Molina Healthcare Inc

Hello, and welcome to the Molina Healthcare Third 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. To ask a question, you may press star, then one on your touchtone phone. To try your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to Julie Trudell, Senior Vice President of Investor Relations at Molina Healthcare. Please go ahead.

Good morning, and welcome to Molina Healthcare's third quarter 2020 earnings call. Joining me today are Molina's President and CEO, Joe Zabretzky, and our CFO, Tom Tran. A press release announcing our third quarter earnings was distributed yesterday after the market closed. and is available on our investor relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Thursday, October 29, 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 third quarter 2020 earnings release. During our call, we will be making certain forward-looking statements, including but not limited to statements regarding the COVID-19 pandemic, the current 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 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 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 Zebretzky. 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 third quarter. Second, we will discuss the impact of the COVID-19 pandemic on various aspects of our business. Third, we will convey our 2020 guidance in the context of our third quarter results. And fourth, we will provide an update related to the continued execution of our growth strategy. Let me start with the third quarter highlights. Last night, we reported GAAP earnings per diluted share for the third quarter of $3.10, with net income of $185 million. This result was supported by an MCR of 85.9%, a G&A ratio of 7.3%, and an after-tax margin of 3.7%. Our year-to-date GAAP earnings per diluted share is now $10.65. On an adjusted basis, which excludes non-recurring, non-operating items, our earnings per diluted share were $3.36 for the third quarter. The excluded items related primarily to costs associated with our exit from Puerto Rico and startup costs associated with various growth initiatives. In summary, we are pleased with our third quarter performance. both with respect to the continued delivery of solid earnings and the focused execution of our growth strategy. All of this was achieved while dealing with the effects of a global pandemic. Unlike the second quarter, in which the combined COVID-related impacts served to temporarily increase our earnings, in this third quarter, the combination of all COVID-related impacts netted to a negligible to slightly positive impact on earnings. Therefore, our reported results and ex-COVID results are essentially the same. We will once again quantify the various COVID impacts on our results to provide some clarity on how they affected our operating metrics. But it is clear to us that our operating metrics were substantially in line with our expectations, both as reported and as adjusted for COVID impacts. Now, I will provide some highlights related to our third quarter results from an enterprise perspective. Beginning with revenue, our premium revenue of $4.8 billion increased by 17% over the prior year and by nearly 400 million and 9% sequentially. Relatedly, our membership increased sequentially by 478,000 members, or 13%. primarily in Medicaid. Bear in mind, these increases include the membership and revenue of Passport, which we assumed on September 1st when the Commonwealth of Kentucky novated Passport's Medicaid contract to Molina. With respect to medical margin, with an 85.9 percent MCR, our performance was also strong and only modestly impacted by COVID. we experienced a modest amount of utilization curtailment, which was partially offset by the cost of COVID-related care, the net of which favorably impacted the medical cost line. This was substantially offset by COVID-related rate refunds on the premium revenue line. In the quarter, these items combined had a negligible impact on the total company medical margin in earnings, but served to decrease the medical care ratio by approximately 60 basis points. This strong medical margin performance anchored by Medicaid reflects a sound non-COVID rate environment, continued excellent management of medical costs, and a moderately lower acuity population. All of the COVID-related impacts on our third quarter metrics 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 7.3%, despite spending on specific COVID-related items, including the cost of servicing the additional membership volume. Net investment income, usually not an earnings item with significant variability, was again unusually low at $14 million, compared to $40 million a year ago due to the current low interest rate environment. Our line of business results were mostly in line with our expectations, with strong metrics in both Medicaid and Medicare. However, our marketplace results fell short of our expectations. In Medicaid and Medicare, control over medical cost utilization and unit cost continues to provide the ballast for a sustained, consistent performance, all while ensuring our members receive high-quality care. COVID-related impacts were slightly favorable in the Medicaid and Medicare businesses. Excluding the COVID-related impacts, our performance and resulting margins in these lines still exceeded our pre-COVID expectations. In our marketplace business, the COVID-related impacts in the quarter were net unfavorable. We also operationally underperformed in our bronze product with respect to both utilization control and the achievement of risk scores that accurately reflect the acuity level of that population. We remain confident in our ability to