Molina Healthcare Inc

Good day and welcome to the Molina Healthcare First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Julie Trudell, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining Molina Healthcare's first quarter 2020 earnings call. With me today are Molina's President and CEO, Joe Zabretsky, and our CFO, Tom Tran. Press releases announcing our first quarter earnings and the definitive agreement to acquire Magellan Complete Care were distributed yesterday after the market closed. The press releases and the slide presentation regarding the MCC announcement are available on our Investor Relations website. A replay of this call will be available shortly after the conclusion of the call for 30 days. The numbers to access the replay are in our earnings release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Friday, May 1, 2020, and have not been updated subsequent to the initial earnings call. In this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2020 press release. During our call, we will make forward-looking statements, including statements relating to our growth prospects, our 2020 guidance, the Magellan Complete Care Acquisition, and our long-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K Annual Report for the 2019 year filed with the SEC, as well as the risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call and take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zabredsky. Joe?

Thank you, Julie, and good morning. This is an unprecedented time. The COVID-19 pandemic has had and will continue to have a profound impact on our country, our state partners, our members, and our employees. Our team has worked tirelessly over the past two months to ensure that the needs of all of our constituencies are addressed quickly in this rapidly changing and challenging environment. COVID-19's impact on the US healthcare system and the overall economy will continue to develop during the year, no doubt causing some short-term challenges, but also serving to highlight the important role government-sponsored health care plays in this type of crisis. Clearly, the macroeconomic environment will significantly impact our results this year and for the foreseeable future. With that said, as a pure play government managed care business, we remain well positioned at a time when reliable access to high-quality health care is more critical than ever to our members and our state partners. We would like to provide you with updates today on a number of fronts. First, we will cover the financial results for the first quarter. Second, we will discuss the new but hopefully temporary operating environment created by the COVID-19 pandemic. Third, we will convey our guidance in the context of our first quarter results and this new operating environment. And fourth and lastly, we will provide some detail about our exciting acquisition of Magellan Complete Care that we announced last evening and other updates to our Pivot to Growth initiatives. Let me start with specific first quarter highlights. We reported earnings per diluted share for the first quarter of $2.92, with net income of $178 million and an after-tax margin of 3.9%. which slightly exceeded our expectations for the quarter. Premium revenue was $4.3 billion, an 8.9% increase over the prior year, which is consistent with our pivot to growth. The medical care ratio was 86.3%. We experienced medical cost pressure in the Medicaid line of business early in the quarter, resulting from slightly higher than normal seasonal flu, combined with early but at the time unidentified, COVID-19 costs. These increased costs were offset by lower medical costs in all lines of business very late in the quarter as elective and discretionary health care services began to be postponed and deferred. These offsetting factors, combined with negligible prior period reserve development, produced a medical care ratio that squarely met our expectations. We managed to a G&A ratio of 7% in line with our expectations, even after reflecting incremental expenses associated with the mobilization of our workforce to work at home and other new operational protocols related to COVID-19. The total company after tax margin was 3.9% in line with our expectations, comprising product line margins of 3.2% in Medicaid 8.4% in Medicare, and 4.1% in Marketplace. While a $2.92 earnings per share result modestly exceeded our expectations, its achievement is noteworthy in the context of the environment in which it was produced. Which brings us to our second topic, the dramatically different environment in which we currently operate and some of the changes we have made in response. To recap a few of these measures, As shelter-in-place directives and all-out shutdowns quickly spread throughout our geographic footprint, we swiftly moved substantially all of our associates to work at home. We accomplished this with no disruption to service as service metrics have remained excellent. This is a remarkable accomplishment in light of the potential for disruption to utilization management, care management, network access, and information technology infrastructure. Substantially, all of our company's workforce, 10,000 associates, are currently working from home. Many providers have seen disruption to their patient and revenue flows. Providers are struggling more than ever with utilization management, payment integrity routines, and associated protocols in a rapidly evolving environment in which their cash flows have suddenly declined. While this requires adaptability on our end, we maintained strong performance in network management and utilization control. To assist providers in this challenging time, we accelerated claim payments by $150 million in late