Molina Healthcare Inc

Good day and welcome to the Molina Healthcare second quarter 2020 earnings conference call. All participants will be in 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 Investor Relations at Molina Healthcare. Please go ahead.

Good morning, and welcome to Molina Healthcare's second quarter 2020 earnings call. Joining me today are Molina's president and CEO, Joe Zabretsky, and our CFO, Tom Tran. A press release announcing our second quarter earnings was distributed yesterday after the market closed and is available on our investor relations website. Shortly after the conclusion of the call, a replay of this call will be available for 30 days. The numbers to access the replay are in the earnings release. For those who are listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Friday, July 31st, 2020, and have not been updated subsequent to the initial earnings call. In this call, we'll refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2020 press release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding the COVID-19 pandemic and the economic environment, recent acquisitions, 2020 guidance, and our longer-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause 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 our Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call to take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zabretzky. Joe?

Thank you, Julie, and good morning. Today, we would like to provide you with updates on a number of topics. First, we will cover the enterprise-wide financial results for the second quarter. Second, and relatedly, we will discuss the impacts of the COVID-19 pandemic on various aspects of our business. Third, we will convey our guidance in the context of our second quarter results and this new but temporary operating environment. And fourth and lastly, we will provide a premium revenue growth outlook for 2021, which is approximately 20%, as we now emerge from pivoting to growth to activating our growth phase. Let me start with specific second quarter highlights. Last night, we reported earnings per diluted share for the second quarter of $4.65. with net income of $276 million. This result was supported by an MCR of 82.3%, a G&A ratio of 7.5%, and an after-tax margin of 6%. Our year-to-date earnings per diluted share is now $7.54, representing 66% of our full-year guidance. The COVID-19 pandemic had an impact on many aspects of our quarterly results. Some of these impacts increased earnings, while others served to decrease earnings. While many of these impacts are known and estimable, others require significant judgment to estimate. Today, we will do our best to quantify the COVID impacts on our results and separate them from the underlying core earnings power of the business. In doing so, two things are clear. Our operating metrics were substantially in line with our expectations, both as reported and as adjusted for COVID impacts, and both our core earnings and the growth trajectory of our business have not been disrupted by the short-term impacts of COVID. We estimate that taken together, all COVID impacts on our financial results for the quarter resulted in an increase in net income in a range of $65 million to $100 million, equating to an increase in earnings per diluted share in a range of $1.10 to $1.65. Now, I will provide some highlights related to our second quarter results from an enterprise perspective. Beginning with revenue, our premium revenues of $4.4 billion increased by 8% over the prior year. Relatedly, our membership increased sequentially by 151,000 members, or 4%, primarily in Medicaid. With respect to medical costs, with an 82.3% MCR, our performance was also strong, although significantly augmented by COVID impacts. Although in many cases we were required to relax our utilization management and payment integrity routines as an accommodation to providers, we continued to effectively manage medical costs while ensuring all of our members received high-quality care. This MCR result was impacted by two directionally different factors related to the COVID-19 pandemic. We experienced lower than expected medical costs due to COVID-related utilization curtailment, a phenomenon that may or may not recur during the balance of the year. And a number of our state Medicaid customers enacted retroactive rate refunds. In the quarter, the lower medical costs and the retroactive rate refunds combined to reduce our reported medical care ratio by an estimated 300 to 400 basis points, which accounts for substantially all of the reduction in the ratio, both year over year and sequentially. All of the COVID impacts on our second quarter results will be described in more detail in a few moments. Next, we continued to effectively manage our administrative costs through productivity gains and fixed cost leverage, producing a G&A ratio of 7.5%. This is despite spending on specific COVID-related items, which temporarily increased our administrative spending. Our net investment income, usually not an earnings item with significant variability, was again unusually low at $18 million compared to $34 million a year ago due to the current low interest rate environment. Our line of business results were very much in line with our expectations. with strong metrics in both Medicaid and Medicare, while our marketplace results were slightly lower than expected due to a higher than expected member acuity mix. Finally, in the quarter, we continued to improve our capital structure. We issued $800 million of high-yield bonds used to retire short-term floating rate debt. We also upsized our revolver, to $1 billion from its previous level of $500 million. These are more than mere transactions. They are the culmination of a two-year long and highly successful restructuring and optimization of our capital structure. We are now positioned with well-priced debt, nicely laddered maturities, solid credit metrics, and ample dry powder to execute on M&A opportunities if and when those opportunities arise. In summary, we continue to perform well across the many fundamentals of managed care, which has been our hallmark, and we are continuing to grow revenue as a result of our focus on top-line growth. Now, I will provide some commentary about the effects of COVID on our second quarter results. The COVID impacts on our quarterly results include a decrease in medical costs due to COVID-related utilization curtailment offset by direct care related to COVID patients, retroactive rate refunds to a number of our state Medicaid customers, an increase in our G&A spending on activities related to COVID, and a meaningful increase to our Medicaid membership. As previously mentioned, we estimate that, taken together, all COVID impacts on our financial results for the quarter have produced an increase in net income in a range of approximately $65 million to $100 million, equating to an increase in earnings per diluted share in a range of $1.10 to $1.65. I will now provide more color on the most significant factors contributing to this. With respect to the COVID impacts on medical costs, early in the quarter, we experienced significantly lower utilization and a variety of cost categories, categories representing approximately two-thirds of our total spend, with utilization levels increasing slowly as the quarter progressed. By the end of the quarter, utilization of these categories was still approximately 10% lower than we would have normally expected. The medical cost categories most impacted were elective surgeries, services in ambulatory settings, ER visits, behavioral services, and wellness and preventive services. We also incurred the direct cost of care for COVID patients, with just over 4,100 hospitalizations, an average inpatient episode cost of $9,000, plus the cost of outpatient and other professional services. The cost per COVID episode varies widely, depending on the acuity of the patient. We estimate that COVID lowered our second quarter medical costs by $190 million to $240 million. As you know, as a general matter, there are fewer elective procedures performed under the Medicaid program than is the case with commercial health insurance. Since our book of business is heavily weighted to Medicaid, the effect on us of elective procedure curtailment is therefore less pronounced. Six of our state customers enacted temporary retroactive rate refunds during the quarter with the intent of recouping the portion of our capitated rates not spent on health care services due to the pandemic. In the quarter, these refunds amounted to $75 million pre-tax and related to the states of Ohio, Illinois, California, South Carolina, Mississippi, and Washington. Some items of note. The refunds in these states took various forms, ranging from simple rate adjustments to a slightly more complex risk sharing corridor around a target medical loss ratio, as well as supplemental payments to providers. In many of our states, however, it was business as usual as we continued to operate on the pre-COVID rate structure. Our position on rate adequacy has been consistent. We do not intend nor do we want to keep state Medicaid money that was intended to be spent on medical benefits but was not due to utilization curtailment caused by COVID. In many of our Medicaid states, there are already mechanisms in place to protect against a surplus margin as there are minimum MLRs in seven of our states and profit caps in two others. The FMAP increase and potential additional FMAP increases should significantly relieve any potential rate pressure in our states. And CMS has authority to approve or disapprove proposed rate actions that are not aligned with the definition of actuarial soundness. Once the COVID-19 pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will continue. With respect to our G&A expenses, COVID-related activity increased our second quarter expenses by approximately $25 million. A variety of new operational protocols, technology implementations, and benefits for our employees all related to the COVID pandemic were established or implemented during the quarter. In addition, we have consciously managed our headcount at above optimal levels to ensure we maintain adequate service levels, but also to be socially responsible to our dedicated staff. Medicaid membership increased sequentially by 152,000 members in the quarter, a 5% increase. Much of this was due to the suspension of redeterminations as we believe that unemployment-related enrollment has not yet materially accessed managed Medicaid. It remains unclear how high the membership peak will be, how quickly it will be attained, how quickly it will fall as the economy recovers, and where it will ultimately settle. We have invested in many local growth initiatives with providers, in branding and awareness campaigns, and in social media outreach to ensure we obtain our fair share of increased membership. We believe that post-COVID Medicaid membership will stabilize at an increased level as the future natural unemployment rate will likely be higher than previously experienced. In summary, as we work through this unprecedented period, we remain focused on executing on the underlying fundamentals of our business. regardless of the short-term COVID related impacts on our reported financial results. Now I turn to our guidance for the full year. Our full year earnings guidance range remains at $11.20 to $11.70 per diluted share with a midpoint of $11.45. Our earnings per share year to date is $7.54 which means through six months we have earned 66% of our revised guidance. Given the environmental uncertainty that we expect to exist through the end of the year, we are not adjusting the range of our previously provided earnings per share guidance. We intend to adjust our full year outlook as appropriate when our third quarter results are reported. The reasons for this cautious approach have already been stated but bear repeating. The near-term outlook for medical costs, the cost of COVID itself, and the potential elective procedure rebound are unknown at this time. There is still potential for additional near-term rate actions or voluntary company concessions to customers, members, and providers. We will fulfill our obligation to make any rebate to a member, CMS, or our state customers related to the statutory requirements that exist today. After doing so, if we conclude that there is still a remaining financial imbalance, we will correct that imbalance. Our membership forecast has a wide range of possible outcomes, as there are numerous macroeconomic variables in play and, relatedly, the acuity of any potential membership increase and the cost to service it are also highly variable. And lastly, we believe that any methodology for extrapolating annual earnings estimates by quarter should be suspended in one's thinking. I would now like to turn to the progress we have made in executing our growth strategy, which is having an immediate impact and which allows us to forecast premium revenue growth of approximately 20% for 2021. We have essentially checked the box on at least one initiative across all the revenue growth dimensions outlined in our growth strategy. We have retained all of our existing Medicaid contracts. We have won a new state contract, and we have executed meaningful and accretive acquisitions. And with the impact of the recession, organic growth will be much better than expected. Some highlights. Based on announced re-procurement schedules, the revenue associated with our current in-force Medicaid contracts should be intact through 2021. Plus, we have significant certainty related to 2022. The new management team has won or defended all of the re-procurements that were under its control. We assumed the YourCare membership on July 1st, which will increase membership by 47,000 members in the third quarter, and should provide approximately $140 million of revenue for the remainder of 2020 and $280 million for the full year of 2021. The Magellan Complete Care regulatory review process is proceeding as planned. Recall that the federal antitrust approval is complete and the state approval processes are progressing. We hope to close the transaction by the end of the year, and if we do, this acquisition will provide the previously announced $2.8 billion of revenue in 2021. For every month the closing would be delayed beyond the first of the year, that annual revenue estimate would decrease proportionately. Our Kentucky RFP win will have a contract start date of January 1st, 2021. Before considering any of the potential benefits of the passport acquisition, Under a conservative set of membership assignment assumptions, the contract should provide at least $850 million of revenue in 2021, with upside potential into 2022 as membership organically builds. Organic, same-store membership growth, increased product penetration, and our nascent Navajo Nation project would also modestly contribute to the 2021 revenue growth rate. Finally, as previously announced, we are exiting the Medicaid business in the Commonwealth of Puerto Rico. We have reached an agreement to execute an orderly transition of our members to an on island competitor. The unwinding will be completed by November 1st, and the impact of the transaction itself and the contract exit are not financially material. Under these assumptions, we project 2021 premium revenue of approximately $21.5 billion. We are very pleased with a 20% increase in premium revenue as we move from pivoting to growth to fully activating our top-line growth strategy. Another major development in activating our growth strategy was our recently announced transaction to purchase certain passport assets. The transaction is expected to close before the end of 2020, providing us with a well-known brand in Kentucky, a turnkey operation, and the opportunity to gain additional membership. Passport represents a potential upside to our 2020 and 2021 revenue guidance. The purchase price for Passport is approximately $20 million, plus contingent consideration payable in 2021 based on the level of enrollment retained above a certain threshold. A few words about the Passport transaction and its benefits. We will acquire the Passport brand name, all its operating infrastructure, and we will assume approximately 500 highly trained Kentucky-based Passport and Evelyn employees. The acquisition allows us to enhance operational readiness in advance of our new contract award in Kentucky and enables continuity of care for Passport's members. The acquisition allows us to avoid startup losses inevitably associated with building a greenfield health plan and the early lack of scale. The acquisition allows us to compete more effectively for additional membership above what we might have ordinarily received from the standard auto-assignment process related to our own contract award. And from a financial perspective, we expect to recover the purchase price from positive cash flow in less than one year, as the plan would be immediately profitable and is likely to produce membership well above what we might have achieved organically. It is also important to note that the membership, revenue, and earnings related to Passport could all commence and begin to impact our results on or about September 1st, if the Commonwealth of Kentucky approves our joint request for an early contract novation. This would be a very positive outcome, although it would impact the year-over-year revenue growth rate calculation. As I conclude my remarks, I take a pause from discussing our operating and financial performance and instead comment on our compassion, our humanity. During this unprecedented time, our company made many significant contributions to charitable and community causes. We offered financial assistance to distressed providers and worked with our state customers to understand where they saw human tragedies unfold and offered our financial and operational assistance. We will continue to do so, and in fact, we are developing plans to deepen our social commitment to build stronger communities one life at a time. I offer another heartfelt thank you to our management team and our 10,000 associates who are executing well while dealing with their own stresses and issues related to the pandemic and racial strife. Even when facing these challenges, our associates are inspired and motivated by the opportunity to make positive change by delivering high-quality healthcare to the disadvantaged. Our associates continue to excel, and I stand in admiration of their dedication and their will to sacrifice in the face of all types of adversity. In conclusion, this was a meaningful quarter for the company. Our results met our expectations despite the turbulence caused by the COVID pandemic. We took major steps forward in our transformation. We sustained our margins but did right by our members and customers. We fully activated our revenue growth strategy and continued to deploy excess capital in strategic acquisitions. This level of performance provides an insightful glimpse into our very bright future. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom?