those reconnects with the gap.

Joe Zubretsky:

I think we use the word generally, obviously, because we were reporting a retroactive rate that not only us but the entire industry is advocating a guest. So that was the reason for the term. But for the most part, about 40% of rates that we know about that impact 40% of our revenue for 2024 in the Medicaid business, the rates have been actuarially sound and have included what we consider to be actuarially reasonable adjustments for acuity.

Operator:

The next question comes from Stephen Baxter from Wells Fargo. Please go ahead.

Mark Keim:

So on the reconnects themselves, we’re seeing them come back in closer to the stayers average, the portfolio average. Now I appreciate your question about historical benchmarks of data, but the problem is over the last two to three years, we didn’t really have such a phenomena. But I am feeling pretty good about the MLR of these reconnects, both seamless and with the gap.

Operator:

Next question comes from Scott Fidel from Stephens. Please go ahead.

Joe Zubretsky:

So Scott, we’re very pleased with the strategic complement to our Medicare business, taking it from a $4 billion business to nearly a $6 billion business in a very important state for us, obviously, in California, where we’re doubling the size of our Medicaid business. So from a strategic rationale perspective, we’re very excited about it. In our embedded earnings is a run rate accretion level of $1 of earnings per share, ultimately, given the way the CMS pricing cycle works, it is going to take us a little longer than normal to get there, but we’re confident in doing so. I’ll stop short on commenting about their financial performance. They’re a public company. This is a material to their operations. So I would allow them to report on how they’re doing. But we do have visibility into how they’re performing. And when we said that one of the variables going into next year is how will it perform in the first year. We don’t yet know because we don’t know where it will be performing when we close on it. I’ll stop short of commenting on their performance because that would be inappropriate. Obviously, they’ll report earnings soon, and you can get a view as to how the Medicare business is doing.

A.J. Rice:

Just maybe to ask about the exchanges a bit more. It sounds like you’ve got some conservatism, at least you believe you have in the fourth quarter baked in. I know you’ve been running a pretty low MCR year-to-date and exchanges. Are you allowing for significant uptick? Sometimes we see that utilization. Obviously, as people hit their deductible limits, et cetera, and exchanges. Can you give us any sense of what you’ve baked in? And I think the comment was made and as you look ahead to 2024, you’re not expecting a lot of premium growth, it seems like you’ve repriced the business pretty well. Why not take a little more active approach to growing that product line next year, given it sounds like you’re hitting your margin targets pretty easily this year in that product? Or maybe I’m missing something.

Mark Keim:

A.J., the only thing I’d add is Joe has been adamant about small, stable and silver in this product. And so when we set rates last June, we set them on our discipline on our margin expectations. It looks like the risk pool next year is stabilizing with some of the more strangely players dropping out, which means the risk pool for the rest of us has stabilized as a result on pricing we committed to last June, we’re seeing a much better competitive position. Joe mentioned 20% of our county is now growing to 30%, where we’re number one or number two, which means I’m expecting to get more volume than I thought before at margins that conform with our discipline. So we’re feeling good about that outlook.

Operator:

The next question comes from George Hill from Deutsche Bank. Please go ahead.

Mark Keim:

I’ll take that. Obviously, I’m in no position to comment on retro rates that haven’t been contractually committed to by our state partners. But with our actuarial team and our data-driven process, we’re in there working with them. And I’d say there’s a handful right now where the data is compelling. The state is receptive to the discussion. We’ll let that play out. And of course, I’ll book those benefits if and when they come.

Operator:

The next question comes from Gary Taylor from Cowen. Please go ahead.

Joe Zubretsky:

First question, Gary, this is Joe. Yes, as embedded earnings, you’re absolutely right. We removed Indiana from embedded earnings but replaced it with New Mexico and an expansion in Texas now that the contract is finalized. And yes, as I said, we’re very confident that we can get Bright to target margins after a two-year period and achieve the $1 earnings per share accretion number. And again, we’re just saying that we just don’t know what we’re going to inherit in terms of earnings per share closing to forecast the first year.

Gary Taylor:

Thank you.

Sarah James:

Thank you. One clarification on the rejoiners, can you give us a split of what’s coming back in exchanges versus coming back on Medicaid? And then in the two of the 12 states that didn’t put in the acuity adjustments, are you able to see any pattern there, either in how the cost that is coming in, maybe the timing that they started redeterminations or how the rate is structured with risk corridors that you’re able to determine maybe why those two were outliers?

Mark Keim:

Hey Sarah, on the reconnects, when we use the term reconnects, both seamless and with a gap, that is purely a Medicaid concept. So that 25% going to 30% that we’re seeing is strictly within Medicaid – then separately, as I mentioned earlier, we’re picking up members in the marketplace. I mentioned closer to 40,000 through SEP in the third quarter. So that would be a different concept. And obviously, as an enterprise, only helps – in the overall membership story. And then Joe is exactly right, on the two of the 12 states where we haven’t seen it yet, there’s a few things driving that. The timing of when folks started impacts how quickly data develops to have a data-driven process. The timing of the fiscal year is definitely a component, but in all cases, the concept of actuarial sales just means it’s a matter of getting the data into timing consistent with fiscal years and appropriate retro periods. So we feel good about that process. And again, the vast majority have already given us those concessions. So we feel good about how the process will unfold.

Operator:

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Operator:

Good day, and welcome to the Molina Healthcare Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Investor Relations. Please go ahead.

Joe Zubretsky:

Thank you, Joe, and good morning. Today we will provide updates on our financial results for the second quarter 2023, our full year 2023 guidance in the context of our second quarter results, Medicaid redeterminations and our growth initiatives, and our strategy for sustaining profitable growth, including our 2024 premium revenue growth drivers. Let me begin with the second quarter highlights. Last night, we’ve reported adjusted earnings per diluted share for the second quarter of $5.65, or 24% year-over-year growth on $8 billion of premium revenue. Our 87.5% consolidated MCR in the second quarter demonstrates continued strong operating performance in medical cost management and was at the low end of our long-term target range. We produced a 5.3% adjusted pre-tax margin or 3.9% after tax, a very strong result that was above the high end of our long-term target range. Year-to-date, our consolidated MCR is 87.3% and our adjusted pre-tax margin is 5.4%. We note that investment income produced higher than expected results due to the increasing yield environment. In the second quarter, we continued to generate excellent margins in our Medicaid business with an MCR of 88.3%, bringing our year-to-date MCR to 88.4%. This result was in line with our full year guidance and long-term target range. As expected, the medical cost impact of redeterminations was negligible, although we are in the very early stages of that process. In Medicare, our reported MCR was 89.2%, which is above the high end of our long-term target range. We are experiencing some cost, pressure and professional and outpatient services and higher first year MCRs associated with growth. With a year-to-date Medicare MCR of 88.6%, the book of business continues to produce attractive margins. In Marketplace, our reported MCR was 73.7% for the quarter and 71.2% year-to-date. This result reflects the successful implementation of our pricing, metallic mix, and membership continuity strategies to restore this business to mid-single-digit target margins. In summary, our second quarter results built on our strong start to the year. Medicaid, our flagship business representing over 80% of revenue continues to produce strong, predictable operating results and cash flows. Our high acuity Medicare niche serving low-income members continues to grow organically and our Marketplace business is now well positioned to achieve target margins. Turning now to our 2023 guidance. Based on our strong second quarter results, we are increasing our full year 2023 adjusted earnings per share guidance by $0.50 per share to at least $20.75 or 16% growth year-over-year. Consistent with our long-term earnings per share growth target of 15% to 18%. Our earnings per share guidance is now $1 per diluted share higher than our initial guidance issued in February. Our pre-tax margins are exceeding our expectations. The Medicaid MCR is right on target, Medicare slightly behind target and marketplace substantially better. We note that these target ratios produce best in industry margins. Then of course, the interest rate environment has allowed us to produce investment income that has provided a short term earnings boost. Now, a few words on Medicaid redeterminations. During the second quarter, all but four of our states began disenrolling members with the remaining states initiating disenrollments on July 1. Our Medicaid membership declined by 93,000 members during the quarter, which was well within our expectations. Although the medical cost profile of members who have left is slightly more favorable than the portfolio average, the impact on our overall Medicaid MCR was negligible and within our expectations. We continued our outreach to members to minimize procedural disenrollment. We also continued to work with our state partners to ensure rates remain actuarially sound to account for any potential shifts in acuity. To date, all of our states have expressed a willingness to adjust rates as needed to account for any changes in acuity or trend. Mark will provide more color on redetermination during his remarks. Turning now to an update on our growth strategy. At our May Investor conference, we laid out our strategy for sustaining profitable growth. We plan to grow premiums at 13% to 15% through a combination of growth in our current footprint, strategic initiatives and accretive acquisitions. We also established a 2026 premium revenue target of $46 billion. We already have significant momentum toward achieving these growth goals. Our five recent state RFP wins drive more than $5 billion in incremental premium revenue. A portion of this incremental revenue is included in our 2023 guidance attributable to our Iowa contract, which we successfully launched July 1 with approximately 200,000 members consistent with our expectations. Most of the remainder emerges in our 2024 revenue outlook and a small component in 2025. We are also executing on the M&A component of our growth strategy consistent with our strategy of acquiring capitated government-sponsored assets. In June, we announced the acquisition of Bright HealthCare’s California Medicare Business for an attractive purchase price of approximately 28% of expected 2023 premium revenue. Bright’s Medicare business serves approximately 125,000 MAPD, D-SNP and C-SNP members across 23 counties in California with 60% membership overlap with Molina’s Medicaid footprint. We expect the transaction to add approximately $1.8 billion of premium revenue, deliver $1 of adjusted earnings per share at full run rate, but no earnings contribution in the first full year of ownership. We expect the transaction to close by the first quarter of 2024. The closing is subject to the solvency and continued operation as a going concern of Bright Health Group throughout the pre-closing period, as well as federal and state regulatory approvals and other closing conditions. Based on known building blocks, we now have line of sight to approximately $38 billion of premium revenue in 2024 or 19% growth before executing on additional strategic initiatives. Our new store embedded earnings is now $5.50 per share, providing meaningful visibility into our future earnings growth potential. We see additional embedded earnings upside if and when the several remaining COVID era corridors are eliminated. Two short months ago at our Investor Day, we reaffirmed our long-term financial targets, the centerpiece of which is the long-term earnings per share annual growth rate of 15% to 18%. Our performance this quarter supports that outlook. The revenue base and new store earnings profile continue to build with highly accretive new contract wins and M&A. Our second quarter and year-to-date operating results provide a very solid earnings base off of which to grow, and we have seen nothing in the early stages of the Medicaid redetermination process that changes our view of the earnings trajectory of the business. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Operator:

Thank you. [Operator Instructions] Today’s first question comes from Josh Raskin with Nephron Research. Please go ahead.

Joe Zubretsky:

Sure, Josh, I’ll start and then I’ll kick it to Mark for some color. First of all, the rate cycle in terms of the – our portfolio of states and how the rate cycles emerge actually couldn’t be better positioned for how the redetermination process is going to unfold. 25% of our revenue has rates that renew between April and July, another 25% in the early fall and 50% on January 1, which gives us good opportunity to have great visibility into any potential impact of redeterminations and engage in those discussions with the state, which are already occurring. Now as you know, and I’ll note the impact of acuity shifts is a normal rating criteria. Rating criteria includes a credible medical cost baseline, a trend off the baseline, benefit changes, plus or minus, and any potential acuity shift. So the fact that there’s an acuity shift that’s speculated to occur is actually part of the dialogue we’re already having in the states. Now only a handful of states actually implemented rates between April and July. And I’ll hand it over to Mark and he can give you some color on how those discussions went.

Josh Raskin:

Okay. So bottom line half are reflecting this already in some sort of perspective, we see it coming and the other half are going to make you whole at some point?

Josh Raskin:

Yes. Okay. Thank you.

Justin Lake:

Thanks. Good morning. Just a couple of questions on numbers. First, on the exchanges, can you tell us what the potential benefit was or what the actual benefit was to second quarter in terms of the 2022 final risk adjustment true-up. And then you said there that you’re confident in mid-single-digit target margins your MLR looks to me like it’s down 10% plus in the first and second quarter. Last year was flat. So it looks like you’re on target to do well better than 5%. And am I missing something there? Or is the back half going to be kind of flat year-over-year on an MLR basis?

Mark Keim:

Sure. I saw some analysts right on this topic. And some of them, we’re throwing around some pretty big numbers as much as $66 million in positive development of December 31. Just on risk adjustment. And what those analysts miss is that about half of that benefit a little more is tied up in margins. For those of you that follow the accounting, when we hang up an actuarial liability for risk adjustment, we try to identify the liability, but we also book a margin associated with it in case we’re wrong. More to the point, we also book a margin for risk adjustment data validation or RADV. So that $66 potential benefit that folks were looking at is roughly cut in half, a little bit more than cut in half just by the retention of margins that don’t fall to the bottom line. So then you’re working with a little bit less than half of that. The other thing is, as these risk adjustment liabilities ultimately emerge, most of you are aware that a service called Wakeley [ph], which anonymously combines the inputs from everybody so that we can all get some insights as we move along. As a result, quarter-to-quarter, we’re accruing and getting pretty dialed in on the ultimate liability. So this big number we’re potentially talking about more than cut and half, and largely recognized in first quarter with a little bit in the second quarter. The only other thing I’d say on the topic is this is normal development of risk adjustment kind of like IBNR, you always book it, but you expect it to roll off slightly favorable. So I wouldn’t call this necessarily an anomaly, but it is spread between the first and second quarter, and it’s in our numbers.

Justin Lake:

That’s great detail. Thanks. I’ll – can I squeeze in one on investment income, Joe? What’s the expectation for the full year? And then you said some of this is temporary. What should we think about normal investment income as we take out to 2026?

Mark Keim:

Joe’s got it right. Half of the portfolio is in cash, we made close to 5% on that cash in the second quarter. Now if anybody’s guess what the Fed does here. But our balance sheet is obviously very responsive to changes in Fed short-term rates. So 5% of that cash in the second quarter, but it’s anybody’s guess where these rates go third and fourth quarter. And as Joe mentioned, I’m also forecasting a slight decline in cash balance as we pay out some payables and some other true-ups on our balance sheet.

Operator:

Thank you. And our next question today comes from Stephen Baxter of Wells Fargo. Please go ahead.

Joe Zubretsky:

Let me just reframe the numbers, and I’ll keep it to more. Our states have all have executed ex parte processes. The automatic renewal rates have ranged from 20% to 70%, which is actually quite high. On terminations, at least two-thirds of the terminations have been procedural, in some cases, up to 75%, which then means – and this is the important point on the procedural terminations. The number of reconnects of the members that will reconnect to the process within the 90- to 120-day grace period is actually expected to be quite high since the procedural termination rate was also quite high. Now we haven’t seen that yet. Because this process just started. But we believe throughout the third quarter into the fourth, we’re going to see significant reconnection activity, which will carry with it retroactive premium back to the initial data disenrollment. Mark, some color on the detail numbers?

Stephen Baxter:

Thanks. And just one quick follow-up, if I can. You mentioned the medical cost profile on the early disenrollment slightly favorable. I guess at this stage, how are you thinking about what that could look like for the reconnects. Thank you.

Mark Keim:

Yes. Just to add to that, levers are slightly lower on MLR. We’re expecting a lot of reconnects. How will reconnects come back on MLR? Well, there’s a theory out there that reconnects many of them will only become aware of their need to reconnect because they have another claim or another doc visit, which means when they’re coming back on, they may come with a claim but they were also likely to come with two to three months of premium revenue. So I’m expecting pretty much a reversion to our mean as we see these reconnects and not a lot of volatility there.

Operator:

Thank you. And our next question today comes from A.J. Rice of Credit Suisse. Please go ahead.

Joe Zubretsky:

Well, I think on the first part of your question, first of all, state mix is really important. As we said in our prepared remarks, some states moved very aggressively initially, some states more cautiously. Some states, even – three of our states pause to let the administrative processes catch up with the flow of work. So I think state mix is really, really important as you judge any one company or any one state against sort of the market average. But we have seen nothing in the process that is outside of our expectations as we said. In terms of experience, we believe that a member will be reminded that they need to be on Medicaid if and when they have to go to the doctor or the emergency room or for some procedure. And as Mark said, maybe they’ll come back with a claim, but they’ll also come back with three or four months of retro premium. And that means the reversion to the mean to the portfolio average MCR is supported by that thesis.

A.J. Rice:

Okay. And maybe just one follow-up on the – in your comments about the Bright Health acquisition. You mentioned that one; you’ve got a solvency contingency in there. Is that related to the California plan you’re buying? Or is that related to all of Bright Health and would there be any opportunity if there is any issues for you to support the California plan as you’re waiting to get the regulatory approvals.

A.J. Rice:

Okay, thanks a lot.

Calvin Sternick:

Yes. Thanks for the question. I know it’s pretty early on the marketplace side of things, but just curious what kind of sort of trends you’re seeing in terms of applications or enrollment in June and July that you can speak to? And then maybe just one follow-up on the Bright business, $1 per share of embedded earnings, no contribution next year, but can you give a sense for what sort of the time line is to reaching run rate on that business?

Mark Keim:

On the marketplace question, you’ll appreciate with special enrollment period, we’re constantly picking up members month-to-month. That’s a pretty routine phenomenon here. What will be different going forward is we’ll start to pick up people that came off the Medicaid roles. Now we’ve got good visibility in special enrollment period, month-to-month, who’s coming in from Medicaid. Who’s coming in from our Medicaid plans, who’s coming in from other Medicaid plans, those numbers are still quite de minimis. Within our special enrollment period gains. But I would expect them to pick up dramatically in the months ahead. Remember, June is still the first month that most folks came off. So July, August, September, I would expect to see the marketplace numbers start to creep up. And we’re able to track those who’s coming from Medicaid and what plans.

Calvin Sternick:

Great. Thanks.

Scott Fidel:

Hi, thanks. Good morning. Actually just wanted to stick on the marketplace topic. And just interested in some of your early thoughts around positioning for 2024, given that if you’re going to be back at target margins here this year, I know that you’re very sensitive to managing the exposure on this business given how volatile it’s been on the margin side, but it definitely looks like there’s a pretty hardening pricing environment for individual and small group occurring – for 2024. And then if there is continued opportunity on the Catcher’s Mitt side for [indiscernible] in 2024 as well. So really just sort of thinking about where your sort of philosophy is right now on that growth versus margin question for the exchanges in 2024.

Scott Fidel:

Okay. Got it. And then just for the follow-up. Interested if you could maybe just walk us through what’s now factored into guidance for Medicare MLR for the back half of the year? And then just, I guess, obviously, you’re not giving 2024 guidance here, but some early thoughts on some suggestions on how we should think about Medicare MLR sort of modeling for 2024. Obviously, it’s a bit elevated this year and looking out to a pretty challenging rate environment next year and then you’ve got the Bright asset coming online as well at breakeven. So just sort of your thinking here on sort of Medicare MLR, I guess, sort of trajectory in the back half and it’s 2024. Thanks.

Mark Keim:

And just to build on that, I feel good that we had a reasonable line of sight into Q2 as we put in our pricing for next year. Scott, just on your question on the rest of 2023, we’re conservative guys within our guidance is mid-to-low 88 [ph] for the rest of the year, and that’s within the guidance we’ve given.

Operator:

Thank you. And our next question today comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Joe Zubretsky:

Well, Sarah, I don’t think we’re going to comment on any particular state, but we – our protocols that we started building a year ago on member outreach and every state was different. Some states allowed significant involvement from MCOs, some states less so. Some states allow you to actually help the member reestablish eligibility by filling out forms. Some states didn’t. Now as you know, CMS has stepped in and sort of suggested through policy statements that states should allow MCOs to be more involved in the reverification process. So I assure you that we are locked in to every single state in which we do business with the state regulatory authorities and are working hand in glove with them to make sure that everybody that should be on Medicaid is and people that shouldn’t be thrown off Medicaid aren’t. State by state. And yes, it has had an impact on our outreach efforts and gives us really good line of sight and good visibility into the fact that if a member should be on Medicaid, we’re pretty confident between the state’s efforts and our efforts that we’ll be able to keep them in the system.

Joe Zubretsky:

Without getting into specifics, I will answer the question this way. Our due diligence process through a clean room process allowed us visibility into their bid through an independent third party. And we are confident that the transparency that was provided in that process gives us confidence that the bid was rational, included all trend factors that should be included in a bid. And as I said, their profit improvement plan is going to be the key factor. How much of that profit improvement did they actually achieve between sign and close in terms of what we inherit is actually going to determine whether – what the bet earnings picture looks like at the point of closing.

Operator:

Thank you. And our next question today comes from Michael Ha with Morgan Stanley. Please go ahead.

Mark Keim:

Well, a couple of things. Those couple of states that we already had rate concessions in the July 1 race. A very small part of our revenue and also done somewhat academically as the data hadn’t developed in those states quite yet. All of that is incorporated in the guidance I’ve given you. But again, such a small component. I think I mentioned five states started their new fiscal year, July 1, representing just 10% of revenue, and the states that gave those concessions were a subset within that. So not really a big deal, but in guidance.

Joe Zubretsky:

I’ll keep the PPD question to Mark, but on the Medicare MLR, it was outpatient, mostly ambulatory surgeries. Our population really doesn’t have a lot of the hips, knees and joints that you’d see in a more standard Medicare advance population. But we’re also seeing PCP visits and the typical routine preventive screenings come back. I won’t call it pent-up demand, but returning to normal, the types of services that Medicare patients and members normally get. Ambulatory surgeries, PCP visits, preventive screenings and care, a little bit of drug usage, but not a lot. And keep in mind, we’re only operating – I need to – I’m not rationalized again, 120 basis points above the top end of our range. The Medicare book is well positioned to earn a 4.5% pretax margin this year. So we’re in good shape there. Mark, do you want to talk about the PPD?

Michael Ha:

Yes.

Michael Ha:

About $27 million.

Michael Ha:

Got it. Thank you.

Steven Valiquette:

Great. Thanks. Good morning. So I guess, given your comments earlier on the call to address all the investor debate as to whether or not the Medicaid MLR could be adversely impacted by just lower utilization members coming off the rolls during redeterminations and thus risk of higher Medicaid MLR on the remaining Medicaid members. Really just the conclusion around all that is what is your level of concern around this higher Medicaid MLR risk at this point, if any? Can be now put this to bed from your perspective. And also, if you could remind us, is there any preliminary buy as you can point to for your 2024 Medicaid MLR to be either better, in line or worse versus what you guided for Medicaid MLR for 2023? Thanks.

Mark Keim:

Yes, into next year, specifically around Medicaid MLRs – it will be partly a function of these pricings and rate cycles that we’re having, most of which are in front of us. 50% of our revenue comes up for our January 1 fiscal year. That – those pricing discussions, obviously, actuarial policies require that states recognize anything that goes on with redetermination. And then finally, as Joe mentioned, even into next year, those continuing corridors and minimum MLRs continue to give us great comfort on our projected margins. So not looking at a lot of volatility into next year.

Operator:

Thank you. And our next question today comes from Kevin Fischbeck at Bank of America. Please go ahead.

Mark Keim:

Yes. Thanks for the question, Kevin. I’m hesitant to give specific numbers because it differs state to state. But the real reason I’m hesitant to give the numbers is two things. One, for the most part, they were done academically, not on data they were done prospectively academically, so means they were guessing no better than all the rest of us were three months ago. So academic prospective. But the bigger point is you might get a specific concession for redetermination. But in the presence of seven or eight adjustments up and down for other reasons, it gets lost co-mingled into the grand scheme of things. We have to come back to the overall concept of actuarial soundness. And if those rates develop in a place that just aren’t appropriate, we’ll be back with our states to make sure that they are.

Joe Zubretsky:

It’s really hard to say. First of all, our Medicare book, the profile of it is vastly different than many of the other books of business. This is not mainstream MAPD. This is high acuity, D-SNP and the demonstrations, which are the fully integrated Medicare and Medicaid product. So the population is vastly different. Look, our trends in the quarter were very simple to understand, 3% in Medicaid, 6% in Medicare, 7.5% in Marketplace. All well within expectations. And I would just say that the mix of the book of business and the profile of the book of business better said, is probably reasons for some of the differential as competitors report their results.

Joe Zubretsky:

I don’t think there’s any discernible answer to that. The 81% of our book of business is Medicaid. The trend is behaving exactly within our expectations. And why one is behaving slightly hotter or more warm than the other, it’s hard to tell.

Operator:

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Joe Zubretsky:

Well, the process – again, it’s early. The process is in full gear. We have robust distribution channels internally, call center employees or licensed agents who know how to do this, and the warm transfer process is enacted and in process. All we’re saying is because it’s so early, we have not seen a huge uptick in the number of marketplace members we’re getting out of Medicaid. We track what we obtain in marketplace out of our own Medicaid plans, but we also track what we get in the marketplace from other Medicaid plans. And because it’s drilling the process, all we’re saying is that monthly figure has not increased dramatically, but we expect it will as this process gets more traction.

Nathan Rich:

Great. And then some state Medicaid programs, I think, are looking at covering the GLP-1 drugs for obesity. I guess, have you had any conversations with states with respect to that? And what factors they might be considering and how that could be worked into state programs just as we think about what potential impact could be?

Nathan Rich:

Thank you.

George Hill:

Hey good morning guys and thanks for sneaking me in. I know it’s a small part of the business. But I guess is there a way to big picture think about like the magnitude of the change in the value of the benefit in MA for 2024 as you guys try to balance the kind of the challenging rate environment with the changes to the risk model with kind of the need to preserve the margin profile of the business or preserve the margin profile of the business. Everybody kind of talks about the kind of the like the drawing down on benefit bout just trying to get a sense of magnitude, if there’s a way to quantify that or kind of talk about it directionally.

George Hill:

Yes, I was. And just like with the challenging rate environment, everybody is talking about kind of like the raining and it benefits a little bit. I don’t know if there’s a way to quantify that a little bit or kind of speak to it directionally kind of the magnitude of the change of benefit.

Mark Keim:

The only other thing I’d add, George, is when we think about benefit design, there are a number of items which for a competitive shopper are must-have. And there’s a bunch of other things, which are part of the benefit load that are nice to have but don’t necessarily influence the buying decision. You can imagine how we’re thinking about changing benefit design. But we and our decisions probably won’t be much different than the broader markets. So I’m expecting a pretty even competitive dynamic next year.

Joe Zubretsky:

And with no other calls, that concludes our call today. Thank you, everyone.

Operator:

Good morning, and welcome to the Molina Healthcare First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Investor Relations. Please go ahead, sir.

Joe Zubretsky:

Thank you, Joe, and good morning. Today, we will provide updates on our financial results for the first quarter 2023, our full year 2023 guidance in the context of our first quarter results and our growth initiatives and our strategy for sustaining profitable growth. Let me start with the first quarter highlights. Last night, we reported adjusted earnings per diluted share for the first quarter of $5.81 or 19% year-over-year growth. Total premium revenues at $7.9 billion were as expected, representing a 5% increase over the prior year. Our 87.1% consolidated MCR in the first quarter demonstrates continued strong operating performance. We produced a 5.5% adjusted pretax margin, 4.1% after-tax, a very strong result that is above the high-end of our long-term target range. In the first quarter, we continued to generate excellent margins in our Medicaid business with a medical care ratio of 88.4%. This result was in line with our guidance and long-term target range. Our portfolio of 19 state contracts in 2023 growing to 21 states in 2024, provides earnings [balanced] (ph) and diversification related to rate setting and contract reprocurements. Actuarially sound rates prevail, as the rate-setting process continues to capture a credible medical cost baseline with forward trend and benefit changes and core medical cost trends remained stable and well-controlled. In Medicare, our reported MCR was 88%, which is at the high-end of our long-term target range as a result of driving growth into high acuity low-income consumer segment. In Marketplace, we ended the quarter with 271,000 members. Our Marketplace business is appropriately sized in the overall portfolio, given the inherent volatility of that risk pool. Our first quarter Marketplace MCR was 68.6%, significantly below full year expectations even when considering seasonal patterns. This result reflects the successful implementation of our pricing, metallic mix and membership continuity strategy to restore this business to mid-single digit target margins. In summary, 2023 is off to a very strong start. Medicaid, our flagship business representing over 80% of revenue continues to produce strong predictable operating results and cash flows. Our high acuity Medicare niche serving low income members continues to grow organically and Marketplace is now well positioned to achieve target margins in 2023. Turning now to our 2023 guidance. Based on our strong start to the year, we are increasing our full year 2023 adjusted earnings per share guidance to no less than $20.25 or 30% growth year-over-year, even after absorbing $0.75 of one-time implementation costs for new contract wins. We have deliberately reframed from increasing our guidance beyond the first quarter outperformance as we continue to apply appropriate conservatism to our forecast. We believe this conservative discipline is appropriate for several reasons. First, we would not project our significant first quarter Marketplace outperformance to be repeated for the balance of the year. Second, we are not forecasting short-term interest rates to remain at their current levels. Third, as a general matter at this early-stage in the year, it is prudent to anticipate potential medical cost variations. And fourth, and lastly, we do not believe the acuity shift due to redeterminations will have a significant net margin impact, but there is the potential for some sporadic and isolated shifts in acuity. If that were to be the case, there are significant mitigants to any potential impact. These mitigants include a commensurate mix effect premium benefit, experienced rebate and minimum MLR offsets in certain states, and of course, actuarially sound rate adjustments, both retrospective and prospective. That being said, we believe that any potential shift in Medicaid member acuity that could increase medical costs for 2023 is captured in our 88.5% Medicaid MCR guidance for the year. Turning now to an update on our strategy for sustaining profitable growth. Building on our momentum from last year, we are off to a strong start in 2023. At the end of January, the Texas Health and Human Services Commission posted its intent to award our Texas Health Plan, a contract for all our existing eight service areas in the state. Given the continuity of coverage in these service areas and strong brand loyalty, we expect to see continued market share gains and revenue upside in Texas. In March, we announced that our Indiana Health plan was awarded a four year contract to provide managed long-term services and supports. We believe this contract will commence in mid-2024. As one of four managed care organizations in the program, we expect to serve approximately 33,000 members, resulting in annual premium revenue of approximately $1 billion. With the addition of the Indiana LTSS win, our five recent state RFP wins driving within $5 billion in incremental revenue, with a portion included in our 2023 guidance, but most emerging in our 2024 outlook and achieving full run rate in 2025. Based on known building blocks, we now have line of sight to $36 billion of premium revenue in 2024 or 13% growth before additional strategic initiatives. Our new store embedded earnings are now $4.50 per share, providing meaningful visibility into our future earnings growth potential. We see an additional $2 per share of embedded earnings upside if and when the several remaining COVID era corridors are eliminated. Our acquisition pipeline remains replete with actionable opportunities. While the timing of transactions remains inherently difficult to predict, the strength of our pipeline and our track record of success give us confidence in our ability to drive further growth from this important element of our growth strategy. The company's performance continues to validate our long-term strategy, and its value creation potential. Our strategy is sound and it's working. We are delivering topline growth, both organically and with accretive acquisitions, while sustaining industry leading margins. Our model is clear and proven. We will grow organically in our existing footprint. We will win new state contracts and sign new acquisitions, building clear visibility to new store revenues and their related embedded earnings. We will harvest the embedded earnings and include them in our guidance as the contracts incept and the acquisitions closed, all while adding yet additional new revenue streams to our forward outlook. I look-forward to sharing more about our future growth plans and longer-term strategy at our Investor Meeting on May 15th. As is our hallmark style, we will provide you with our detailed playbook for achieving our growth targets and maintaining industry-leading margins. We will not only [declare those] (ph) but also show you with transparency and specificity, how we will achieve them. Our May 15th Investor Day session is appropriately titled, sustaining profitable growth, the next wave. With that I will turn the call over to Mark for some additional color on the financials. Mark?

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Josh Raskin with Nephron Research. Please go ahead.

Mark Keim:

Great, thanks for the questions, Josh. I'll take the second one first. The states have a lot of different protocols and policies about how we can interact with members ahead of redetermination. The good news is, they're giving us the list of at risk members months ahead of time, which is very helpful to reach-out to them, interact with them, see if we can re-verify them or in many cases, put them into our Marketplace product if appropriate. Now in the cases where members are being redetermined, they lose their eligibility, which we're estimating is about 50%. I don't know that I had great insights on specifically where they'll go. And Josh, it's complicated, because what we see is some will get re-verified, lose eligibility and move right into another product, others may go uninsured for a few months and then eventually wind-up in one of those products. So I don't have good estimates on that. The only other thing I'll remind you of is, we didn't put any upside on retaining redetermined members in our Marketplace outlook. So anything that we pick up through redetermination is upside to our Marketplace outlook.

Mark Keim:

You bet.

Stephen Baxter:

Yes. Hi, thanks for the question. I appreciate that you're thinking on redeterminations hasn't really changed. Over the past few months, though, we have seen a lot of states come out with their own projections on membership losses. It does seem like these estimates would generally skew towards lower levels of retention and 50%. You're assuming -- I assume you spend time talking to the states about their expectations. I'm curious what you think is the key difference between what they're assuming and what you think will play out? Thanks.

Mark Keim:

And just to put a point on what Joe said, Stephen, maybe what you're reacting to is some of the at-risk member data points. The states are putting those out specifically so that managed care organizations can reach out to those members and whether its eligibility issues or verification issues, interact with those members to minimize it. So the list of at-risk is certainly bigger than the list of folks that will actually lose eligibility.

Justin Lake:

Thanks, good morning. A couple of things. One, Medicare Advantage, you talked about mix pushing you to the higher end of the MLR range there. What is the long-term MLR range you expect for Medicare Advantage? And can you give us a little color on the mix of business and why it's pushing it towards the higher end? And then lastly, just a number question on investment income, what is assumed in your guidance for investment income this year? Thanks.

Mark Keim:

Yes, that's exactly right, Joe. The things to think about there is the investable balance will decline over the year from where it is and about $8.2 billion right now. It will decline as we pay down previous year corridors, minimum MLRs, things like that. Second, we're mostly in cash, which means we're instantly responsive to any cuts in rates. And when I look at the Fed funds outlook, most folks are baking in maybe another raise in the second quarter, but likely two cuts in the back half of the year. So we are cautious in our outlook.

Nathan Rich:

Great, thanks for the question. I wanted to ask on the Marketplace business. How much of the outperformance, do you see as sustainable? It sounded like it was mainly driven by pricing and I guess, helped by strong retention. I guess, do you have an updated view of where MCR will land for the year? And then enrollment was a little bit lower than we had expected. I just wanted to get your updated thoughts on if 230,000 members by year-end is still the right target.

Operator:

Thank you. And our next question today comes from Scott Fidel at Stephens. Please go ahead.

Joe Zubretsky:

Scott, it's Joe. Yes, there are a variety of factors, regulatory factors that have been introduced in the past number of months that have caused folks in the Medicare Advantage business to think differently about the earnings trajectory. First, let me remind everyone that Medicare is only 15% of our total book. Also remind you that of that Medicare book, half of it are the MMP demonstrations. Now while MMP demonstrations aren't totally insulated from these industry dynamics, they do not have STARS scores. They're not subject to the rate notice, although rates come in a different way, 40% of that revenue is actually Medicaid driven and not Medicare-driven. So I wouldn't say we're insulated from it, but with half the book being in MMP, which is not responsive to those various rate type actions. We're pretty well insulated. But it does relate to our D-SNP book. We believe that our product is competitive. It is replete with value-added benefits. Many of these factors affected the entire market. So, if we have to pull back on value-added benefits to keep the product at zero premium and competitive, we think we can do so. I think we're well positioned for a couple of other good years in Medicare.

Michael Hall:

Thank you. Just quickly first on Medicaid revenue PMPM looks like it was roughly flat year-to-year, which may have driven your Medicaid revenue to be slightly below the street this quarter. I am having a tough time just thinking of what could have driven this, especially given higher LTSS mix, which presumably would have increased the blended PMPM. So any color you could provide there? And then on your comments about redeterminations, not expecting the acuity shift to have net margin impact, but could see some strategic cases. And I know you mentioned, Joe, that the shift in acuity captured in your current 88.5% guide. But comments today do sound a bit more optimistic. Is it fair to say what you've learned since fourth quarter about the acuity of your at-risk redetermined lives might be more incrementally positive?

Mark Keim:

And Michael, it's Mark. Let me just take the first question on Medicaid, not sure what your model was, but the Medicaid revenue for me came in right about on expectation. But there's things that can move it a little up, a little down quarter-to-quarter, which might be driving some of what you're seeing. Certainly, mix changes quarter-to-quarter, year-to-year. Retro premiums, which are driven by a number of different items, retro membership updates, things like that certainly drive variations in revenues. And don't forget when we book corridors, minimum MLRs or any form of experience rebates, those run through the revenue line as well. So you put those things together, my hunch is, that's what explains what you're seeing. But overall, I think we're pretty close to just out everybody's model on first quarter.

George Hill:

Yes. Good morning, guys. And thanks for taking the question. Joe, one of your competitors talked about kind of getting enhanced from the states as they start to go through the redetermination process. Would just be interested to hear kind of like what kind of data that you guys are having access to as this process begins to kick off and kind of how that impacts your early thoughts about 2024?

Mark Keim:

Absolutely. So we started one state in April, but the vast majority of my states won't actually go through eligibility and redetermination until June and July. So, we're fairly back-end loaded here, which is why we're a little limited on data just at the moment. We've got one state. But as Joe mentioned, the way this works is long before a member would actually get redetermined or lose eligibility, they go on in at-risk list. And the states define at-risk in two ways. One, places where they have some data that suggests the member will lose eligibility, some data point that suggests that or just verification failures where they can't reach that number. They're giving us those lists months in advance. So I’m mostly back ended for June and July. But in many cases, I have a list of those members already. We can start reaching out to them, contacting them through all of our different channels long in advance. Now that data is not particularly helpful on what will happen because the whole point of that data is to preempt some of the people that shouldn't lose coverage. So, it's very helpful on us retaining members, but it's not helpful in saying from a data perspective, how many will we lose or what would the economic impact be, if any? Now the real data points on real stairs and levers don't happen until redetermination actually occurs. And again, for us, that's just one state so far. The states published files 834s, 820s, which let us know specifically who's coming and going, who the stairs and levers are. And we're way too early to have real insights on that given one state so far.

Joe Zubretsky:

Yes. Just because the member has been identified as someone who will have to go through the reeligibility process. And by the way, that data is very immature. It's not in hundreds of thousands of members. It's tens of thousands of members. We can extrapolate very little from that. And so, it's way too early to make -- draw any conclusions from the early at-risk member data that we've seen. It will build over time. And as we have insights and we report quarters, we'll fill you in on where we are.

Operator:

And our next question today comes from A.J. Rice of Credit Suisse. Please go ahead.

Joe Zubretsky:

A.J., I'll answer the second first. We talked about risk-sharing corridors during the pandemic that were introduced in a dozen of our states as a direct result of the pandemic. Reminding everyone that pre-pandemic, dating all the way back to earlier in the decade, various types of mechanisms existed in 17 of our states, MLR floors experience rebates. Those have always been in place. And because of our performance, we routinely pay into them. The better you perform, the more you'll pay into them. And the more you pay into them, the greater the cushion should your fortunes reverse later in the year. So we're not going to go through the actual numbers because it actually matters where you're in the money, in what state and it's way too difficult to project anything other than we have routinely paid into these mechanisms, the experience rebates, we did last year in 2022 because we were very profitable. Reminding you, we still have best-in-class industry margins even after having paid into them. And yes, should an inflection occur later in the year for whatever reason, redetermination for any other reason, these payables act as the first cushion to financial performance. Mark, do you want to take the question about what quarter we'll have visibility? We've talked about that a lot. And it’s might be third, more likely fourth.

Operator:

Thank you. And our next question today comes from Calvin Sternick with JPMorgan.

Mark Keim:

Hi, Calvin, it's Mark. Joe got it exactly right. The majority of our states, the calendar year is the same as the fiscal year. Which means, if data is developing in the third and fourth quarters it positions you very well for an on-cycle rate review. Now at least two of our states have already committed to a mid-cycle rate review as well, anticipating that at least we should look at the data together. So we feel good about that. Overall, I think on the topic of retrospective and prospective, states have been really open to both. And in many cases, I think they're waiting for the initial gimps of data to decide on-cycle, off-cycle, retrospective, prospective, how they might do that. But the general signal from the states is very much of a partnership here to work through this rate cycle.

Sarah James:

Yes. Sorry about that. So I wanted to follow-up on the timings. As far as your discussions with state goes, they have 12 months to get through the redetermination, but some of the states have been vocal about staffing issues on teams that would be evaluating that. So as you talk to them, what kind of color are they giving you on how ratable or front-end loaded their process might be? And then just to follow-up on your earlier bronze mix shift in the exchanges. Has that influenced how you accrue for risk adjusters versus past years, given the shift in metal tier? Thanks.

Mark Keim:

Yes. Hi, Sarah. On your about timing, don't forget the states have 12 months from the end of the PHE to complete redetermination, the PHE ends in May. So even though some states began redetermination in April, the clock starts ticking as of May. So 12 months from May, I think there may be a difference between states intentions of how fast they move versus how fast they actually move. And we're seeing a little bit of that in some of our partnership discussions with them. So we'll obviously be accommodative of any schedule they want to roll out. But staffing issues, resource issues, it will be interesting to see how the next 13 months here play out.

Sarah James:

Great. Thank you.

Steven Valiquette:

Hi. Thanks. Good morning. For the first quarter itself, Mark, you mentioned that the major medical cost categories were largely in line with your expectations. So I guess just trying to reconcile this with some of the strong inpatient and surgical volume growth trends coming out of the public hospital companies this quarter. Just curious if you can just remind us what magnitude you may have anticipated this and factor that into the guidance across the different books of business as far as any sort of extraordinary growth in inpatient? Medicaid and Medicare MLRs were still both up year-over-year in 1Q 2023 versus 1Q 2022 despite the MLR beat versus the street. But again, just curious how much elevated inpatient costs maybe not have been a factor in the MLR dynamics in the first quarter? Thanks.

Mark Keim:

Right. On inpatient, I hear you on the data points, but we're seeing just something just a little bit different. Lower surgical and obviously, lower COVID as the effects of the pandemic are diminishing, but also increasingly outpatient type of care for COVID cases. So as Joe mentioned, a fairly light trend for the first quarter.

Steven Valiquette:

Okay. That’s helpful. Thanks.

Gary Taylor:

Hi, good morning. Two quick ones for me. Just one, I think I missed just a little bit of the opening comment on exchange. So I just want to go back to that for a second. I know that trended better than you thought, but I didn't hear if that change where you thought you would land on your original 78% to 80% for the year. And then I just also wondered if anything you've seen so far makes you change your outlook on whether you have a receivable or a payable accrual in exchange for 2023?

Mark Keim:

The only thing I'd add to that is, with risk adjustment, the correlation between medical cost experience and risk adjustment at this point is pretty tight. So if the risk pool changes a little bit, I'm expecting effectively a hedge from our performance on risk adjustment.

Joe Zubretsky:

Yes. Given where we performed -- I'm sorry, we couldn't hear the first part of your, you're referring to Medicaid, correct?

Joe Zubretsky:

Thank you. Yes. As I said, 17 of our states have always for a long period of time had mechanisms, experienced rebate mechanisms and minimum MLR mechanisms, which are set at pretty low levels, which allow you to actually earn excellent margins as we have been even though we still have been paying into these mechanisms. So yes, as I mentioned, last year, we had a good year and paid into them. And in the first quarter, again, good first quarter. We also paid into them in the first quarter. We don't disclose how much, but it's a routine part of the business. It's part of the overall earnings trajectory of how we think about the business and the first quarter was business as usual, excellent margins in Medicaid and still paid into these corridors and rabates.

Operator:

Thank you. And ladies and gentlemen, this concludes today's question-and-answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.

Operator:

Good morning, and welcome to Molina Healthcare’s Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Molina Healthcare. Please go ahead.

Joe Zubretsky:

Thank you, Joe, and good morning. Today, we will provide updates on several topics. Our financial results for the fourth quarter and full year 2022, our initial 2023 revenue and earnings guidance, our growth initiatives and our strategy for sustaining profitable growth, and our outlook on premium revenue for 2024, given our new business successes in 2022. Let me start with the fourth quarter highlights. Last night, we reported fourth quarter adjusted earnings per diluted share of $4.10, representing 42% growth year-over-year. Our fourth quarter 88.3% consolidated medical care ratio, 7.5% adjusted G&A ratio, and 3.9% adjusted pretax margin demonstrate continued strong operating performance. The fourth quarter completes another strong year of operating and financial performance. For the full year, we grew premium revenue by 15% to approximately $31 billion and grew adjusted earnings per share by 32% to $17.92. Our full year adjusted pretax margin of 4.4% was squarely in line with our long-term targets. Medicaid, our flagship business representing approximately 80% of enterprise revenue continues to produce very strong and predictable operating results and cash flows. For the year, we grew membership by approximately 10% and premium revenue by 21%, driven by the inception of our Nevada Medicaid contract, recently closed acquisitions and organic growth. The rate environment is stable and we are executing on the fundamentals of medical cost management. The full year reported MCR of 88% is at the low end of our long term target range and consistent with pre-pandemic levels, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high acuity Medicare niche serving low income members representing 12% of enterprise revenue, continues to grow organically and demonstrate strong operating performance. For the year, we grew membership by 10% and premium revenue by 13%. Membership growth was driven primarily by our low income MAPD product, which more than doubled in 2022. The full year reported MCR of 88.5% was modestly above our long term target range, but includes approximately 300 basis points of pressure from COVID-related care. In Marketplace, the smallest of our three lines of business, we repositioned the business both in terms of its size in the portfolio and metallic mix. On a pure period basis, the business performed at roughly breakeven. While the financial performance did not meet our initial expectations for the year, we believe we have positioned our marketplace business to achieve target margins in 2023. Turning now to the execution of our growth strategy for the year. The successes in 2022 were many. On the M&A front, we closed on the acquisition of Cigna's Texas Medicaid business at the beginning of the year. And the AgeWell acquisition, at the beginning of the fourth quarter. In July, we announced the My Choice Wisconsin acquisition further adding to our market leading LTSS franchise. Our performance on Medicaid RFPs in the year was exceptional. We renewed our contract in Mississippi, doubled the size of our California contract for 2024 and won two new contracts

Joe Zubretsky:

Thanks, Mark. In looking back over the past five years, we pause briefly to reflect on our company's accomplishments. We won $5 billion in new Medicaid awards over the period and defended all of our existing contracts. We acquired $10 billion in profitable revenue. In short, we doubled the revenue base. We have produced industry-leading margins in our core products, averaging 4% to 5% on a pretax basis. The top line growth and margin expansion allowed us to grow earnings per share from a loss in 2017 to nearly $20 per share in 2023 guidance. We've ascended to Fortune 125 status and were promoted into the S&P 500. We have a pure-play government managed care franchise to grow and build on. We only take this retrospective journey to express our excitement, enthusiasm and energy for the next five years. There are so many more opportunities to continue to grow and expand our franchise. As we say here at the company, reaching milestones is not a cost for celebration, but a cause for consternation as reaching one merely marks the point in time to set new aspirational goals. We plan to share our view over the next five years with you at an Investor Day later this year. This concludes our prepared remarks. Operator, we are now ready to take questions.

Josh Raskin:

Hi. Thanks. Good morning. So the guidance for the 2023 MLR is overall flat. I assume it would be fair to expect the Marketplace MLR to be down meaningfully. But even just based on size, probably not a meaning contributor. Would it be fair to assume that the Medicaid MLR embedded in there is actually up? And maybe you could help quantify some of those absolute changes by segment and maybe specifically how reterminations are impacting your view of the Medicaid MLR?

Mark Keim:

That's right, Joe. Josh, it's Mark. Total guidance at 88% MLR. As Joe mentioned, each of the segments I've got pretty much right in the middle of long-term guidance. So think of Marketplace, 79% to 80%; Medicare Advantage 87.5% and Medicaid, call it, 88 5%. For weightings, pretty similar to what we had this year, probably about 5% marketplace, which is a little bit smaller as the portfolio about 13% Medicare Advantage, about 82% in Medicaid. So you round all that out. The only other thing I'd say is, we finished full year Medicaid in 2022 at an 88%. We're obviously in our guidance saying an 88.5% roughly for Medicaid. So that's an additional 50 basis points for new stores, who knows redetermination or just general conservatism, but that's how I'm thinking about the MLRs there.

Mark Keim:

That's the way to think about it, Josh.

Operator:

The next question comes from A.J. Rice with Credit Suisse. Please go ahead.

Joe Zubretsky:

Sure, A.J. The membership results starting the year with 290,000 members, finishing the year with 230,000 members. We'll aggregate to about $1.6 billion in premium for the year. And that was fully in line with our expectations with respect to our pricing strategy. Look, we're allocators of capital and this business has shown that due to the instability of the risk pool by the introduction of the special enrollment period and other factors that it does have some inherent volatility. There also has been some irrational pricing over the past couple of years. So pushing the pause button and going silver stable, in small was exactly the right approach and the business for 2023 has landed in a good place for us to achieve our mid-single digit margin target, if we conclude that the risk pool has stabilized due to the lack of government movement of the risk pool rules, pricing is rational, we likely would conclude to allocate more capital to this line of business and grow it again. Mark, anything to add?

A.J. Rice:

Okay. That’s great. Thanks a lot.

Justin Lake:

Thanks. Good morning. A couple of questions on the numbers side. First, on Medicaid membership, can you give us the membership? I know it's going to be flat. You talked about some new growth of acquisitions offsetting redeterminations. Can you give us those numbers in terms of what you're expecting there for each of those buckets? And then, how should we think about redeterminations from '23 into 2024 in your mind? And then on the reserves, I've heard you talk about DCP and I saw in the release that you mentioned a bunch of payments in the quarter. I did go back and take a look at fourth quarter paid versus fourth quarter kind of reserved or medical costs, last year to this year, it didn't look like there was a significant change in paid claims as a percentage of total in the fourth quarter of this year versus last year. So hoping you could just flesh that out a little bit in terms of what you were seeing there? Thanks.

Justin Lake:

Right. Thanks for the color.

Calvin Sternick:

Hey. Good morning. Just a quick follow-up. It sounded like you said if the marketplace was stable, you could look to grow it again next year. And that just sounds a little different than some of your previous comments where you kind of let the membership float up and down year-to-year. I just want to understand that in the context of your overall strategy. Is the growth outlook for Marketplace just based on your evaluation in the market this year, and that's something that you look to reevaluate next year or are you saying that you kind of want to grow Marketplace going forward.

Calvin Sternick:

Got it. And I know you're not forecasting growth from Marketplace from redeterminations. But just curious if you have a sense for what the recapture rate was pre-COVID. So when someone got redetermined in Medicaid, how long did they typically go uninsured before they got coverage elsewhere? And I guess how often are you able to recapture some of those members in a Molina Marketplace product?

Calvin Sternick:

All right. Great. Thanks.

Scott Fidel:

Hi. Thanks. Good morning. I guess, I'll use my question just to try to fill out a couple of the other modeling elements for 2023. Just interested if you could give us your thoughts on operating cash flow, and then also investment income and interest expense for 2023?

Scott Fidel:

Okay. Thanks. And just one quick follow-up question. Just on the M&A side, how you're thinking about the pipeline and sort of the pacing of engagement in 2023. Obviously, you've got some significant installations of new business in flight. So interested in how you're thinking about layering in M&A as well. Thanks.

Scott Fidel:

Okay. Thank you.

Michael Hall :

Hi. Thank you. Just wanted to touch on the marketplace, again and just ask about like what happened in '22. So at the beginning of the year, you're expecting 79% MLR, but Q2 I think there was a large miss really full year expectation to 84%. And then this past quarter, even excluding the 300 bps of scheduling past provided balances still ended up higher than expected. Now you're at 87% to end the year. So I thought pricing was more disciplined than you went through this major recalibration of your metal peers to cover. So I would have expected more MLR stability than what we saw. Could you walk us through about like what happened with Marketplace and why the large divergent from initial expectations?

Operator:

The next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Joe Zubretsky:

So I'll turn it to Mark. But yes, given the mix of the business has changed and many of the dynamics of the businesses have changed, the seasonal patterns of how MCRs emerge, has changed slightly over time. So I'll turn it to Mark to give you a view of how Medicaid might perform over the quarters.

Operator:

The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Joe Zubretsky:

Sure, Nathan. We actually consciously separated the two major components of our embedded earnings because one of them is, in our view, entirely controllable, harvesting the $4 of earning our target margins on latent contracts and M&A is something we have a proven track record of doing. We separated that from the $2 of lingering COVID era corridors because eliminating them is outside our control. They were put in place during COVID. They're articulated as being related to COVID. There are three remaining two that matter. Washington, State of Washington and Mississippi, and we believe over time that they will either be compressed or eliminated, but we don't control that. With respect to rates, I would say that states, our customers and their actuaries are vary at least aware of the potential for an acuity shift somewhere due to the redetermination process. And the fact that they're aware of it. And we would -- and if or not, we will certainly make them aware if we experience it, leads us to believe that if there is a significant shift in acuity somewhere in the book of business that the actuarial soundest principle will prevail, and we'll be able to have a productive conversation about that.

Nathan Rich:

Thank you.

Gary Taylor:

Hey. Good morning, guys. Most of my questions are answered, just two quick ones. One on the exchange membership loss driven by repricing. Is there any particular state you'd point out in your footprint or is that pretty evenly distributed that rate increase in the enrollment decline? And then just secondly, because 99% of all the incoming investor angst about Molina is around redetermination risk and potential impact on margins, et cetera. Just wondered if you could share with us any additional work you've done on low utilizers, zero utilizers, people, populations most likely to be redetermined, et cetera? I know you've shared some of that before and just anything else you might add to provide some comfort around your Medicaid, MLR guide would be helpful, I think. Thanks.

Mark Keim:

Yes. So we update this analysis every quarter and the conclusion is really not changing. Joe mentioned a couple of the data points, the folks with us more than one year versus less the folks in the zero to 25% MCR bucket. Expansion, we're seeing a little bit of an increase, but across the board is not much. Remember, expansion is just 30% of our total revenue. The other data point that some folks have been talking about is coordination of benefits or duplication of benefits, do we see any increase in that population. Once again, not really, a little bit of an expansion. So across the board, is there something here? Maybe, but it's really minimal. So again, not expecting much of an impact here to the extent it plays out. Now I refer back to the previous question, where I think the states are quite amenable to revisiting it. On your first question, are we fairly even distributed on our Marketplace? Yeah. I don't see any real estate density in any outliers of one state being disproportionately dense. We've got pretty good distribution across our 14 states here.

Operator:

The next question comes from Steven Valiquette with Barclays. Please go ahead.

Joe Zubretsky:

Steven, it's really an anomaly of the product design, not anything that we design, but the way the product is priced from an industry perspective, where one thing I can point to that is absolute fact is for the same member in bronze and silver with the same acuity level, the same services and therefore, the same HCCs, the risk score produces less revenue in bronze than it does in silver. And there are other aspects of it that make it just slightly less attractive. Mark?

Steven Valiquette:

Okay. Thanks.

Kevin Fischbeck:

Great. Thanks. One quick clarification question before I jump into the real question. The $6 of embedded earnings, it wasn't 100% clear to me. Is that in addition to the $0.65 coming back or is that $0.55 in the 3.50?

Kevin Fischbeck:

Okay. So that $6 on the current guidance is not on the 20, 40 earnings power number.

Kevin Fischbeck:

All right. And then I just want to go back one more time to the redeterminations because it's interesting because on the one hand, it sounds like you thought about redeterminations as a potential MLR pressure in your Medicaid MLR guidance, which is different, I think, than how you've talked about it in the past, but then throughout the call, you've kind of dismissed it as a potential pressure to MLR. So just trying to understand a little bit finer like are you saying you've put it in, but you think it's set most 10 basis points or something like that, something kind of immaterial or how exactly are you thinking about and what exactly are you including in this year's guidance? And then I guess to build on that, if it is a pressure this year, would you expect that pressure to be higher or lower next year? Higher because more members are being determined or lower because states have more time to adjust rates? Thanks.

Mark Keim:

That's exactly right. So we finished last year at an 88% for the year. Our guidance anticipates an 88.5%, and we don't attribute any specific basis points to a driver. But in general, reversion to the mean flu, RSV, number of different things we could think about in there. Don't forget, we also have some new stores coming along, Iowa, the acquisition of My Choice Wisconsin. In general, just a little bit of conservatism, reversion to the mean, not attributing any basis points specifically to redetermination. But look, we've all had the conversation enough. We're acknowledging that, that's something that's potentially in there. in our reversion to the mean. Now you also mentioned maybe what happens next year. So to the extent any of this starts to manifest it will largely be back-end loaded in the year, just given the way redetermination is going to play out. I think that gives all of us a lot of time to anticipate it but just as much work with our state partners to make sure that rates in the concept of actuarial soundness anticipate the same thing.

Operator:

The next question comes from George Hill with Deutsche Bank. Please go ahead.

Operator:

Yes. Thank you, sir.

George Hill:

Okay. Thank you, guys. Joe, and I think you kind of just touched on this in the last answer, but my question was around the $0.65 in implementation costs in 2023. I guess could you kind of break out the buckets that they're typically going to fall into. And again, this was just commented on, but I assume no part of that repeats in '24 that all goes away and there's no part of that cost structure that's durable.

Mark Keim:

Right. I'll just build on that. So if you think about the $0.65, the way I think about it, about a third of it is IT, sort of a fixed component and about two-thirds of it is staffing, mostly highly variable, right? We have to staff up ahead of day one membership. So that's the way to think about it. It obviously, it comes to us ahead of when we start booking revenue. So I wouldn't say that it goes away specifically. What it does is it goes into the anticipated margin once we run these businesses. We've talked about $3.50 of same-store -- of new store embedded earnings here. That $3.50 is, of course, after operating costs. The reason we have $0.65 is we're not booking revenue yet. So $0.65, one-third, fixed; two-thirds variable, that's the right way to think about it.

George Hill:

That’s helpful. Thank you.

David Windley:

Good morning. Thanks for taking my question. I hope you can hear me. I have a few small ones. In your discussion around, the state's willingness to revisit these rates, as redetermination progresses. Do you have a sense of the urgency around that? Meaning, will they do that on a relatively short notice or will they want to have that discussion in the next rate cycle or after the majority of the redetermination in their state has played out.

Mark Keim:

And David, it's Mark. The fact that a number of these states have also led with this thought, unprompted to me is encouraging that will be somewhat proactive here.

Joe Zubretsky:

No, I think the medical trends we've experienced late in the year seem to have fallen into a nice pattern of, lack of volatility and understanding what COVID is actually costing sort of like on a run rate basis. It almost evolved into a $40 million to $50 million monthly run rate. And as long as it stays stable, as long as we know where the COVID infection rate is spiking, it certainly is -- the inpatient cost is certainly the more costly component, and that certainly hits the Medicare more than the Medicaid book. We have pretty good line of sight into what those services will cost us. But late in the year, it sort of settled into a nice pattern of $40 million to $50 million a month.

Joe Zubretsky:

No, not at all. We obviously measure the returns against our weighted average cost of capital. Obviously, we're earning more on the free cash now than we were before. So there's less of a drag. But no, it hasn't caused any change in momentum in terms of the appetite for counterparties in the market to want to speak to us and think about becoming part of the Molina enterprise.

Operator:

This concludes our question-and-answer session and Molina Healthcare's fourth quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good day, and welcome to the Molina Healthcare Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Investor Relations. Please go ahead, sir.

Joe Zubretsky:

Thank you, Joe, and good morning. Today, we will provide updates on several topics, our financial results for the third quarter of 2022, our full year 2022 guidance in the context of our third quarter results, our growth initiatives and our strategy for sustaining profitable growth. Our outlook on 2023 premium revenue and earnings growth and lastly, given our recent new business success and early outlook on premium revenue for 2024. Let me start with the third quarter highlights. Last night, we reported third quarter adjusted earnings per diluted share of $4.36, representing 54% growth year-over-year. Our earnings growth reflects strong premium revenue growth, sustained target margins and the realization of a meaningful portion of our 2021 embedded earnings. Our third quarter 88.4% consolidated medical care ratio, 6.9% adjusted G&A ratio and 4.3% pretax margin demonstrate strong operating performance even as we navigate prolonged pandemic-related challenges. Our year-to-date performance, highlighted by an 87.9% MCR, a 6.9% adjusted G&A ratio and a 4.5% pretax margin is squarely in line with our long-term targets. This reported pretax margin increases when normalized for the effects of revenue pass-through payments and the marketplace prior year risk adjustment true-up previously reported. Medicaid, our flagship business, representing approximately 80% of enterprise revenue, continues to produce very strong and predictable operating results and cash flows. The rate environment is stable. COVID costs have tempered and we are executing on the sound fundamentals of medical cost management. The year-to-date reported MCR of 88.2% is at the lower end of our long-term target range, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high acuity Medicare niche serving low-income members, representing 12% of enterprise revenue, continues to grow organically and demonstrate strong operating performance. The year-to-date reported MCR of 87.4%, even with sustained cost pressure from COVID-related care is fairly in line with our long-term target range. Marketplace, at 7% of enterprise revenue, continues to track towards a return to profitability in 2022 on a pure period basis. We have succeeded in keeping the business small, keeping it silver and keeping it stable. In summary, we are very pleased with our third quarter and year-to-date performance. We executed well, delivered solid operating earnings and continued to deliver on our growth strategy. Turning now to our 2022 guidance. We now project our 2022 premium revenue to be approximately $30.5 billion or $500 million above our previous guidance. From the time of our pivot to growth in 2019, this updated 2022 revenue guidance represents a 3-year, 23% compound annual growth rate. Excluding the estimated impact of the redetermination pause, our 3-year compound annual growth rate is 19%. In addition, we have increased our full year 2022 adjusted earnings per share guidance to at least $17.75. This represents a $0.75 per share increase compared to our initial 2022 guidance despite absorbing an additional $0.50 per share from the net effect of COVID and $0.44 per share for the prior year Marketplace risk adjustment true-up. As we prepare to head into 2023, we have a very solid earnings baseline off of which to grow. Turning now to an update on our long-term strategy for sustaining profitable growth. We are executing well on the many dimensions of our growth strategy. On the RFP front, we continue to build on our track record of success in both retaining our existing Medicaid contracts and winning new ones. The quarter's highlights were many. In Mississippi, Molina was selected to continue serving Medicaid members across the entire state. In California, we've not only retained our current footprint, but we're also selected to serve the important county of Los Angeles, which will add significant membership in premium revenue. In Iowa, we were awarded a new statewide contract entering as one of 3 managed care organizations serving a total managed Medicaid population currently at 800,000. And we were awarded a new statewide contract in Nebraska as one of 3 managed care organizations serving a total managed Medicaid population currently at 360,000. Once it commences in January 2024, the California contract award is projected to provide membership growth, measured on current membership roles in excess of 1.2 million members as well as the associated significant premium revenue growth. This projection is based on the state's own published county-by-county Medicaid membership count. We were 1 of 2 plans selected in each of Sacramento County and San Diego County, which are existing Molina counties, but where we now expect additional membership in 2024. We were also selected to be the sole commercial health plan in Los Angeles County, which is a 2-plan model county. Finally, we also won awards in both San Bernardino and Riverside Counties known as the Inland Empire, where we expect our current membership levels to remain the same. With awards in each of these 5 California counties, we were successful in being selected in every county on which we bid. We are very confident in our ability to operationally prepare for this expansion. We have a deep knowledge of the [Medicare] program, and we have an existing long-term presence in Los Angeles. We have already commenced the 15-month build-out for this significant expansion. In combination, all of these contracts will expand our Medicaid portfolio to 20 states. These new contracts are expected to add approximately $5.8 billion in annual premium revenue and at least $3 of earnings per share, once we achieve full run rate margins. Looking forward, our RFP response has been submitted for [Texas STAR+PLUS]. It is pending evaluation and subsequent award announcement. We believe we are well-positioned to retain this contract due to our track record of operational and clinical excellence, standing and reputation, cutting-edge innovation and the demonstrated ability to right winning proposals. With multiple new state RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts. We have submitted our proposal for the LTSS contract in the state of Indiana, and have many other new state business development initiatives well underway, including the potential for returning to New Mexico and expanding to our former nearly statewide footprint in Florida. In summary, our track record of success validates our long-term revenue growth strategy and its value creation potential. Before I turn to some further particulars regarding our outlook for both 2023 and 2024, I want to briefly put a point on the magnitude of the company's achievements in the third quarter and what those achievements mean for the future of our company. Stated at a high level, the new business wins will have a profound impact on our company over the next few years. As a matter of year-by-year sequencing, in 2023, we will be busy scaling our proven operating infrastructure to service this new revenue, incurring front-end implementation costs. In 2024, we expect to achieve full run rate contract revenue with earnings beginning to emerge from this significant new revenue. And finally, in 2025, we expect to achieve our full run rate target margins. Against the background of this sequencing and high-level view, I will now provide some color regarding our 2023 outlook. 2023 will be an important year as we prepare for our new revenue growth. We will be hiring and training additional staff to expand our already expert teams and extending our systems to ensure ample capacity. We expect that the onetime nonrecurring expense in 2023 associated with this robust growth will be $0.75 per share. Given our strong current performance, we are raising our 2023 core earnings outlook, the earnings that would have been produced by our company before these recent wins from at least $20 per share to at least $20.25 per share. This core earnings outlook, a meaningful measure of underlying performance, represents 14% growth on today's updated 2022 guidance of at least $17.75 per share. When we include the onetime nonrecurring $0.75 per share implementation costs, our reported earnings per share outlook for 2023 is now at least $19.50. Turning now to our premium revenue outlook for 2024. While it is far too early to provide specific financial guidance for 2024, we do have line of sight to many of the premium revenue growth drivers that we expect to materialize in 2024. First, we expect to continue to grow organically in our current geographic footprint. Second, we expect our recent RFP wins in California, Iowa and Nebraska as well as our AgeWell and My Choice Wisconsin acquisitions to be operating at or near full run rate revenue. And third, we expect that these growth drivers will be partially offset by the impact of redeterminations and through potential pharmacy carve-outs. Combined, these revenue building blocks create an attractive growth trajectory and path to at least $37 billion in premium revenue in 2024. With over a year to go, additional M&A announcements and new Medicaid procurement wins would add to this already attractive 2024 premium revenue picture. A few words on our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023. As previously described, the $5.8 billion in incremental revenue in 2024 from our recent RFP wins adds at least $3 per share in incremental earnings. These earnings are anticipated to begin to emerge in 2024 when all of our new RFP wins will then be operational. With this $3 per share addition, our total 2023 embedded earnings power is now nearly $6 per share. This is strong latent capacity to achieve our near- and long-term earnings objectives. In summary, we are very pleased with our business performance and the exciting developments over the past few months. Combined, this has created a solid and growing financial profile, at least $20.25 per share of core earnings in 2023, $37 billion of premium revenue in 2024. 2023 embedded earnings power of nearly $6 per share and all of this is before any impact from the continued execution of our growth initiatives. Of course, we could not accomplish all of this without our excellent management team and dedicated associates, now approaching 15,000 strong, who in concert with our hallmark proprietary operating model and management process, have produced these results. To the entire team, I once again extend my deepest thanks and heartfelt appreciation. With that, I will turn the call over to Mark for some additional insight on the financials. Mark?

Operator:

[Operator Instructions] Today's first question comes from Josh Raskin at Nephron Research.

Joe Zubretsky:

Josh, this is Joe. First, I would answer your second question first. All that is to be determined. As you know, in past contract wins, both here and in the industry, that is certainly a possibility, but I'll leave that to further discussion. On the preparation, we've been in California for 40 years. We know Sacramento and San Diego very well. Our membership is likely to double there. We'll scale up. And so we don't see much of a big and heavy lift for Sacramento and San Diego. Bear in mind, we are in L.A. County. We're a subcontractor to the current commercial plan. We know the providers, we know the landscape and we're really confident that with 15 months to prepare, we have the 3 things that you need to be ready on day 1. We have the time, we have the money and we have the know-how. And we will be fully ready on 1/1/24 to handle the significant new membership in LA County.

Joe Zubretsky:

Well, I think, managerially, it's a charge. I mean it's a cost that has to be incurred in advance of the revenue showing up, but we have to take it through earnings. 1/3 of it is IT scaling. The other 2/3 is staff. Take the variable cost of running $6 billion of revenue and look at having 2 to 4 months of that cost paid for trained and ready to go in advance of the contract. And you can see how easily it's going to cost $60 million pretax and $0.75 a share.

Justin Lake:

First off, maybe you can walk us through the components of the $1.7 billion of organic growth. Maybe just price and membership growth along your 3 business lines?

Mark Keim:

Sure. When we think about the $1.7 billion of organic growth, that was a 2-year number from our build that's looking over 2 years. Justin, we typically think of 3% to 4% organic growth on an annual basis. Generally, that's about half membership and about half rate. In a year, that's more or less. We're in a lower rate environment right now, which certainly matches trend. But you can do a little bit of math on our current book and work with those organic growth numbers. The other thing that you'd want to stack on top of this, as you think about that organic growth rate is you have to adjust for some of the pass-throughs that we have in our book right now. We've got about $500 million of pass-through revenue this year. So of course, that's going to make a year-over-year comparison less than it might otherwise look because that's not a recurring item, right? Then the only other thing to think about on organic growth is, as Joe mentioned many times on Marketplace, our Marketplace strategy is not to grow ambitiously. So I would not put a meaningful growth rate or any growth rate necessarily on Marketplace year-over-year. But I think if you add those things together, you'll get very close to the 1.7 number I talked about.

Joe Zubretsky:

No, Justin, this is Joe. We won't comment specifically on the protest process itself, but with all 3 awards. We believe that the RFPs were thoughtfully designed and well executed by the various states and that our proposals were effectively judged on their merits. We are very familiar with the protest processes in these various states and are actively engaged and well-resourced to handle it. And right now, we're heads down, preparing for day 1 implementation. We're pretty confident that many of these protest processes will not be protected and come to culmination and an answer in due course very soon.

Nathan Rich:

If I could ask a follow-up on the new contract wins. Could you talk about how the margins on that contract ramp up in 2024 and beyond. It looks like you're targeting about a 4% margin on that new business. Can you talk about maybe what we should expect in 2024 versus the years beyond that?

Mark Keim:

No, that's exactly right, Joe. The 3% is fully loaded. As we've said numerous times with fixed cost leverage, we would ideally see a few bps go to the G&A ratio. But this is conservative and assumes maybe that you give a little bit back in rate. But nevertheless, a conservative view on outlook -- now part of your question might have been 24 ramp into 25 run rate. The 3% is a conservative view of run rate. On the 24, how does that ramp up? It's interesting. Some markets, if folks are new to Medicaid, they can come in hot in the '90s for the first couple of quarters. Other markets where people have been in Medicaid and are quite used to the product and on normal utilization. They'll come in more at the normal run rate. So to be conservative, I'd say that the [MLRs] will be a little bit hotter than we aspired to. Remember, 88% to 89% is our longer-term Medicaid outlook. Would they come in a little hotter than that in the first year? Maybe. But I wouldn't think too much. And so conservatively, we say it takes a year to get to our run rate there.

Joe Zubretsky:

No, I think our outlook for COVID remains the same. It's going to cost us $2.50 a share. And generally, what's been happening is the direct cost of COVID-related care, which have been pretty modest quarter-to-quarter have been nearly -- entirely offset by what we call COVID-related utilization suppression. And therefore, the net COVID cost has been the amount of outperformance in our Medicaid contracts that goes into the risk-sharing corridor. So our outlook on that hasn't really changed. Yes, we are expecting a normal flu season for 2022 into '23. $40 million plus is a normal flu season for us. It went to nearly 0 in the first flu season after pandemic. It's now increased to about half the normal size at about $20 million, and we expect it to go back to $40 million plus into next year, fully baked into our forecast.

Stephen Baxter:

Congrats on the Medicaid wins. I think you guys mentioned in the prepared remarks, potentially this being a little bit of a lower rate environment on the Medicaid side. I was hoping you could give us a sense of how you're thinking about the outlook for rates inside of your guidance for the next couple of years. And then separately, I was hoping you could give us an update on the total amount of Medicaid premium return you expect to see in 2022, both for COVID era provisions and also for any preexisting provisions that were in the states?

Mark Keim:

Yes. Just on the Medicaid revenue build, I'll work off 2024 just for the full picture. We talked about $5.8 billion from the 3 new states. The acquisitions will add $1.4 million, that's AgeWell, which is about $0.5 billion on top of this year and My Choice, which will be the full $900 coming in -- full $900 million. Other components of Medicaid revenue build redetermination across the 2 years, I see revenue headwinds of $1.6 million. And we mentioned in the prepared remarks, that would be split between the 2 years pretty evenly, we expect. Then finally, we have mentioned 2 pharmacy carve-outs that will affect our Medicaid revenue for about $700 million across the 2 years. You put your best assumption on the organic growth for Medicaid, and I think that would give you the components of the Medicaid building blocks.

A.J. Rice:

I know you're saying that particularly for next year on the Marketplace, you're not assuming a lot of growth there. Any comment on where you think the margins will go and what your objective is there longer-term as well? Any updated thoughts?

A.J. Rice:

Okay. And then I know in your prepared remarks, you talked a little bit about reverification impact being spread over '23 and '24. Any updated thoughts about looking at it today. Obviously, we did have a 3-month delay on the PAG. And I don't think you guys have talked -- any updated thoughts about how much would be in '23 versus '24 and where you ultimately land. And then I don't think you've talked much about recapture with your Marketplace offering. Do you think you'll recapture any of the lost lives?

Mark Keim:

Yes. Just as a reminder, the most recent extension was on October -- mid-October to mid-January. We expect that the earliest states would start to redetermine then a month later in February and expect them to do it in a straight-line basis, more or less, across the year. CMS has required states to be done in 1 year, whether they can do that or not remains to be seen. But let's assume that they get there across 12 months. We're currently carrying roughly 750,000 members since the start of the pandemic. Our assumption, A.J., is that at the end of the year, we will have retained 50% of them and lost only 50% to redetermination. I model a PMPM across the book of about $3.75 on these. So when I do the math, the total revenue loss would be $1.6 billion. But remember, that's spread across 2 years. While the membership comes down this year, the revenue was half this year and half next year. If you look at the member months, so call it 0.8% this year, 0.8% next year, back to that into your revenue models. And of course, the member months will support all that.

Kevin Fischbeck:

Great. I just wanted to make sure I understood the $6 in earnings power fully. So I guess, first, you guys said -- I believe that you started with the $3 that you have this year at the $3 on the new business, that makes sense. But then you said if you took $1 out of the existing $3 and added back to $0.75, I just -- I don't know where that dollar that you're taking out is from? Is that from the COVID bucket from the deal bucket? How should we think about that? And then I guess we're applying this to $6 to the $19.50, I just want to make sure we have the right base to think about with the earnings power.

Mark Keim:

Yes. So let me walk you through that. In our last call, we talked about $3 of embedded earnings. As Joe mentioned, we're increasing that by an additional $3 to recognize the run rate of the 3 new states. So we're at $6 currently. The dollar that comes down -- excuse me, we're going to put $1 into our guidance -- our outlook for next year. It's a combination of the acquisitions and the net effect of COVID. I'm expecting about $0.50 to come off the net effect of COVID that we're currently carrying. I'm expecting to realize about $1 of the acquisitions that are in our embedded earnings. And then finally, on redeterminations, $0.50 will go the other way. In my embedded earnings, I'm carrying $1 -- a negative $1 on a redetermination $0.50 of that's going to go into our outlook for next year. So you add that up, that's the dollar. Then finally, we're recognizing the $0.75 of onetime costs. So that gets you to $5.75 million to $6 a dollar for what we're putting into our outlook, increased it for $0.75 for the implementation cost that gets you to $5.75. And to be very clear, that $5.75 is off the $19.50 of adjusted earnings outlook.

Mark Keim:

Joe, I'd just put a point on that. A year ago, we had more than $6 of embedded earnings and 4 of that went into current year performance. So it's quickly converting into real earnings.

Joe Zubretsky:

We continue to look at the data. And we see -- we do see increased duration across our products. It's not as much as you might think because the disenrollment rate is still pretty high. Nonutilizing members are off but only up modestly and longer duration members do have more favorable [MLRs]. This really doesn't affect the ABD population because they're chronic, that's 1/3 of the revenue. And so if we do have any pressure, we're likely to see it in the expansion population, but we expect it to be minimal. Mark?

Kevin Fischbeck :

Can I just follow up on that? Because the point about 0 utilizers, I guess, it doesn't take much of the increase your utilizers to have an increase on -- or an impact on MLR like if you had 90% MLR and then the following year, 50 basis points, more people had 0 reserve utilizers, wouldn't that take your MLR down by 50 basis points and take your Medicaid earnings up by over 10%? Like when you say there's just not a big delta in your utilizers, like what are we -- are we talking about 10 basis points? Are we talking about 100 basis points and when you say that you mean like the expansion? Or do you mean like overall across the entire book of business?

Joe Zubretsky:

And of course, the underlying assumption is that even if those low utilizers, the percentage did change, the underlying assumption that is being made is those are the ones that are going to leave and there's really no evidence. We always have 0 utilizers. We always have low MLR members -- and there just is no statistically relevant data that suggests that, that's going to put pressure on the MLR.

Steven Valiquette:

Great. So just regarding the L.A. County Medicaid contract award. I mean, every state is a little bit different in how they handle the outcome of a successful appeal under that [indiscernible]. So I guess my question really is just around the scenario analysis, just to confirm that one way or the other. I guess is the scenario that your new award in L.A. County could be 100% completely reversed by a successful appeal by the incumbent? Or under the other scenario, does Molina stay in place as a new plan sponsor no matter what. And the incumbent would just be added back in as an additional plan sponsor over and above the existing awards and to sort of dilute the membership you would gain otherwise? Just curious to get the thoughts on that. And also for the other state awards too, if there's any just high-level color on that as well.

Steven Valiquette:

Okay. All right. So it sounds like it's still TBD. Okay. That's helpful.

Scott Fidel:

I was hoping maybe you could just do a quick diagnostic for us. Just when we look at the recent success that you just had in the RFPs and really was quite substantial. And Joe, I know that sort of fixing and accelerating the RFP capability has been a key strategic priority really since you came on board. But really just sort of seem to just really hit its stride more recently. So if you had to pick 2 or 3 things that you think of just resonated in particular with the states in these recent awards, would be helpful to hear about that. And then how transferable do you think those are to somebody's big RFPs that are still ahead in Florida and Texas.

Scott Fidel:

And if I could just ask one separate follow-up just back on the exchanges. And I know that you're really trying to manage the membership and keep this exposure relatively limited. But obviously, 2023 is going to be a pretty unusual year with some of these really aggressive players like Bright now exiting the market, which is going to going to put a lot of membership back sort of into the pool. So how are you approaching that? I mean we did see in the landscape data yesterday that 14% premium increase you talked about and that your premiums are pretty conservative versus the market. But you probably can still end up right with adding a lot of membership potentially. So just interested in how you're sort of thinking about that sort of incremental enrollment and then managing sort of trying to keep the business still relatively low exposure?

Operator:

And our next question today comes from Calvin Sternick at JPMorgan.

Joe Zubretsky:

Yes, Calvin. One of the things we haven't talked about yet because right now, job one is to scale up our operations in California to handle the Medicaid membership, job one. But yes, L.A. County, in particular, has a very high concentration of D-SNP members and Marketplace participants. And while we have those products in California, because of our small presence currently in L.A., I wouldn't say that we have a large LA presence in those 2 products. But yes, we would quickly evaluate whether we would -- once we're comfortable, we've got the day 1 readiness in place, fully scaled and operating well in Medicaid, we would absolutely evaluate whether our Medicare product and our Marketplace product would be -- we followed the same pattern we followed across the country, plant the Medicaid flag come in with our ancillary products and build a robust and diversified product portfolio. I would consider that upside to the growth case, but we have not included it in our current estimate.

Joe Zubretsky:

Well, right now, we're planning that we will be implementing our Medicaid contract on 1/1/24. That's what we're planning on. And let's assume that happens. I would say that we would not be -- we haven't valued in this yet, but I think would be pretty quick and pretty early to then be filing 2 ancillary products 6 months later until we know that we've got the Medicaid population well serviced and operating excellently. So I would say, just off the top of my head now that you've asked, it would probably be more like a '25 filing for '26, and not '24 to '25.

Dave Windley:

Joe, I just wanted to get your updated thoughts on M&A environment in terms of opportunities, valuation expectations, then also higher cost of capital environment. a lot of organic scaling on your plate? Just what are your thoughts about continued M&A?

Dave Windley:

What are your thoughts about continuing merger and acquisition activity for you.

Mark Keim:

Just to put a point on that, Dave, the pipeline is robust. At any given point, we're relationship building. We're in discussions with numerous targets out there. So I'm very encouraged by that. On a capital perspective, looking out over the next 18 months, I feel very comfortable with our capital position. Just organically, we can self-fund most of anything I see in the pipeline between the capital commitment I need for these new procurement wins as well as the capital for some of the potential M&A. I see ample organic cash flow and capital to support all that without even going outside. Now I wouldn't say I would never go outside to raise more capital. But with everything I see over the next 18 months, we can self-fund all that growth, and we're still looking at our M&A pipeline to see what else is there. So we feel pretty good about that outlook.

Michael Hua Ha:

Appreciate the question, and I appreciate all the new guidance update details. Clearly, a lot of new embedded earnings. But when I think about '23, it looks like there's potentially even more tailwinds that could drive upside to your new guidance, upside from recapturing redetermined lives in your exchange book, that's not in your guide, family glitch fix benefit potential benefit to your exchange Medicaid book if recession picked up, maybe better net investment income and rising rates. So are any of these items actually included in your new guide? Am I missing any other tailwinds that could drive upside? And on the headwinds, drive from redetermination in Florida rate cut, pharmacy carve-outs are there any large headwind buckets that should be on our radar?

Mark Keim:

Great. As Joe mentioned, starting from $17.75, as I've mentioned, about $1 comes in from our embedded earnings. It's a little bit off the net effect of COVID. It's the M&A portion that's yet to be realized. And then it's a little bit of a headwind on redetermination in 2023. Organic growth, we talked about that, which is just the recurring growth of rates and membership. I mentioned in my prepared remarks, the operational catalysts, the PBM renegotiation and the upside on that, the real estate rationalization, which I expect to address here at some point in the fourth quarter. Investment income, definitely upside on that. We manage an $8 billion portfolio today split between cash and longer-term investments. Who knows where short-term rates are going. But certainly, on the cash portion, our net investment income is very responsive to those rates. So I think some nice upside there. All those things bridge you to the 2025 core number that Joe mentioned the $0.75 gets you back to the $19.50. Michael, you addressed a bunch of the things that are potentially. We're still working through on the Marketplace, how will open enrollment work, more importantly, on redetermination. What is the cross-sell opportunity as folks come off Medicaid, maybe into Marketplace, that's all upside. We don't assume any of that in our outlook. -- you certainly hit on the net investment income upside. We continue to work through this rate environment as we go into the new year, most of our rates aren't known definitively. We work through that as we go, so that's something we're thinking about every day. But as Joe mentioned, those rates need to be tied to trend, that's an actuarial requirement. So let's see where trends in rates move. That's one thing that's still evolving in our outlook. But overall, I think you got the core components there, and you mentioned a number of the potential items on top of it.

Joe Zubretsky:

I think from a footprint perspective, counting the number of counties can actually give a misleading answer because we're only probably at about 50% or 60% of the Medicaid counties. However, were in counties that cover 90% of the population. So we're pretty well saturated and penetrated in the Medicaid counties, which is our strategy, follow bring D-SNP into where you're concentrated in Medicaid. Our strategy is very simply is to grow at low teens rates in Medicare. It's a low-income offering, D-SNP, we have our demonstrations, which are basically auto assignment and you roll with the auto assignment algorithms of the federal government. And then, of course, we did launch what we call traditional Medicare Advantage, but it is a low-income strategy. We're not trying to compete with the big guys who are going after affluent seniors. We're targeting people that have enough resources to operate just above the D-SNP income levels and wherewithal levels, but still need a Medicare Advantage product. So it's still a low-income niche offering, and we expect to grow, as we said at our Investor Day, at low teens rates.

Operator:

Ladies and gentlemen, our final question today comes from Joseph France with Luke Capital Markets.

Joe Zubretsky:

Sure. It's -- there's one commercial plan in Los Angeles. And we are a subcontractor meaning in return for a percentage of the premium we service the members. It's under 100,000 members. But we know the environment very well. But it's a very small relationship. It's only a couple of hundred million dollars in premium, and I believe that latest count that I've seen is we're probably at around 70,000, 75,000 members in that book of business. So it gives us familiarity with the territory. Obviously, we have a big installation there with respect to headcount footprint. So we know the area very, very well. But that relationship while it gives us the familiarity that's going to help us scale up, it's financially very small.

Joe Zubretsky:

I couldn't comment whether it did or not, but I would suspect that that's correct.

Operator:

Good day and welcome to the Molina Healthcare Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President of Investor Relations. Please go ahead.

Joe Zubretsky:

Thank you, Joe and good morning. Today, we will provide updates on several topics

Operator:

[Operator Instructions] The first question today comes from Josh Raskin with Nephron Research. Please go ahead.

Joe Zubretsky:

Sure, Josh. Really, it was a function of the surge of special enrollment membership we experienced last year. If you recall, we took on 250,000 members between March and the end of the year. And of course, we had to really gear up and scale up to service that membership, including risk adjustment. So I think part of it was keeping pace with the surge of membership and getting the risk scores. I think part of it was the acuity of the membership. And I think another part of it was just the imprecise nature of actuarial estimations given that unstable environment. The good news for this year is we became aware of this emerging trend early in the quarter as we were developing our final pricing in the Marketplace, and we’re able to take the current view of the acuity of this population into consideration as we filed our final prices for 2023.

Operator:

The next question comes from Matthew Borsch with BMO Capital Markets. Please go ahead. Matthew, perhaps your line is muted.

Joe Zubretsky:

Yes, we can.

Mark Keim:

Yes, sure. Matt, good morning. It’s Mark. I think you’re looking at the year-over-year change. We had a little more prior year development this second quarter than we did a year ago at this time. And that’s not unusual. The way development happens is not always the same year-over-year. The way our providers submit claims and the way our internal operations, including payment integrity work is a little different year-over-year. So yes, the pattern is a little bit different. But what’s more important is I’m reporting our DCP at 50.4%, which versus a year ago at 48% is clearly up. The other thing that you guys look at a lot of times is just the growth in premium versus the growth in reserves. My reserves are up 28% year over my premiums are up 18%. So I feel really good about where I’m reserved. I think we’re in a good spot.

Operator:

The next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Joe Zubretsky:

Sure, Stephen. I’ll kick it to Mark for some of the actual numbers. But as a matter of routine in the Medicaid business, one needs to understand the duration of its membership. Duration could have an impact on the acuity of a population. So it’s something we routinely look at. I will tell you that during the pandemic, the duration of membership, the length of time people are on the Medicaid rolls didn’t extend all that much. And I will tell you that the differences in acuity as measured by medical care ratios is not that much different on short duration members versus long duration members. We have lots of other actuarial and medical economics data points that suggest that the members that will leave, will leave at portfolio averages. But I’ll turn it to Mark for a little more color on that.

Operator:

The next question comes from A.J. Rice with Credit Suisse. Please go ahead.

Joe Zubretsky:

Two concepts, A.J., it’s Joe. First, we always forecast and plan according to the status quo and since the PHE, right at this point will end in October, that’s our planning assumption. We all expect it to be extended to the end of the year, but that’s a separate issue. As we build up our models on a state-by-state basis based on conversations with the state and how they plan to execute the redetermination process, so the buildup of what we do is very much bottoms up. We do, in our forecast. Most of the impact is 2023, some of it spills over into 2024. The key numbers are $3.2 billion of Medicaid revenue gained as the 750,000 membership growth occurred. It will ultimately settle at $1.6 billion and that will roll out mostly in 2023 at $1.2 billion or $400 million spilling over into 2024. Mark, any color to add?

A.J. Rice:

Okay, great. Thanks so much.

Nathan Rich:

Hi. Good morning. If I could ask a two-part question on the 2023 guidance that you gave. For the 10% growth in premium revenue, and obviously, that excludes redeterminations, if you back out the impact of acquisitions, it looks like low-single digit revenue growth. Could you maybe just talk about how that breaks down by line of business? And then you mentioned having industry-leading margins in – I think doing the quick math on the premium revenue outlook and earnings it looked like you were kind of continuing to be at the top end of that range. So, could you maybe just talk about margin potential from here as we think about the next several years?

Nathan Rich:

Yes, sorry, just on the margin opportunity, given that the business is kind of operating today at the high end of the long-term target.

Nathan Rich:

Thank you.

Kevin Fischbeck:

Great. Thanks. I guess one quick clarification and then from the actual question. When you said 10% revenue growth for next year, then you said partially offset by redeterminations. Was that 10% number including those, or are you saying it was 10%, kind of giving us a sense of how you normally grow, but then net, it will be a little bit less than 10% because of those other items?

Kevin Fischbeck:

Okay. So, it’s 10 minus something. That’s how to think about it right now. Okay. And then, I guess as you think about the COVID impact. I guess I am struggling a little bit with how you talk about the cohort impact because it seems like it’s a little bit different than how some of your peers are talking about the COVID impact because, like with Q2, you seem to be saying that COVID was a headwind, but that you were able to offset it with medical management. Where most of the companies seem to kind of be saying, for whatever reason, volume didn’t come back the way that it normally does in Q2 and they are being cautious in the back half of the year. You are still being cautious in the back half of the year. But just tying to understand exactly what you think happened in the quarter. Was it an industry-wide phenomenon, or do you kind of view like your controlling trend below and it’s kind of more outperformance or trying to be more sustainable versus maybe a blip in how people use utilization during COVID troughs and peaks and therefore, maybe a little bit less clear about what happens in the back half? Thanks.