March and early April, while also extending the term of all non-COVID-19-related prior authorizations through September 1, 2020. We also increased telehealth visit reimbursement to be at parity with in-person visits, and have expedited credentialing to ensure we have ample provider capacity. We understand that COVID-19 creates a variety of challenges for our employees, including family members at home who may need support, children who require care. We quickly implemented broad-based programs to help them during this time, including two special stipends of $500 for a total of $1,000 to each of more than 9,000 of our employees. We also implemented pay enhancements for essential employees required to come to the workplace and an additional COVID-19 pay leave policy. We are responding to dozens, if not hundreds, of special requests by our state customers, CMS, and other governmental agencies. For example, we eliminated all member costs for COVID-19 testing and related treatments, We relaxed utilization management protocols in specific instances. We expanded telemedicine access to all members. And we made substantial contributions to the supply of personal protection equipment. We also committed support and resources for various nonprofit organizations serving those in need across the country. Support, supplies, and monetary donations have been made to a variety of trusted organizations that directly serve vulnerable populations. In summary, we would characterize our first quarter results as more than respectable in the context of unprecedented disruption to the entire spectrum of traditional managed care operations that occurred over the span of just a few weeks. In this difficult operating environment, it should be noted that our financial position is strong, as we had already done the hard work to develop very solid capital and liquidity positions. A few words about these matters. Our share repurchase program is now completed as we purchased the total of 3.4 million shares in the quarter for approximately $450 million at attractive prices. We drew down $380 million in remaining capacity of our term loan facility to bolster our liquidity. We availed ourselves of this inexpensive debt instrument which would have otherwise expired in the coming quarter. And after the completion of the share repurchase program and the term loan facility draw, we are holding approximately $840 million in excess parent company cash. I turn now to our third topic, a discussion of our near-term outlook, starting with a description of the current dynamics of our industry. The business model. Government-managed care, particularly Medicaid, has been stress tested through extreme economic scenarios, including the financial crisis, the subsequent boom, and now the effects of the world's worst pandemic in over 100 years. The model has proven to work in both robust economies and in deep recessions. In strong economic environments with low unemployment, there are relatively fewer Medicaid and subsidized marketplace members. Capitation rates tend to be on the strong side of actuarial soundness as state budgets are well funded. During challenging economic environments with high unemployment, there are relatively more Medicaid and subsidized marketplace members. Capitation rates tend to be on the lighter side of actuarial soundness as state budgets become tighter. So, While government managed care, particularly Medicaid, is certainly impacted by this environment, the business and financial model flexes to accommodate these unusual and sometimes extreme circumstances. In an extreme environment, like the one we are in today, government intervention is often required to provide rescue packages, backstop the healthcare system, and the disadvantaged population. The current crisis is no exception. as Congress and the White House have stepped forward with a number of measures. The Families First Coronavirus Response Act includes additional assistance for state Medicaid programs in the form of an increase to the FMAP match. Each state has received a 6.2% increase, which will extend throughout the COVID-19 public health emergency declared by the Secretary of Health and Human Services. There have also been a number of legislative aid packages enacted, including the $2 trillion stimulus package and the additional $484 billion supplemental COVID-19 spending package referred to as Phase 3.5. These funds, in various forms, have been made available to providers, small businesses, individuals, and a number of other constituents and should ease the pressure on the healthcare system during this crisis, which indirectly should help the viability of Medicaid programs. In short, we have a stress-tested business model and significant government intervention designed to accelerate the economic recovery. But even in the presence of these very positive factors, which support a favorable outlook for the longer-term trajectory of the business, the near-term quarter-to-quarter outlook remains difficult to predict. This brings us to a discussion of our guidance for the remainder of 2020. Two overarching factors must be considered in providing guidance in this environment. First, we face a remarkably wide range of possible medical cost scenarios that could emerge over the next nine months. We have modeled many utilization scenarios for the balance of the year, all of which are plausible, but each of which produces dramatically different results. Second, we must consider the likelihood of a significant increase in membership as a direct result of widespread unemployment. With rising unemployment levels and the suspension of Medicaid eligibility redetermination in many states, we are now likely to experience a significant increase in combined Medicaid and marketplace enrollment, but by how much we do not yet know. These COVID-19 effects on medical costs and membership are widely expected to have a net positive effect on near-term earnings. However, we are not yet prepared to draw this conclusion based on the many variables and uncertainties that remain as managed care moves through the full course of the pandemic. We are, however, prepared to state that we view our original 2020 plan and our previously announced guidance with enhanced confidence. Accordingly, we are reaffirming our full year earnings per diluted share guidance range of $11.20 to $11.70. Let me briefly walk through the thought process that supports our guidance. With respect to medical costs, at this point, we cannot predict with any degree of precision how the COVID-19 situation will impact medical costs in 2020 for a variety of reasons. First, the level of future direct COVID-19-related costs is not yet estimable, as the incidence rate of diagnosis and hospital admission and the related costs per episode remain unclear. We observed a steep decline in elected medical procedures very late in the first quarter, through the month of April, but we do not know how long this phenomenon will persist and begin to normalize. The prevailing expectation is that discretionary utilization could be very low for the second quarter and perhaps beyond, but then rebound quickly in the second half as COVID-19 abates and health system capacity frees up. And any potential short-term and non-recurring benefit from lower utilization is partially limited by rebates we could be obligated to pay under applicable minimum MLR regulations. With respect to our administrative costs, our operating efficiencies are secure and our operating leverage discipline is intact. There will continue to be G&A pressure, however, related to non-standard operating protocols and the cost structure required to service any significant additional membership. Investment income will certainly be lower than our original forecast as money market and other maturing fixed income investments blow over into much lower yielding instruments. Recall, too, that our portfolio is short-dated, so the impact is rather immediate. Before the onset of COVID-19, we fully expected to achieve our membership guidance. With the unfolding unemployment levels and suspension of Medicaid eligibility redetermination, we are now likely to exceed that guidance, but by how much we do not yet know. We have developed various models and scenarios based on macro and micro economic factors, which produce widely different results. The eventual outcome will be influenced by several key factors, including unemployment levels, particularly in the lower wage services economy, availability of spousal coverage, and COBRA uptake. The impact of these factors is likely to be greater in the economically sensitive Medicaid expansion sector. Relatedly, pre-COVID, we fully expected to achieve our premium revenue forecast for the year of $17.4 billion. Our previous membership forecast was achievable, and our rates were generally known. Now, it seems likely we could exceed our revenue forecast, depending on the timing and extent of the additional membership we just discussed. A YourCare acquisition will be an additional source of growth when closed. I also note again that any potential upside to annual earnings is limited by rebates we would be obligated to pay under applicable minimum MOR regulations. In addition to our compliance with such regulations, even if our MCRs come in lower than our own internal targets, with a mindfulness of our civic responsibilities, in order to redress any unexpected imbalances, We could choose to reinvest some of that margin differential in provider-based quality of care initiatives and additional benefits for our members or in the communities where they live. While the current near-term economic environment is unpredictable, government managed care business has consistently shown very attractive growth characteristics with compelling free cash flow generation. We are in the right business at the right time to serve our members support our state partners, and move with confidence and conviction into the future. However, we also believe that making accurate and perhaps bold statements about our longer-term future makes little sense at this time. Accordingly, we have decided to postpone our May 28th Investor Day to perhaps later in the year. For now, we are strictly heads down doing the hard work we need to be doing. I turn now to the fourth and final area of commentary this morning, an update on the many activities relating to our pivot to growth strategy. Even with the extraordinary level of activity related to COVID-19, which is now our highest priority, we have not lost sight of our near-term focus on top-line growth. Opportunities to enhance and expand our portfolio in a substantial and synergistic way occur infrequently. Last night, we announced just such an achievement as we signed a definitive agreement to acquire Magellan Complete Care, or MCC, from Magellan Health. This transaction caps nearly a year-long effort, long predating the COVID-19 crisis, and delivers compelling benefits that will endure for years to come. In a single bulk-on acquisition, we had businesses in three new states, and three overlap states to our portfolio at a purchase price equal to approximately 30% of the target's revenue. Proforma, newly expanded Molina Healthcare, would surpass the $20 billion mark in annual revenue. Let me briefly describe the businesses we purchased, their strategic fit with our portfolio, and the resulting financial metrics. As of December 31st, 2019, MCC served approximately 155,000 members across six states, Virginia, Arizona, Massachusetts, New York, Florida, and Wisconsin. Full year 2019 revenue was greater than $2.7 billion. We projected to grow to $3 billion within two years. Magellan Complete Care comprises the following businesses, full service Medicaid in Virginia, a new state. Full-service Medicaid in Arizona, also a new state. Dual eligibles in Massachusetts, granted senior whole health, again a new state. Managed long-term care in New York metro area, granted senior whole health, a new geography. And two small businesses, one in Florida and one in Wisconsin. The addition of the MCC properties allows us to apply our previously demonstrated operating excellence to bring these businesses to our target margins, harvest the full benefit of fixed cost leverage by adding more revenue with little additional fixed costs, and launch Medicare and Marketplace in new Medicaid geographies. Turning to the financial metrics, the $820 million transaction net of certain tax benefits is expected to close in the first quarter of 2021. the purchase is funded entirely with cash on hand. We've projected we'll deliver returns well in excess of our cost of capital as our demonstrated operating capabilities puts us in a unique position to improve the margins of these businesses. As we move margins to our targets, deploy our enterprise-wide platforms, and have the benefit of fixed cost leverage, we expect the acquisition to be accretive by approximately 50 cents to 75 cents cash earnings per diluted share in the first year of ownership and accretive by at least $1.75 in cash earnings per diluted share in the second year of ownership. These new additions to our portfolio demonstrate how carefully targeted M&A can accelerate our pivot to growth. With the addition of MCC, we will serve more than 3.6 million members and government-sponsored healthcare programs in 18 states. We will achieve enhanced geographic diversity, greater portfolio depth, a meaningful addition of durable top-line revenue. We will also be able to maintain continuity of care for NCC's members and stability for its state partners. These qualitative considerations have an added importance in the current environment and demonstrate our unwavering commitment to capably assist our government partners in bringing high-quality health care to individuals and families during this time of great need and into the future. Let me provide you with some additional highlights as it relates to our pivot to growth strategy. First, we terminated our agreement to purchase next-level health due to the seller's stated unwillingness to close pursuant to the terms of the acquisition agreement. Second, in New Mexico, all legislative and political hurdles have been passed in connection with development of the first ever Indian managed care entity. We have been named as the exclusive manager of the managed care entity for the Navajo Nation. We stand poised and ready to serve the 75,000 Navajos eligible for Medicaid. Third, as previously announced, Texas canceled all of the new contracts associated with the Star Plus Reprocurement Awards and canceled the Star Chip RFP. The state has commented that it is not likely to re-procure this contract in the near term, and thus we expect that our revenue base on this contract is secure at least through 2021. Fourth, we await the decision by the state of Kentucky on its Medicaid RFP which we expect to be issued before the end of the second quarter. While Tennessee is the only state to specifically announce that it is postponing its RFE due to COVID-19, we believe there will be a general tendency by other states to also delay procurements until the COVID-19 crisis has abated. And finally, in our continued efforts to shape our business portfolio to optimize value, we have decided to sell our Puerto Rico Medicaid business. In doing so, we will work closely with the regulatory authorities and the provider community to ensure that our members in Puerto Rico are not disrupted and have reliable continuity of care. Now some concluding remarks. I hope it is clear to all that during this time, our members and customers are going to make requests of us to do the extraordinary. Our philosophy is to provide the help first and ask questions later. We trust that we will be adequately rewarded for the work we do and the services we provide. Although in this environment, we expect some non-traditional protocols to be invoked. This philosophy is not incongruent with shareholder friendliness at all. In fact, it is the epitome of a prudent environmental, social, and governance philosophy and the pillar of long-term business sustainability. We will fulfill our moral, civic, and patriotic duty, and we will emerge from this an even stronger company. Not only are we proving to be flexible and adaptable in this changing environment, but we will make sure our performance during this challenge enhances our growing reputation among our existing customers and potential new customers alike as a go-to resource in government-sponsored managed care. Before I turn the call over to Tom, I want to recognize our management team and the entire Molina community. During this unprecedented time, our team, 10,000 strong, has worked tirelessly to ensure that the needs of all of our constituencies continue to be addressed quickly and effectively. The true highlight of the quarter was the performance of our entire workforce and their rapid operational and clinical response across every dimension of the healthcare ecosystem. Truly inspirational. They never lost sight of the members and the state partners who are counting on us to deliver whatever the challenge. Now, I will turn the call over to Tom Tran for more detail on the financials.