Molina Healthcare Inc

Good morning, and welcome to the Melina Healthcare Fourth Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I'd like to turn the conference over to Julie Trudeau, Senior Vice President of Investor Relations at Melina Healthcare. Please go ahead.

Good morning, and welcome to Melina Healthcare's Fourth Quarter 2020 Earnings Call. Joining me today are Melina's President and CEO, Joe Zabreski, our current CFO, Tom Tran, who is retiring later this month, and our current head of transformation and corporate development and CFO elect, Mark Kine. A press release announcing our fourth quarter earnings was distributed after the market closed yesterday 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, February 11th, 2021, 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 fourth quarter 2020 press release. During our call, we will be making forward-looking statements, including but not limited to statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2021 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 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 and 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 will provide updates on several topics. First, we will cover enterprise-wide financial results for the fourth quarter and full year 2020. Second, we will provide initial earnings and earnings per share guidance for 2021. And lastly, we will conclude with some thoughts on our compelling strategic position and our future growth prospects. Let me start with the fourth quarter highlights. Last night, we reported gap earnings per diluted share for the fourth quarter of 56 cents, with net income of $34 million and total revenue of $5.2 billion, a revenue increase of 22% over the prior year. On a normalized basis, defined as adjusted earnings per share and excluding the net effect of COVID, our earnings per diluted share were $3.29 for the fourth quarter. This is consistent with our performance in the first three quarters of 2020, each of which produced approximately $3 per share after adjusting for the effect of COVID. Two items significantly impacted the earnings in the fourth quarter. The first and most prominent of these items was the net effect of COVID, which decreased net income in the quarter by $3.80 per share. The most significant contributor to this impact was the continuation of rate refunds already in flight and the introduction in the quarter of COVID-related retroactive rate actions in California, Michigan, and Ohio. These refunds taken together more than offset the net effect of modest utilization curtailment and a high level of COVID direct cost of care. The second significant item having an impact in the quarter came from adjustments that produced a combined net benefit of $1.07 in earnings per share. The most significant of these was a net benefit from the proceeds of federal litigation, which was partially offset by a charitable contribution to our foundation. In summary, we are pleased with our normalized fourth quarter performance with respect to both 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 the global pandemic. Now, turning to the full year. We reported full year 2020 gap earnings per diluted share of $11.23. with net income of $673 million and a 3.5% after-tax margin. We generated premium revenue of $18.3 billion, an increase of 13% over 2019, reflecting increased membership. We ended the year with 4 million managed care members, a 700,000-member increase year-over-year, primarily due to growth in Medicaid. Our Medicaid enrollment finished the year strong at 3.6 million members, representing growth of over 640,000 members or 22% over the prior year. This increase reflects strong organic growth of 450,000 members or 15% as the suspension of redeterminations was the major catalyst for our Medicaid membership growth in 2020. growth of 370,000 members related to the acquisitions of YourCare, which closed on July 1st, and Passport, which closed on September 1st. This organic and inorganic growth was offset by the 180,000-member decline related to our planned exit from Puerto Rico. I will now provide additional color on our full-year normalized financial performance. which better expresses the underlying strength of our business by isolating the transitory effects of COVID and adjustments. On a normalized basis, our earnings per diluted share were $12.97 for the full year. Our normalized performance comfortably exceeded our full year guidance of $11.20 to $11.70 per share, which was established in the absence of COVID and is therefore the most relevant comparison. With respect to medical margins, for the full year, our MCR on a normalized basis was 85.9%, compared to 85.8% in the prior year. In Medicaid and Medicare, our performance met expectations, while in Marketplace, our performance was below our expectations. Our normalized G&A ratio for the year was 7.3%, compared to 7.7% in 2019, reflecting disciplined cost management and the benefits of scale produced by our substantial growth. We produced a normalized after-tax margin of 3.9%, despite our marketplace business underperforming. We are very pleased that while dealing with the medical cost distortions and operational complexity caused by the pandemic, we produced a normalized margin consistent with our long-term target. Now, I will comment on the item by item effects of COVID on our full year 2020 results. The net effect of COVID decreased pre-tax income by approximately $180 million, or $2.30 per share. This result is the sum of several identifiable positive and negative factors as follows. For the full year, the net benefit from COVID-related utilization curtailment offset by direct care related to COVID patients was approximately $420 million on a pre-tax basis. I should note that while utilization was moderately curtailed in both the fourth quarter and the full year, in the fourth quarter, direct COVID medical costs were higher than in any other quarter of the year. For the year, COVID-related risk-sharing corridors reduced premium revenue and earnings by approximately $565 million on a pre-tax basis. $400 million of this amount was reported in the fourth quarter as the three new COVID-related risk-sharing corridors were enacted, and the corridors already existing at the end of the third quarter remained in effect. For the year, COVID-related activities increased our G&A spend by approximately $35 million on a pre-tax basis. Without question, the effects of COVID created significant distortions to our 2020 operating metrics, but the underlying operating fundamentals and financial metrics remain strong. Turning to our 2021 guidance, beginning with premium revenue. We are very pleased with the rapid activation of our growth strategy. In 2021, we project premium revenue of at least $23 billion, a 25% increase over 2020. This growth is well balanced between a new contract win organic growth, bulk-on acquisitions, benefit expansions in our existing geographies, and greater penetration of our Medicare and Marketplace products into our Medicaid footprint. More specifically, our premium revenue guidance includes a full year of the acquired Magellan Complete Care businesses, which we closed on December 31st, a full year of Kentucky revenue which commenced on September 1st, 2020. A full year of revenue from the YourCare membership in upstate New York, which we assumed on July 1st, 2020. Marketplace revenue growth of 25 to 30% as we begin this year with more than 500,000 members. The full year carbon of the pharmacy benefit in the state of Washington, which is somewhat offset by partial year pharmacy carve-outs in New York and California, and