titrate the medical margin performance of this metallic tier, as we have done in our Medicare and our flagship Medicaid business. In summary, we continued to perform well across the many domains of managed care, and our operating fundamentals remain very strong. Now, I will provide some commentary about the item-by-item effects of COVID on our third quarter. While these items are of note when individually considered, together they net to a negligible to slightly positive impact on enterprise earnings and earnings per share in the quarter. The COVID impacts on our quarterly results include a modest net decrease in medical costs due primarily to COVID-related utilization curtailment, rate refunds to a number of our state Medicaid customers in response to the COVID-related utilization curtailment, which we experienced in both the second and third quarters, an increase in our G&A spending on activities related to COVID, and a meaningful increase to our Medicaid membership. We experienced several significant COVID-related impacts on medical costs in the quarter. First, at the beginning of the quarter, utilization was still moderately curtailed, but rebounded to more normal levels during the quarter. Second, we attracted approximately 300,000 new Medicaid members to Molina since the end of March, and the acuity of that population is clearly lower than the Book of Business average. And third, direct cost to care for COVID patients totaled $35 million in the quarter as a resurgence of COVID infections in episodes has occurred in places including Texas and California and disproportionately impacted the marketplace business. In the quarter, the net effect of these three factors reduced normalized medical costs and increased pre-tax earnings by a range of $95 million, to $105 million. As you recall, in the second quarter, six of our state customers enacted temporary rate refunds with the stated intent of recouping the portion of our capitated rates not spent on medical costs due to the pandemic. In some of those states, the refund period extended into the third quarter. In addition, during the quarter, one additional state, Michigan, enacted a refund mechanism. In the third quarter, the total impact from COVID-related rate refunds served to reduce premium revenue and earnings by $88 million on a pre-tax basis. With respect to rate adequacy, 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. And 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 resume. COVID-related activity increased our third quarter administrative expense by approximately $7 million. We continue to develop a variety of new operational protocols, technology implementations, and benefits for our employees, all related to the COVID pandemic and the related increased volume. Medicaid membership increased sequentially by 473,000 in the quarter, a 15% increase. 325,000 of this increase was directly related to the passport membership in Kentucky, which we assumed on September 1st. The addition of the YourCare membership in New York was almost entirely offset by the expected membership decline from the early stages of our Puerto Rico exit. The remaining 148,000 member increase was primarily 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 COVID-related membership peak will be, how quickly it will fall as the economy recovers, and where it will ultimately settle. However, it does appear that since unemployment nationally is now just under 8%, initial industry estimates of unemployment-related Medicaid membership increases were overstated. Relatedly, The declaration of the extension of the public health emergency period and the related maintenance of effort extension into next year will likely have a favorable impact. In summary, as we work through this unprecedented period of the COVID pandemic, we remain focused on executing on the underlying fundamentals of our business to continue to produce solid results, regardless of the short-term COVID-related impacts on our reported financial metrics, and results. Now, I turn to our guidance for the full year. On September 1st, we closed on the passport acquisition and the Commonwealth of Kentucky novated Passports Medicaid contract to Molina. For 2020, the four months of revenue from this transaction will add approximately $700 million of revenue with negligible earnings. This increase combined with higher Medicaid enrollment through the third quarter, supports the increase in our 2020 total revenue guidance to $19.6 billion from the previous estimate of $18.8 billion. This total revenue guidance for 2020 includes $18.6 billion in premium revenue. Our core performance each quarter has been strong and stable, producing at or about $3 of earnings per share. Although this core business performance is expected to remain strong through the fourth quarter, we are choosing to maintain our existing guidance. We take this cautious approach because of the continued uncertainty related to COVID's impact on medical costs and the possibility for additional COVID-related rate refunds. We further note that the proceeds from the previously announced favorable settlement with respect to the federal risk corridor litigation will be reported in our fourth quarter. Also in the fourth quarter, we intend to make a sizable contribution to our recently launched Molina Cares Charitable Foundation. These two items will likely offset each other. When we report our fourth quarter, we will certainly focus on providing a clear view of the earnings power of the business as a baseline for gauging the quality of our 2021 earnings guidance. Shifting the discussion now to our growth initiatives, we made another major stride in the quarter related