Molina Healthcare, Inc. — 2024 Q1

I guess, first, I wanted to start on the guidance here, is -- you talked about the strength in the core business and the MCR sort of being in line with your expectations. So I guess, is the right way to think that the strength is really coming from G&A? And then when we think about the back half is -- I guess, is the outperformance in the current business enough to allow you to maintain guidance? Or if you think about the -- those potential contracts going away, are there additional SG&A savings you'd need to target in the back half to be able to offset those losses? Just any color to help us frame that would be great.

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.

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? .

It doesn't really change our M&A strategy. I mean we look for opportunities across all of [indiscernible], most of our M&A activity has been in Medicaid, but the Bright acquisition represents first M&A opportunity that we actioned in Medicare. But what we're really saying is the fact that we have this 20-state footprint in Medicaid and growing. The decent opportunity is just one more way to monetize your significant Medicaid footprint. And the fact that we have a very robust and very operationally excellent decent business. Those 2 platforms combined will allow us to participate in the duly eligible population growth rate that's going to happen here over the next number of years. So we're very, very pleased with the final rule that came out from CMS, which basically says that Medicaid will be the anchor tenant for action in the dual eligible population.

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

On Virginia and Florida, just to set the stage, we think right now, that's about a $2 billion revenue run rate and about $1.10 on EPS full year. Now the simplifying assumption is we lose both in the fourth quarter, the headwind would be $0.5 billion on revenue and $0.30. But look, we're still working that through. Those are under protest and exactly what the timing is, is somewhat unclear. But if you deposit that assumption, it would be a $0.30 component to this year's guidance. which, as we mentioned in our prepared remarks, is offset by the underlying strength of the business. So if the full run rate is $1.10, we recognized $0.30 this year, what's left is $0.80 for embedded earnings. -- and that is exactly offset by the $0.80 of accretion we see in STAR and CHIP.

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.

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.

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.

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.

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. .

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.

You mentioned the rate increase is kind of proactive, there probably more reactive, right, as so many of the states react to observe trends as opposed to proactively put it in. I wish they did. But as Joe mentioned, we're okay with the rate increases for this year. The rate increases we've seen look like they match the trend we're expecting. In we saw the acuity impact on trend really level off. And I think that's commensurate with the volume. So far, we've had 550,000 members leave only 50,000 were in this last quarter. So it's really leveled off.

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.

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.

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.

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.

On the -- I believe your first question was on the enhanced subsidies for Marketplace. I understand it -- it's hard to say. -- bear in mind, they do go away unless legislation is passed to extend them. That's -- sometimes that's misunderstood. They are going away because the subsidy enhancement was temporary. and a less legislation is passed to extend them they will.

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.

Gary, the one thing I would point out is certainly when they streamline Medicaid and chip eligibility and all the procedural items that folks have to go through to maintain or get eligibility, it just makes it easier for the appropriate coverage to go to the right people, and we think that's obviously a good tailwind for our business.

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.

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.

On these protest processes, I think I've said about all I really should say about them. They are legal processes, and we have to see how they unfold. But of course, through various requests, I'm sure everybody's got the information they need to document their findings and to put their case forward. So that's all I'll say about it.

It's Mark. Yes, absolutely, there's favorable PYD, and you'll see that in the earnings release where we showed the prior year development on current year reserves. It tracks about as it normally does, not higher, not lower. And of course, we always replenish that. So we feel very confident I showed a 49% days claims payable, which is right in the middle of our standard range. We feel very good about our reserves even with a little bit of noise from the change situation that happened back in February. So very confident, reserves replenished, we feel adequately reserved.

There always is. That's a normal part of a reserving cycle. Typically, the way you reserve is in the current period, you pick a number, which is generally a little bit conservative. And typically, prior periods developed favorably. That is a standard cycle of the actuarial and reserving process and how we recognize earnings. Nothing unusual there in this quarter.

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?

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.