the revenue decrease associated with our planned exit from Puerto Rico. The impact of the affinity acquisition is not included in our premium revenue guidance. We expect the transaction to close as early as the second quarter, so the acquisition could provide $600 million or more in additional premium revenue in 2021. Our guidance includes membership growth relating to the current public health emergency extension set to end in mid-April 2021 with a steady decline over the remainder of the year as redetermination is activated. The Biden administration has recently indicated that it is likely the public health emergency will remain in place for the entirety of the year. If so, states could continue to receive the additional 6.2% FMAP match throughout 2021, which would likewise extend the redetermination suspension requirement for the states. Although we have been adding more than 100,000 Medicaid members per quarter during the redetermination suspension in 2020, it is unclear whether this pattern would continue should the PHE be extended further. Therefore, we have not included in our guidance an estimate of revenue associated with additional volume from potential PHE extensions. However, any extension of the PHE accompanied by redetermination suspension could certainly represent upside to our 2021 revenue outlook. We estimate that for every month the redetermination suspension is extended past April, it could provide additional revenue of approximately $150 million per month. Turning now to earnings guidance. Given our recent and expected continued M&A activity, adjusted earnings per share has become a more relevant measure of our earnings going forward and will be the focus of our comments today. Our initial full year 2021 adjusted earnings guidance is in the range of $12.50 to $13 per share, or approximately 20% growth from 2020 adjusted earnings of $10.67 per share. The upper end of our 2021 guidance range is essentially equal to our 2020 normalized earnings per share of $12.97. Our 2021 earnings profile reflects durable and sustainable operating improvements and earnings growth, which are being temporarily muted by ephemeral industry-wide challenges. Specifically, our 2021 earnings guidance reflects the following positive long-term value drivers. Continued strong performance in Medicaid and Medicare, reflecting an actuarially sound base rate environment. margin recovery and growth in our marketplace business, which we target to achieve mid-single-digit pre-tax margins for 2021 as a result of our intense focus on operational improvements and continued competitive prices in product designs and accretion from the Magellan Complete Care businesses and our Kentucky and Passport installations. Our earnings guidance also considers the following industry-wide environmental challenges, including another net negative impact from COVID, although at a reduced level, due to the continuation of many of the risk-sharing corridors that existed in 2020 and the direct cost of COVID-related patient care offset by moderate utilization and curtailment, and lower-than-expected Medicare risk scores which are an industry-wide challenge that will pressure results. Our risk scores do not fully reflect the acuity of our membership, as in 2020, seniors reduced their access to healthcare services, and therefore, risk score capture was more challenging. Referencing these catalysts and challenges, we now quantify the progression from our 2020 normalized earnings of $12.97 per share to the midpoint of our 2021 adjusted earnings guidance of $12.75 per share. We expect strong core performance to contribute approximately $1.25 in adjusted earnings per share growth, emerging mostly from marketplace as Medicaid and Medicare margins are near optimal. And accretion from our acquisitions, along with share repurchases, will positively impact adjusted earnings by approximately $1 per share. Offsetting these positive factors are two industry-wide environmental challenges that temporarily pressure earnings. Specifically, we expect the net effect of COVID consisting of utilization curtailment and direct cost of care offset by risk-sharing corridors to continue to negatively impact earnings, but in 2021 by approximately $1.50 per share. And the temporary Medicare risk for shortfall phenomenon will pressure results by approximately $1 per share. All of these items, when combined with the initial performance of recent acquisitions operating below target margins, impact our 2021 MCR by approximately 200 basis points when compared to 2020 normalized. This corresponds to a 90 basis point impact on the net income margin. Our 2021 guidance represents solid underlying earnings growth, but it is a constrained picture of the embedded earnings power of the company. The financial profile that we can develop when COVID and industry-related headwinds abate and when our acquisitions achieve their full run rate potential would include First, the net effect of COVID and the Medicare risk score disruption have created approximately $2.50 of adjusted earnings per share overhang. We would expect this overhang to disappear as COVID abates. Second, once we attain our targeted margins on Magellan Complete Care and Kentucky, and once Affinity is closed and synergized, we would expect to achieve additional adjusted earnings per share of at least $1.50. In short, our pro forma run rate after the natural relaxation of these temporary constraints would produce an after-tax margin of approximately 4%, which is in line with our recent performance, and produce adjusted earnings per share comfortably in the mid-teens. I will now provide a few concluding comments that frame the compelling strategic position we have created. The execution of our margin sustainability and revenue growth strategy has allowed us to create a very attractive financial profile. Despite all of the near-term distortions caused by COVID, the achievement of our 2021 guidance implies generating EBITDA of $1.2 billion with adjusted EBITDA margins in excess of 5%. Producing a return on equity of nearly 40%, which is a function of our attractive margin position and disciplined deployment of growth capital. Projecting contribution margin upside, as we soon expect to achieve our target margins in our acquired businesses. Generating excess cash flow, which, when combined with leverage, gives us the continued ability to acquire businesses in our core, producing a two-year compound annual growth rate of 20%. And to summarize, with the durable earnings catalysts being sustained and as the temporary earnings challenges dissipate, our operating profile would produce mid-teens earnings per share. Despite the challenges and near-term distortions caused by the global pandemic, our confidence in the growth, earnings power, and resilience of our business remains high. The inherent growth characteristics of these businesses are exceptionally strong, and we will execute and harvest growth through winning new states, growing market share in our existing states, increasing penetration in high-acuity populations, and actioning accretive acquisitions in our core business. We will continue to sustain best-in-class operating metrics and margins, drive at top-line growth, and remain relentlessly focused on our value-creating mission. I will note that despite the vicissitudes of the economy and despite the pandemic, our management team and our associates have demonstrated a tenacity, a determination, and an ability to deliver. We are in the right businesses with the right people at the right time. our future is very bright. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom.

Thank you, Joe. Good morning, everyone. I am going to discuss our balance sheet, cash flow, and 2021 outlook. Operating cash flow for the full year 2020 was $1.9 billion. reflecting the strong operating result, growth in membership, and the timing of government receipts and payments. Our reserve approach remains consistent with prior quarters, and our reserve positions remain strong. Days in claim payable at the end of the quarter represent 50 days of medical cost expense compared to 52 days in the third quarter of 2020 and 50 days in the fourth quarter of 2019. Five years reserve development in the fourth quarter of 2020 was modestly favorable and was negligible in a comparable period in 2019. We extract $280 million of subsidiary dividends in a quarter and $635 million year today. The parent company cash balance at December 31 2020 was $644 million, a decrease from the prior quarter cash balance of approximately $1.3 billion due primarily to the cash outlay for the Magellan Complete Care Acquisition. As of December 31, 2020, our health plans had total statutory capital in surplus of approximately $2 billion, which equates to approximately 330% of risk-based capital. Through December 31, 2020, we repurchased an aggregate of approximately 760,000 share for $159 million at an average price of approximately $208 per share. We continue to reduce our cost of capital. In November 2020, we closed on a private offering of $650 million senior notes due November 2030 and use a portion of the proceeds to repay the $330 million senior notes. Debt at the end of the quarter is 2.1 times trawling 12-month EBITDA. Our leverage ratio is 53%. However, on a net debt basis, net apparent company cash, the leverage ratio is 45%. Taken together, these metrics reflect a reasonably conservative leverage position. Now turning to guidance. We introduce our initial full year 2021 adjusted earnings per share guidance range of $12.50 to $13. We expect premium revenue to exceed $23 billion, a greater than 25% increase over 2020. And total revenue is expected to exceed $24 billion. We expect the medical care ratio to be approximately 88%. The MCR increase over 2020 is primarily due to the continuing net effect of COVID, temporary Medicare risk score disruption, and higher MCR from recent acquisitions. We expect our adjusted G&A ratio to improve to approximately 7%. This reflects continued discipline cost management, revenue growth, and fixed cost leverage. The tax rate is expected to be approximately 25.6%. And adjusted after tax margin is expected to be approximately 3%, which is impacted by approximately 90 basis points related to the items I just mentioned, including the continuing net effect of COVID, Medicare risk scores, and initial performance of recent acquisition operating below target margins. This concludes our prepared remarks. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matt Borsch with BMO Capital Markets. Please go ahead.

Yes, good morning. I was hoping you could just talk a little bit about the coming marketplace special enrollment period and how you expect that to impact you when you take into consideration what you've characterized as underperformance in 2020?

Sure, Matt. Our forecast for membership in the marketplace, starting the year with 500,000, ending the year with just under 400,000, didn't contemplate the special enrollment period. We're certainly aware of it. We certainly have forecasts of what it could provide. And for those 90 days, it could provide anywhere from 20 to 30,000 additional members. We're forecasting that potentially it could provide an extra 100 to $150 million of revenue for the year. Now, in the context of our margin recovery process, it's unaffected by that. We're very comfortable with the pricing we put into the marketplace. We're very comfortable with our product designs and our our benefit designs, and our product positioning, and we're very comfortable in achieving our mid-single-digit pre-tax margins for the year, irrespective of any additional revenue attained through the special enrollment period.

And maybe if I just related to that, how much do you think the competitive environment in the marketplace impacts your efforts to get to the mid-single-digit level?

Well, it is very competitive. There's lots of new entrants. But we're very confident, and one of the reasons we're confident is the two areas of operational letdown, if you will, in 2020, utilization review and attainment of risk scores. We have introduced operational excellence of those two operating fundamentals in our other two businesses. We're really good at it in Medicaid and really good at it in Medicare, and we were just behind and importing those skills that exist in our company to the marketplace platform. That has been corrected, and so we're very comfortable that by executing across those two fundamentals, we'll get back to mid-single-digit margins. Thank you.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yeah, hi, good morning. A couple of questions here. Just thinking about the one-time items in 2021, just to clarify, as we think about 2022, what can we exclude from the sort of temporary one-time headwinds as we think about sort of kind of like the starting point for next year? Could it be just the COVID? Because it has a number of moving parts in it.

Sure. During our prepared remarks, we gave a sort of a qualitative bridge, even a quantitative bridge, in understanding the catalysts and pressures inside our 2021 guidance, all with the goal of helping our investors understand how what might be looked at as a jumping off point into 2022. So here are the puts and takes. First of all, the net effect of COVID of $1.50 per share or $110 million of pre-tax will dissipate over time. As utilization comes back to normal, as the risk orders disappear, that $1.50 overhang will evaporate as the pandemic is solved. In addition, the Medicare risk score phenomenon. You know, last year was an interesting year. Seniors didn't access healthcare, and so interacting with them, getting the right codes to attain the right risk scores was a challenge, not just for us, but for many of our competitors. Next year, we will either, meaning this year, we will either attain the risk scores, because they'll be getting services, or if we aren't satisfied that we can, we can include that in our BIPs. And last year, obviously, the bids were done far before the impact of COVID was ever known. So we're very comfortable that combined that $2.50 overhang sort of disappears as COVID gets behind us. As we said, in addition, our acquisitions are being integrated really, really well. And we're very comfortable with the $1 of accretion that we're putting in this year's guidance, but we're also comfortable in saying, that when they hit their full target margin and when Affinity is closed and hit its target margin, there's an additional $1.50 of earnings per share there. So all in, you know, there's a good $4 of earnings per share embedded power sitting inside our 2021 guidance.

And just to follow up, when we think about the acquisitions, I mean, clearly you've done multiple acquisitions in 2020. How should we think about sort of management bandwidth to continue to do acquisitions in 2021? Or should we think about you kind of like taking sort of a pause this year, making sure that they're all integrated, getting to their target margin, and then coming back to the market? Sure.

we have created the bandwidth. We have an expert M&A team that finds the properties and knows how to action them and close them. We've built a world-class integration team. The Passport integration is going really well, and the early read on the Magellan integration is going really, really well. That's why we're so comfortable in affirming the accretion targets that we've given you. They've actually, very fortunately, laid out quite nicely on a timeline. By the time Magellan is fully integrated, we'll just be closing on affinity, perhaps by the second quarter. And so if we action one, two, or who knows how many more this year, and they close either late in the year or early next year, the timeline couldn't be more amenable to being very effective at integrating them and harvesting the accretion that we promised our investors.

Thank you.

Thank you.

Our next question comes from Robert Jones with Goldman Sachs. Please go ahead.

Great. Thanks for the questions. I guess maybe just two on the bridge and appreciate you guys breaking out a lot of these components. You know, it looks like the core growth off of that 2020 baseline of 1297 would be, you know, somewhere in the 9.5% range. You know, I'm not sure how much of the HIF benefit would be. flowing through, but, you know, obviously that's below the long-term target of 12 to 15. Just wanted to see if you could maybe walk through some of the moving pieces here and probably more importantly, how you're thinking about the timeline to get back into that long-term range of 12 to 15.

I want to make sure I understand your question. Are you talking about the puts and takes within our 2021 guidance or beyond? Yeah, sorry, Joe.

Yeah, no, just in 2021, You know, it seems like if you look at the core growth, you know, that you've laid out in these slides of $1.25 on top of the $12.97, obviously that would be below the long-term targets. Just curious if you could talk through, you know, kind of getting back towards that range. And obviously it sounds like there's some tailwinds that are not necessarily baked in yet, which I'm sure would be helpful. But, yeah, just wanted to get your thoughts on the growth you've laid out here at the core versus getting back to the long-term range.

Sure. Well, bear in mind that the core performance here is irrespective of the net effect of COVID, which is tracked in a different place as the way we've articulated this. So the $1.25 is mostly the marketplace, since that was the business that underperformed last year. It was just about break-even in 2020, and we're targeting mid-single-digit pre-tax. And if you look at the potential for business $1.92 billion of revenue, you can start to formulate a picture of how that is a significant contributor to the $1.25 core performance tailwind into this year. There are some puts and takes in there, but, you know, with Medicare and Medicaid margins where they are, we're going to grow the top line and attain the margin position there is, but there's not a lot of margin upside in Medicare and Medicaid. So we're very comfortable with the position that we've presented here from a core business perspective. Medicare and Medicaid are pretty much optimized with respect to margins, but Marketplace, as a first step to getting back to where we said we would be, a mid-single-digit pre-tax margin would be our target for 2021.

Now, that's super helpful. I guess just one follow-up on the bridge, you know, the dollar you have here for acquisitions and repos. And if I remember, I think you guys had called out 50 to 75 cents expected from Magellan. Sounded like your care and maybe the Puerto Rico exit would roughly net out. So, you know, 40 cents for repo and I think passport would be the other swing factor. I guess first, does that math make sense as far as trying to bridge to that dollar? And then, you know, how should we think about the split between repo and passport to make up that 40 cent balance?

Yeah, you're generally in the right area. If I were to break apart the dollar, I would say that 75 cents is Magellan, which is the top end of the range that we committed to for the first full year of ownership. 10 cents on Kentucky. It'd be very close to break even in the first full year of ownership, and we'll drive it to peak margins after that. And about 15 cents on buyback. That's how you get to the dollar.

Super helpful. Thanks, Jeff.

Okay, thank you.

Our next question comes from Charles Ray with Cowan. Please go ahead.

Oh, yeah. Hi. Thanks for taking the question. Joe, I just wanted to just follow up there just to clarify one other thing. I apologize if I missed that. When we talk about the net effect of COVID in the $1.50, is that pulling out all the effect of COVID even for acquisitions? Because I guess the question is, in your assumptions for accretion, here in 21 for something like Kentucky, are you factoring in the impact of COVID or PASPR within the acquisition bucket or is it all in the COVID bucket?

We've tried, we've attempted to capture all COVID impacts in the COVID line item. And just to sort of reframe how we track that, our estimate of COVID impact is the amount of medical cost suppression we believe we've observed, offset by the direct cost of caring for COVID patients, and then, of course, both offset by the impact of any liabilities generated due to the retroactive rate refunds or corridors. That's how we capture it. And if it related to an acquisition, it's captured in the COVID line.

Okay, thank you. And just a quick follow-up, in Kentucky and Passport, do we have a sense yet on timing for when they are going to do sort of the auto-enrollment so you'll know what your sort of membership numbers will look like?

In Kentucky, the open enrollment period was extended to March 15th. So there's still members moving around. We began the year with 320,000 members. Our latest accounting has us about in that same zone. But on March 15th, the period will shut down, and we'll know how many members that we're beginning our new contract with.

Okay, great. Thank you.

Our next question comes from Gary Taylor with J.P. Morgan. Please go ahead.

Hey, good morning, Joe. I just wanted to make sure I understand – what you're saying about your re-verification assumptions. So when we look at, for example, the bridge between 20 and 21, you know, that $1.25 of core growth, you're saying most of that is from exchanges. But if you're anticipating at this moment that you're still going to have re-verifications in mid-year start to take place in some of your Medicaid enrollments, rolling off, I'm presuming there's like a net, you know, negative number embedded in there. Is that the right way to think about it? And I just want to make sure you're suggesting if that doesn't happen this year, whatever that embedded negative number is that comes back and, you know, can you size that for us?

Sure. It's interesting because it's all about your assumption of how fast membership roles will attrit once the states turn redetermination back on. But I will tell you, in our numbers, the way the membership flows, both in 2020 and in 2021, there is actually a member month increase in 2021, just based on the timing of both acquisitions and redetermination. So no, I would say that the redetermination process is literally 100% upside to our revenue and earnings picture in the year. We just felt it wasn't prudent, nor did we have any credible way of estimating how many more members we would get if the redetermination pause was extended, and then how fast would they actually roll off, depending on how states plan to implement the reintroduction of redetermination. So I would just say that the redetermination process issue or phenomenon is upside to both our revenue and earnings guidance for the year.

So you've still got enrollment growth playing out now through the first half, some assumptions about some leakage in the second half, but that weighted average is still positive year over year?

Yes. The way we look at it is we're beginning, on a Medicaid basis, we're beginning the year with 3.6 million members. On January 1st, 200,000 members come over due to MCC. And in the first quarter, based on our historical average of about 30,000 a month during redetermination suspension, we'd pull in another 100,000 members. It would hit its peak at 3.9, but then 600,000 would roll off in the balance of the year. Now, that's a pretty quick roll-off, and it might happen slower, which is another perhaps element of conservatism in our forecast. And yet, if you then process that against 2020 and the timing of how membership grew and the timing of our acquisitions, there's actually a 9% member month growth in 2021 on Medicaid.

Very helpful. Thank you. Thank you.

Our next question comes from Justin Lake with Wolf Research. Please go ahead.

Thanks. Good morning. A couple questions here. First, Joe, a lot of people at J.P. Morgan got the impression that the COVID headwind was going to be materially less than $2. So I'm curious if there's something that happened between then and now to push that number up closer to $2. And then you did a great job of kind of laying out for us the 2020 components within the COVID headwind. Can you do the same for 2021 and specifically on utilization? Can you tell us how much, you know, where you expect COVID costs to be versus normal utilization?

Sure. Sure. So, let's provide the context for 2020. Our estimate of medical cost suppression for the entire year was about $620 million. That was offset by approximately $200 million of the direct cost of COVID care for COVID patients. netting to a $420 million surplus. We hesitate to call it a benefit, a surplus due to the impact on medical costs from the COVID pandemic. We then, and this is not an estimate, it's an actual number, recorded $565 million of rate refunds, risk-sharing corridor liabilities in the year, and that combined with additional G&A of $35 million resulted in the net $180 million pre-tax cost of COVID in our company for the year, which is $2.30 a share. Just to pose against that, to answer now your direct question, we are forecasting a more moderate, more modest level of suppression. And the reason is both the supply and demand side of the healthcare economy were shut down last year for a while. Patients were afraid to go in for services, and if they wanted them, there were many executive orders and direct mandates not to provide elective and discretionary procedures. The supply side is open for business this year, but we still think there will be a demand side softening and will result in utilization suppression of somewhere around $200 million for the year, which is one-third of the amount of suppression we experienced in 2020. will incur direct costs of COVID care, and the net of all that is somewhere between $140 and $150 million. Most of this, we forecast, will happen in the first half of the year. Hopefully the vaccinations and the vaccines and social distancing will cause all this to really dissipate in the later half of the year. Now, against that, we're also forecasting approximately $250 million of impact from retroactive or not retroactive, but risk sharing quarters, I should say, which nets to about $110 million, which is your $1.50 a share. So the gross numbers are a lot less dramatic, but it's still netting to $1.50 a share. One of the reasons we're very comfortable with this estimate is really we focus on the net impact, because If utilization is higher or lower than expected, there will be some flex up and down with the risk-sharing corridors. There's actually sort of a natural hedge between the suppression and the corridors themselves. So, we look at the net number. We're very comfortable with that net number. And as the pandemic goes away, we think this goes back to, you know, normal times, and there will be no impact from COVID on a going-forward basis, obviously. So I hope that helps. That's the tail of the tape. I know that was pretty detailed, but that's what's included in our $1.50 estimate for the cost of COVID for 2021.

So that's really helpful. So what you're saying here effectively is you've got $110 million risk corridor hole where they're just setting your margins lower than your typical target. And that's really the problem. The other stuff's going to flex up and down, but you're below target here by $110 million. Do all of your states at this point have risk corridors? Is there any uncertainty around more of them coming on?

Well, let me address the first part. The answer to the first part, the response is yes, that's true. If you're already in a risk corridor and your medical costs go up or down, there's no net impact on the company. But that is the way to look at it, that because the risk-sharing corridors didn't address COVID suppression specifically, it just address your MLR, then if you're outperforming your MLR targets, you're giving back some money to the state. So the intention was to have a direct correlation between COVID suppression in a corridor, but the corridor is against medical costs generally. So the fact that we're very profitable in some states, the fact that we outperform many of the market participants in some states, you know, the rate refund probably a little higher than people might have expected. But the answer to your second part of your question is correct. It will flex up and down in a state where we're already in a corridor and where a state where there's not, we would either enjoy the benefits of additional surplus or the effects of additional higher medical costs. The only state, the biggest state that does not have a corridor in 2021 is California. Texas and Washington already have them. and all of our other states continue them on into 2021. Thanks.

Our next question comes from Scott Fidel with Stevens. Please go ahead.

Hi. Thanks. Good morning. First question, Joe, I just wanted to just talk a little conceptually about the long-term margin target. It looks like you gave us a crosswalk. back to that 4%, you know, level that you had been guiding for as a long-term view for the last couple of years. And just interested, though, you know, and maybe taking the other side of that a bit, just in terms of comfort with that, you know, sort of longer-term view, Just when we think about the exchange margin profile, you have rebate that since your investor day a couple years ago. You guys are doing more inorganic growth, acquiring lower margin businesses. There is a consistent mix-up impact that will likely be from that. Then also, just if some of these risk quarter programs, the states end up liking them a bit. and end up keeping them. So just want to just get your thoughts on sort of framing, you know, some of those maybe longer term headwinds against that 4% long term target.

Sure, Scott, you know, as you sit here in the second year of this global pandemic, we're not going to update our long term margin guidance, we're just sort of going to go as you go as you plow through this, start to form your views of what the landscape is looking like, as you plow through it. I think that's the more prudent approach. But having said that, when you actually look at the pro forma impacts of many of these phenomenon that we consider quite temporary, you can pro forma this thing back to the high threes or close to 4%. For the second part of your question, I actually hope that we always have a decrement sitting inside our margin for acquisitions that do not perform in their first year. That's a good decrement to have. because if we can buy properties that are underperforming and with sweat equity, get them to perform, that is just another form of accretion. So the 40 basis points, there's 40 basis points in our margin in 2021 in our guidance that is literally related to the underperformance in the first year of our acquired properties, both on the GNA line and on the MCR line. And the last part of your question was related to the risk orders. Look, when they were introduced in 2020, they were clearly related to pandemic. They were presented that way. They were retroactive because they had to be because they were introduced mostly after the pandemic started. As they were reintroduced for 2021, they were presented as pandemic related. The feeling was that there could be strange effects from the pandemic, additional COVID costs, the cost of the vaccine, additional suppression, and that's why they were introduced on a symmetrical basis. You're protected on the downside and the state's protected on the upside. In CMS's approval guidelines, they have clearly stipulated that when they receive these for approval, they are viewing these as being attributed to the utilization impacts related to the pandemic. So, It's been pretty clear to us that they were presented as relating to the pandemic. CMS is approving them on the basis of relating to the pandemic, and we believe when the pandemic dissipates that these will disappear as well and we'll be back to the traditional rate-setting environment where rates are set prospectively using a credible medical cost baseline and a trend off that baseline.

Got it. And then for my follow-up question, I know a lot of this content has just come out in the last day or two, and you guys are probably absorbing it. But I'm just interested, Joe, in sort of your framing on some of the proposals, you know, that came out of Ways and Means on expanding the HIC subsidies and from E&C on some of the Medicaid, you know, expansion proposals and how you would frame the opportunity from that. And then I guess also caveated with that, you know, because they're using reconciliations, the funding for it is only temporary for two years, so I guess there would be questions on sustainability, right, of the funding that, for example, the Republicans, you know, took back to the House or the Senate in 2022.

Well, thanks for that question. You know, we're only three weeks into the new government, and look what's been done. We all knew that the new government would be proponents of the social safety net, of making sure the disadvantaged have access to high-quality healthcare and plenty of subsidies so they can afford it. And look what's happened just in the first three weeks. In terms of the executive order, at least the intention, to extend the PHE to the end of the year. The executive order to introduce the special enrollment period on the marketplace. The executive order that The euphemism in the executive order was encouraging states to look at prior administration policies, which was really taking a shot at the public charge rule and Medicaid work requirements. So just what's come out of the White House in the past three weeks is incredibly bullish on government-sponsored health care, particularly for the disadvantaged. To your other point, you know, things can get done through the reconciliation process, and they're going to. The three committees in the House that generally write to healthcare issues are Ways and Means, Energy and Commerce, and Oversight. And look at the language that they're introducing, increasing subsidies in the marketplace up to 150% of FPL, making the product accessible to people over 400%, capping the cost at 8.5% of their income, and so on and so on and so on. Just in three weeks of the new government, both in the legislative bills that are coming out of the House and from executive order in the White House, just couldn't be better for government-sponsored managed care. And we're pleased to see that progress already being made. Okay, thanks.

Our next question comes from Dave Wendley with Jefferies. Please go ahead.

Hi. Thanks for taking my questions, Joe. Good morning. I wanted to follow on Gary's line of questioning on the redetermination. Last time around, when I was turned back on, there was kind of this realization that the risk profile or the margin on those folks redetermined off was pretty attractive, like maybe even included a lot of zero utilizers. I'm wondering if you think that is likely to happen this time around when that finally gets turned back on, and have you made that assumption in your guidance or in your estimates?

The answer to your last part of your question, Dave, is no, we haven't. But it still remains to be seen what it does to the acuity of the population. Now, because we haven't introduced many more members than our forecast. Our guidance only includes 100,000 member growth in the first quarter of the year, and then the attrition starts in the last three quarters of the year. But we certainly have not forecasted, you know, a continued softening of the acuity profile of our membership base. And in fact, If that, in effect, happens, and it happens in a corridor state, it'll go back against the corridors anyway. So net-net, the impact of the extension of the redetermination suspension is a net positive on any dimension. It's a net positive to our guidance. We did not include any members past the first quarter. We rolled them off pretty quickly. As I said in my prepared remarks, If you take 500,000 members, which is sort of what we got in redetermination, you know, for every month at 300 bucks p.m. p.m., there's your $150 million of additional revenue. What's the margin profile of that revenue? You can speculate that it's very, very good as the acuity of the population improves as you get more members. But we have not included any of that impact in our guidance for the year. Either the membership flow or a acuity improvement that is sort of a jolt, a positive jolt to our earnings and earnings per share.

Okay. And follow-up then, separate topic, as you think about to your comments earlier on having built the bandwidth and the integration team to continue to look at M&A, as you look at targets and does a thought around the balance of how you'd like to build your book of business influence what you're looking at, i.e., you know, increasing MA and, well, really MA, I guess, from an acquisition standpoint in your mix, or is it more opportunistic in what looks the best? How do you think about the balance of your book as it relates to inorganic growth?

We'd love to. balance it out with more Medicare. It's, you know, they're hard to find, but we'd love to balance out with more Medicare. We're growing it nicely organically, but we'd love to find properties that have Medicare advantage or decent populations. I would say along the lines you've asked the question, we more look to the state. Is it a full-time remittance state where we don't have so much market share that we couldn't get it done? Lighting up new space is really important. High acuity, really important. We're really good at high acuity. And there's a lot of players out there that have a lot of high acuity lives and have little ability to manage them. So the upside on $1,500 of premium per month is huge, huge margin potential. So I would actually say that the geography is important. We love high acuity. And if they're underperforming but not broken, all the better because then we'll take our operating team open up the Molina playbook, and drive accretion through margin expansion.

Great. Thank you. Our next question comes from Kevin Fishbeck with Bank of America. Please go ahead.

Great. Thanks. Just wanted to make sure that I understood. We've talked a lot about redeterminations this year, but I guess, in theory, it is a headwind in 2022 guidance. It's not something that you guys spiked out. as something that would be contract to that $4 of earnings power. I wasn't sure if that was included in your kind of net COVID number when you thought about 2022, or that's something that we should separately identify. If it is separate, are there any other kind of factors we should take into account?

No, I mean, since we did not put the any impact, if there is a positive impact from re-determination in 2021, since it's not in our guidance, we did not then therefore create a headwind in 2022. So, just to be very clear, because I appreciate the question, any impact from the extension beyond April of any additional membership or a slower attrition of membership is not in our revenue guidance, and any profit enjoyed by additional member months in 2021 is not in our guidance. So, as I said, we're very comfortable saying there's only upside to 2021 on the redetermination suspension.

I'm talking about what's in 2021 in your guidance because you have it going through April and then slowly coming off as the year goes on. To your point about member months, you'll end the year at your Medicaid enrollment number, but your member months in 2021 will be higher than your 2022 member months just because your determination is in for the first full quarter and partially rolling off as the year goes on.

Sure. I understand your question. I'm sorry. I apologize. I misunderstood your question. No. And again, we weren't giving a specific 2022 outlook. We were more trying to craft the bridge that we gave you as if we're guiding to $13 a share for 2021, sitting inside that is an earnings power that's higher than $13 due to some temporary phenomenon. But we weren't necessarily trying to extend it to 2022 with earnings or revenue bridge. Sorry, I misunderstood your initial question, but now that will come at a later date.

Okay, so that is something else which is factoring to think about earnings power then?

Sure, unless, of course, unless, you know, the suspension goes on and, you know, members stay on through the end of 21, depending on other acquisitions that we might do, then there's, you know, the affinity piece that's coming in. So, we we're not doing a 2022 guidance bridge per se, but I understand your question and it's a legitimate one.

Okay. And then maybe just second question, then the, the exchanges, it's, you know, it's obviously unusual to see a company grow very quickly and expand margins the way that you guys did. Obviously it sounds like risk coding is, is part of it. But how should we think about that business? Is 2021 guidance normalized margin? And how do you think about long-term the top line growth outlook for exchanges?

We're going to be guarded and giving a forecast for where the margins will land, the competitive landscape changes every day. We're very comfortable in getting this to mid-single-digit pre-tax this year. Now, our hope, again, given the competitive landscape, that would lead to mid-single-digit after-tax in the future. That's where we think the business could perform. But let's work through the 2021. There's a lot of revenue to bring on, a lot of members to service. Some of them are new. We'll have to get their risk scores. So let's, one step at a time, I've asked my team, let's get to the mid-single-digit pre-tax margin this year. And then as we prepare our bids for 2022, let's sort through how much margin we think we can get and how much membership we think we can get. But, you know, starting the year with $500,000 and a 25% to 30% revenue growth year over year was a nice start to, you know, get back in the game in this business.

Great. All right.

Thanks. Okay. Thank you.

Our next question comes from Josh Raskin with Nefron Research. Please go ahead.

Thanks. Good morning. Question on the Medicare risk score headwind of the dollar per share. I sort of calculate that to about 3% of your total Medicare revenue, which seems a little bit higher than I think what some others are suggesting. So I guess my question would be how much of your overall Medicare premium dollar actually comes from risk adjusters? And then are there any actions you're taking sort of shorter term to try and improve that risk scoring, you know, this year as you sort of get ready for next year and to the bids in the middle of the year?

Yeah, Josh, truth be told, in that dollar is a little bit from the physician fee schedule. So we just didn't think it was that big enough to call out. So there's a little bit of physician fee schedule in there. But you're in the right zone, 2.5% to 3%. You know, our risk score revenue, you know, is multiple to that, two to three times that at least from what I recall. And, you know, the industry had a choice last year. You know, we're in the middle of a pandemic. It just started in March and April. You're now starting to develop your bids. And for the most part, while we always tend to be conservative in our bids, we didn't put in a specific load for, okay, we're going to fall short on risk scores. Obviously, with hindsight, that cost us, you know, three points on the revenue line. But next year, meaning this year, we'll either – have an estimate of what we think we can attain, and then based on what we target for benefit design in our margins, we would then allow for that in the bid we submit. So either way, whether we get the risk score or whether we price to it, we think this is a one-year phenomenon. That's the way we look at it.

Okay. All right. But it could be as much as a third to even half of your total risk score revenues disappearing this year. That's sort of the math, right?

I think it's about a third. I would check that, but I think it's about a third.

Okay. And then just a quick follow-up on your margins. Where did you end 2020 full-year margins in Medicaid and Medicare?

Where did we end? Well, again, depending on whether you look at a normalized basis or not, but, you know, on adjusted earnings for 2020, we're at 3.3%. net income margin, normalized 3.9. And I would tell you that the individual margins for the lines of business were generally in line with our long-term targets. So 3.3% adjusted, 3.9% normalized. And the lines of business, except for marketplace, obviously, which was supposed to break even, were pretty much in line.

Our next question comes from George Hill with Deutsche Bank. Please go ahead. Pardon me, George. Your line might be muted.

It was. Thank you for that. I'm sorry, Joe. As it relates to the Medicare risk scoring, I guess, can you talk about the timing or your expectations as it relates to the ability to conduct the beneficiary evaluations and maybe talk about what you've seen in the back half of 20 and kind of the expectations as we roll through 21, just as your ability to get in front of these people?

Sure. Well, you know, utilization did remain suppressed through the balance of 2020. It wasn't as suppressed late in the year. But, look, our team is on this. We have a Cracker Jack Medicare team. They're all over this, and their instructions are very simple. have a credible estimate of how many interactions you can actually achieve, what's your reasonable estimate of proper risk scores attained, and to the extent it falls short of your long-term expectation, make sure you consider it in your bid. So either way, and obviously with the goal of making sure your product remains competitive with benefit designs from competitors, So the team's all over it, and the good news is this year we'll have full visibility. Last year it was five of war. You're submitting your bids right as the pandemic was in full throttle, and we made the conscious decision not to introduce that into our bid. This year we would think otherwise.

Okay, thank you.

This concludes our question and answer session. I'd like to turn the conference back over to Joe Zabrinsky for any closing remarks.

Thank you, Operator. When we started this transformational journey over three years ago, the work ahead loomed pretty large. We knew that if we formed the right team, that we could succeed, so we sought to recruit managed care industry veterans, battle-hardened veterans, if you will, who would know exactly what to do. Tom Tran personifies that. He developed a durable financial infrastructure that has been instrumental in our early success and which will have lasting impact. The team he built is a high-performing one, and we are very confident in their continued success. Tom's tireless energy, steady hand, and good nature will certainly be missed by us all. Tom, On behalf of all of our constituents and for me personally, thank you for your immense contribution to our success, and we wish you the best of luck and good health in your retirement. Operator, with that, we'll end our call today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.