to the activation of our growth strategy. In September, we signed a definitive agreement to purchase Affinity Health Plan of New York for approximately $380 million. The profile of Affinity is perfectly aligned with our philosophy of staying close to our core business. It is a managed Medicaid business in New York City. as well as surrounding counties, and is a nice complement to the senior hold health business that we are acquiring with the Magellan Complete Care acquisition. Affinity serves approximately 284,000 Medicaid members. Its membership base is stable, and the company has very good share in the markets it serves. Affinity's operating infrastructure is sound. It has solid provider relationships, a high-performing team of enrollment coordinators, and a platform which has the ability to successfully defend and expand its market position. Affinity has not performed to the levels of profitability that Molina has achieved. It therefore provides yet another opportunity for us to bring our operating discipline, business processes, and technologies to improve margins and harvest fixed-cost leverage with our other New York-based businesses. The transaction is expected to close as early as the second quarter, so the acquisition could provide up to $600 million of revenue for 2021. At a purchase price of less than 30% of reported revenue, we are projecting excellent returns in excess of our cost of capital. The transaction is expected to be immediately accretive by 15 to 20 cents adjusted earnings per share in the first 12 months of our ownership. After that initial integration period, we expect to achieve margins consistent with both Molina's performance track record and the industry norm for the New York metro area. The purchase of Affinity is another milestone in a growth-oriented 2020. Our growth initiatives continue to be anchored by our capital allocation priorities First, organic growth of our core businesses. Second, inorganic growth through accretive acquisitions. And third, programmatically returning excess capital to shareholders. We previously provided you with a 2021 premium revenue outlook. This outlook included a pro forma estimate of the revenue associated with our announced acquisition of Magellan Complete Care, which is on track to close around the end of the year, and an estimate of the revenue expected from auto-assigned membership in our new Kentucky Medicaid contract. That outlook, which included only a modest early estimate of organic growth, was 2021 premium revenue of $21.5 billion. This 2021 outlook has improved now that we are currently serving all of Passport's existing membership in Kentucky, the majority of which we are expecting to keep. Our expectation is not affected by a court ruling last Friday that a sixth player should be added to the Kentucky Medicaid program for 2021. That ruling did not rescind our Medicaid contract award, does not impact the earlier novation of the passport Medicaid contract to us, and does not affect our status as a current incumbent in the program. Our 2021 outlook has also improved the announcement of the affinity acquisition. We will provide refined revenue guidance with all the supporting details when we announce our 2021 four-year guidance. There is so much activity related to the political arena, legislative actions, and judicial review that we feel obligated to provide some brief commentary on these topics. We have no new perspective to add on the upcoming election. except to say that all of the most likely potential political outcomes are generally positive for managed Medicaid and related government subsidized programs, although some political scenarios are more favorable than others. On the legislative front, the recently announced extension of the COVID public health emergency is likely a positive indicator for continued membership gains and to provide more support for an actuarially sound rate environment. Much has been written and discussed regarding the Affordable Care Act case that is scheduled to be argued before the Supreme Court on November 10th. We believe that even if the court were to find the individual mandate to be unconstitutional, it should nevertheless find the individual mandate to be severable from the balance of the law, both as a matter of logic and based on the clear intent of the 2017 Congress which zeroed out the individual mandate tax penalty. It is also clear as a factual matter that the marketplace business can function effectively without any penalty for failure to purchase health insurance. Regardless of the Supreme Court's ruling, we believe there is a high likelihood of a legislative fix to the law before any final legal opinion would go into effect. As I conclude my remarks, I offer another heartfelt thank you to our management team and our 10,000 associates who are delivering excellent results while dealing with their own stresses and life challenges. 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 country's most vulnerable populations. Our associates continue to excel, and I stand in admiration of their dedication and desire to serve our membership base during these most challenging times. In conclusion, this was yet another meaningful quarter for the company. We are pleased with our third quarter performance, especially in light of the turbulence caused by the COVID pandemic. We took major steps forward in our transformation. We sustained our margins and did right by our members and customers. We continued to execute on our revenue growth strategy and deployed excess capital in strategic acquisitions. This strong performance points to a very bright future. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom?