Molina Healthcare Inc

Good day and welcome to the Molina Healthcare first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please also note this event is being recorded. And I would now like to turn the conference over to Joe Krocheski, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina Healthcare's first quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Zabrowski, and our CFO, Mark Kimes. A press release announcing the first 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 made 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 are as of today, Thursday, April 28, 2022, and have not been updated subsequent to the initial earnings call. In this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2022 press release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2022 guidance, our growth strategy and expected growth, our RFP submissions, the COVID-19 pandemic, our acquisitions, our future margins and embedded learning power, and our long-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could 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 filed with the SEC, as well as the risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zabrowski. Joe?

Thank you, Joe, and good morning. Today, we will provide updates on several topics, our financial results for the first quarter 2022, our full year 2022 guidance in the context of our first quarter results, and our growth initiatives and the reaffirmation of our strategy for sustaining profitable growth. Let me start with the first quarter highlights. Last night, we reported adjusted earnings per diluted share for the first quarter of $4.90, with adjusted net income of $288 million. First quarter premium revenue grew 19% year over year to $7.5 billion, driven by strong membership gains in Medicaid and Medicare. Our 87.1% consolidated MCR in the first quarter is squarely in line with our long-term target range and demonstrates strong operating performance, even as we continue to navigate pandemic-related challenges. In the quarter, the net effect of COVID increased our consolidated MCR by approximately 50 basis points, decreasing net income per diluted share by approximately 57 cents. Within the net effect of COVID, inpatient COVID costs in the quarter were the highest since the beginning of the pandemic, surging in the month of January and then steadily subsiding throughout the quarter. These costs were mostly offset by COVID-related utilization curtailment and effective medical cost management. Despite the continued pandemic-related impacts, of 3.7%, a very strong result that is at the high end of our long-term target range and consistent with normal seasonal patterns. Turning now to highlights by line of business. In Medicaid, we ended the quarter with approximately 4.6 million members, an increase of approximately 700,000, or 18% year over year. This strong performance drove 24% Medicaid premium revenue growth year over year. Increased membership was the balanced result of our recent acquisitions and organic gains supported by the redetermination pause. In the first quarter, we continued to generate excellent margins in our Medicaid business, with a medical care ratio at 88.1%, which is in line with our long-term target. The enduring highlights of our flagship Medicaid business are as follows. Our diversified portfolio of 18 state contracts provides for excellent distribution of risk related to rate setting and contract re-procurements. Actuarially, found rates prevail, and the rate setting process establishes a credible medical cost baseline with forward trend and benefit changes. Poor medical cost trends remain stable and well-controlled. The few remaining COVID risk-sharing corridors continue to capture some of our outperformance, but we expect these to be eliminated over time. And we continue to execute our growth strategy. Our in-state market shares are large enough to be relevant to our state customers, yet small enough to support significant growth opportunity. In Medicare, We ended the quarter with 148,000 members, or 17% growth year-over-year, with related premium revenue growth of 18%. Our performance was driven primarily by organic gains in our DSNP and MAPD products as we continue to increase our market share and our existing footprint and expand geographically to match our Medicaid footprint. Our reported Medicare MCR was very strong in the quarter at 86.5%, which is below the low end of our long-term target range, even after absorbing 190 basis points of COVID-related pressure. In Marketplace, we ended the quarter with 371,000 members. This result is higher than previously projected, driven by higher than expected effectuation rates, during the later stages of open enrollment. The declines in membership and premium from prior year are consistent with our previously communicated strategy to reposition the book of business and its risk profile. Our marketplace business is now more appropriately sized in the overall portfolio. Our first quarter marketplace MCR was 78.6%. This result is in line with our long-term target even after absorbing 270 basis points of COVID-related pressure and reflects the successful implementation of our strategy to restore this business to target margins. As Mark will discuss in a moment, the favorable mix of renewal membership and the silver tier products gives us great confidence that we will achieve our 2022 margin goal. In summary, 2022 is off to a very strong start. Medicaid, our flagship business, representing 80% of revenue, continues to produce strong, predictable operating results and cash flows. Our high-acuity Medicare niche, serving low-income members, continues to grow organically and exceeded our long-term target margins. And Marketplace, A complementary product in our government-subsidized strategy is now well positioned for success at 7% of total company premium revenue. Turning now to our 2022 guidance, beginning with premium revenue. We now project premium revenue to be approximately $29.25 billion, or approximately $750 million above our previous guidance. our revenue growth rates are consistent with our long-term targets. Specifically, our updated premium revenue guidance now includes approximately $400 million of additional Medicaid revenue resulting from the extension of the public health emergency from April to July and the associated suspension of membership redeterminations. Approximately $100 million of marketplace revenue resulting from stronger open enrollment as we now expect to end 2022 with approximately 270,000 members and approximately $250 million related to state-based pass-through revenue payments. As in the past, we have excluded from our premium revenue guidance any impact of the age well acquisition, which we expect to close in the third quarter of this year. Turning now to earnings guidance. We are increasing our full year 2022 adjusted earnings per share guidance to no less than $17.10. Specifically, our increased 2022 earnings guidance reflects the favorable impacts of strong first quarter performance, underlying strength in the business in the rest of the year, the margin associated with the increase in our premium revenue, the combination of which is largely offset by a 50 cent per share increase in projected net effect of COVID. We have remained cautious in forecasting utilization trends in the remaining nine months of the year due to the uncertainties of COVID and related utilization curtailment, as well as core medical cost trend. We believe at the end of the second quarter, our membership will have seasoned enough to allow us to fine-tune our forecast of COVID-related medical costs and core medical cost trend. We are confident in our 2022 outlook that features revenue growth rates consistent with our long-term targets, an after-tax margin at the midpoint of our long-term guidance range, and strong earnings per share growth of 26%. Turning now to an update on our strategy for sustaining profitable growth. Building on our momentum from last year, we are off to a strong start in 2022. Based on our past track record, we are confident in successfully retaining the Medicaid contracts that are currently in a re-procurement process. Our RFP responses have been submitted in Mississippi and California, and our pending evaluation and subsequent award announcement. The Texas Star Plus RFP has been issued by the state, and our response is currently being developed. We have a high degree of confidence in retaining these contracts as a result of our operational and clinical excellence, standing and reputation, innovation, and the demonstrated ability to write winning proposals. At the beginning of the year, we successfully launched our Medicaid plan in Nevada, adding a new state to our footprint and 125,000 members. With multiple RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts. We have one new state proposal pending in Rhode Island and many other new state business development opportunities well in process. Our M&A platform continues to execute at a high level. On January 1st, we closed on the acquisition of Cigna's Texas Medicaid business, deepening our service offerings in the state and adding 44,000 high-acuity members. Our acquired businesses are achieving or exceeding their earnings accretion targets. The pipeline of acquisition opportunities remains robust. We are confident in our ability to drive continued value from this important dimension of our growth strategy. The company's performance continues to validate our long-term strategy and its value creation potential. We can and will grow the top line at 13% to 15% per year on average over time by a combination of market share gains, new contract wins, footprint expansion, and of course, bolt-on M&A. We can achieve this growth and maintain pre-tax margins in the range of 4% to 5%. Rates are stable, and our effectiveness at medical cost management while ensuring optimum quality has been consistently demonstrated. A number of external factors are combining to support government-sponsored health care. In particular, demographics, economic disruptions, and political priorities are working together to generate meaningful tailwinds the industry. And finally, our strong cash flow generation gives us ample capacity to invest in new capabilities and acquisitions. Our strategy is sound, validated with each quarter's performance, and will continue to be value-creating. As I conclude my remarks, I want to express my continued gratitude to our management team and to our nearly 14,000 Molina colleagues. Their skill and dedication, and steadfast service form the foundation for everything we have achieved and everything we will achieve in the years to come. With that, I will turn the call over to Mark Kime for some additional color on the financials. Mark?

Thank you, Joe. Good morning, everyone. This morning, I will discuss some additional details of our first quarter performance. I will then turn to the balance sheet and some thoughts on our 2022 guidance. beginning with some detailed commentary about our first quarter results. The total company net effect of COVID reduced net income by 57 cents per share and added 50 basis points to the consolidated MCR. This result was largely consistent with our expectations. However, the impact varied by lines of business with minimal impact on Medicaid and larger impacts on marketplace and Medicare. In Medicaid, our reported MCR was 88.1, a strong result that was in line with our long-term target. For the quarter, the net effect of COVID was a modest 10 basis point increase to our reported MCR, as the high volume of inpatient stays and COVID related corridors were largely offset by curtailment of utilization. In Medicare, our reported MCR was 86.5, better than our long-term target. During the quarter, the net effect of COVID increased our reported MCR by 190 basis points. This pressure was more than offset by favorable risk adjustment and product mix. In Marketplace, our reported MCR was 78.6. This result was in line with our long-term target despite absorbing 270 basis points of net effect of COVID. Our reported MCR was also influenced by our strategy of focusing on silver products, which experienced less MCR seasonality than bronze products due to lower deductibles. Silver members, as a percent of our book, increased from approximately 50% in the first quarter of 2021 to 75% in the first quarter of 2022. Additionally, renewal members now comprise two-thirds of our membership, up from one-third last year. These factors, combined with a more limited SEP in 2022, give us continued confidence in restoring margins to our mid-single-digit target in 2022. Our adjusted G&A ratio for the quarter was 7.1%, reflecting increased temporary labor costs due to industry-wide hiring challenges and some one-time items. We expect our full year 2022 G&A ratio to be consistent with our long-term target. Turning now to our balance sheet, our capital foundation remains strong. We harvested $115 million of subsidiary dividends in the quarter, and our quarter and parent company cash balance was $250 million. Debt at the end of the quarter was 2.1 times trailing 12-month EBITDA. Our debt-to-cap ratio is 46.3. However, on a net debt basis, net of parent company cash, these ratios fall to 1.8 times and 43.5% respectively. These metrics reflect a conservative leverage position and ample cash capacity for additional growth and investment. Turn to reserves. Our reserve approach remains consistent with prior quarters. and we continue to be confident in our reserve position. Days and claims payable at the end of the quarter was flat sequentially at 51 days of medical cost expense. Finally, a few comments on guidance. We have increased our 2022 adjusted earnings guidance to no less than $17.10 per share. We continue to project slightly more than half of the year's earnings in the first two quarters. In addition, we have increased our view of embedded earnings by 25 cents to $2.75 per share. The increase is driven by the higher net effect of COVID we are now expecting this year, partly offset by moderately higher impact from redetermination that we expect next year, stemming from the extension of the public health emergency. As a reminder, this embedded earnings power does not represent 2023 guidance, but rather an accounting of drivers that are temporarily suppressing our earnings profile and our current projection of the impact of Medicaid redeterminations post-2022. This concludes our prepared remarks.

Operator, we are now ready to take questions. We'll now begin the question and answer session.

If you'd like to join the question queue, press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing any keys. To remove yourself from the question queue, please press star, then 2. And the first question comes from Matthew Borsch with BMO Capital Markets. Please go ahead.

Good morning. Thanks for taking my question here. You have Ben Rossi filling in for Matt. I just wanted to ask about the exchange. So as a follow-up to the expected revenue member attrition for Marketplace, which decreased about 30% for premiums and about half membership enrollment from year end last year, can you help us think about how trends in Marketplace margins were impacted by the adverse selection dynamic this past quarter compared to where margins sit at the end of the year? Because you previously mentioned last call about a possible seven to eight point increase during the quarter. I'm just curious on how that progress is coming along and whether you think the rate of about 1.5% to 2% monthly attrition is still representative for the group. Next.

Hi, Ben. This is Joe. The marketplace business is now perfectly positioned to achieve our mid-single-digit pre-tax margin target for the year. I will tell you it's very difficult to make comparisons year over year given the substantial mix shift that we orchestrated from 2021 to 2022. So some data points. Our 78.6% MCR in the quarter was burdened by 270 basis points of COVID. So on an ex-COVID basis, it's closer to 76. That will likely grow for seasonality during the year, modestly, and we believe we'll achieve in the middle of our long-term target range at 79% for the full year. We're confident in that, As Mark said in the prepared remarks, because of the mix of renewal membership versus new membership, which is now two-thirds renewal, one-third new, the mix of silver versus bronze, which is now 75-15, and last year was 55-45, and the fact that the SEP period last year took all comers. There were no income cutoffs. And this year, we believe the eligible population for SEP has been basically reduced by half due to the limitation on income to 150% of FPL. So year-over-year comparisons are very, very difficult given the dramatic orchestrated shift in the book. The business is now very, very well positioned to achieve our mid-single-digit pre-tax margin for the full year.

Great. Thank you. The next question comes from Kevin Fishbeck with Bank of America.

Please go ahead.

Great, thanks. I just wanted to clarify the comment about how MLR has performed versus your long-term targets in Q1. Is that basically a comment that you expect the year's MLR to come in as expected because some businesses, I guess particularly the exchanges, have that seasonality where you'd expect Q1 to always be the lowest in the quarter and therefore almost always be below your target MLR for the year? Or are you saying it's below your target MLR for Q1? Just trying to understand if you're telling us that this will persist to the rest of the year or just whether Q1 was a good quarter.

Sure, Kevin. It's Joe, and then I'll kick it to Mark. Yes, there is some modest seasonality to the business. In fact, I would say that the seasonality in marketplace is much more dampened than it has been in the past. due to the higher silver mix that we have, one data point. Two, the answer to your question is both. We're hitting our long-term targets both on the quarter, and we expect to hit them for the full year, although there's 70 to 90 basis points of seasonality from the front end of the year to the back end of the year.

Mark? Yeah, that's exactly right, Joe. The answer is both. Within the quarter, all three lines of business were within long-term guidance. In fact, Medicare was better. And they're all tracking to be squarely in the middle of long-term guidance on a full-year basis. And, of course, that's reflected in our full-year guidance.

Operator?

The next question comes from Stephen Valliquette with Barclays. Please go ahead.

Great. Thanks. Good morning, everybody. So just regarding the COVID impact on MLR across all your books of business in the first quarter, it was obviously pretty low on Medicaid, but then much higher on Medicare and Marketplace. I guess I'm curious which one of the three COVID impact trends really surprised you the most in the first quarter. And also, as we think about that, the extra 50 cents of EPS had went in the guidance for 2022. from COVID. Is there any bias for that to be skewed towards any of the specific books of business, or is that just too hard to predict right now? Thanks.

Hi, Stephen. It's Joe, and then I'll kick it to Mark for some additional color. The net effect of COVID was slightly higher than our expectations in the quarter. I remind everyone that we calculate or estimate the net effect of COVID as being the direct inpatient cost of COVID-related care offset by an estimate of what we believe to be utilization curtailment due to the pandemic. And furthermore, the effect of our outperformance in the states that continue to carry the COVID-related corridors forward. That's how we calculate the impact. For the most part, in the recent past, we have seen the direct cost of COVID-related care, which were very significant in the quarter, It surged in January and was significantly reduced in both February and March, pretty much offset by curtailment. Not totally, but pretty much. And then, of course, our outperformance, which we continue to enjoy in the states that have carried forward the corridors, continues to be captured by the corridors. So it was a little higher than expected. And the reason we increased our estimate for the full year is you're never completely comfortable that curtailment will always be a direct offset to COVID-related care. And to the extent it doesn't, we wanted to be conservative with our outlook for the year.

Yeah, and just to build on Joe's comments, clearly in Q1, we saw higher net effect of COVID as a percentage or in the MCR in Medicare and Marketplace. As Joe mentioned, the increase of 50 cents across the rest of the year, really about some uncertainties and some conservatism about the outlook for the cost of COVID inpatient and the related curtailment. Where that might manifest, we've typically seen a little more in Medicare and marketplace, but it can move around among the lines of business. But I think that's a pretty good overview of our outlook.

Okay, that's great. Thanks. Thanks. The next question comes from Justin Lake with Wolf Research.

Please go ahead.

Thanks. Good morning. I wanted to follow up on your comments around the $2.75 of kind of pent-up earnings. As I look at your run rates from an EPS perspective, it looks like your margins are towards the or pinned to the higher end of your old target ranges. across the book. One, is that right? Or do you feel like you've still got some room to the high end? And if so, if you are at the higher end, do you feel like you have upside to those margin targets? Do you feel like there's further room in terms of earnings power? Or should we look at that 275 as being more cushioned against something that could happen like state rates get a little tougher or what have you?

Sure, Justin. It's Joe. And then I'll turn to Mark for some color. But We are operating in the first quarter, given the seasonality of the business, at the high end of our margin range. We produced an after-tax margin of 3.7 on a pre-tax margin of 4.9. For the year, as I just suggested with the MCR seasonality commentary, that that will moderate to where we estimate in our full-year guidance a pre-tax margin of approximately 4.4%. and 3.3% after tax in the middle of the range. So yes, if you then take embedded earnings purely without any other puts and takes for future forecasting and guidance, it would bring you higher in the range, which is entirely possible. But as you suggest, our embedded earnings guidance is not a forecast. Our embedded earnings estimate is not a forecast and is not guidance. And yes, it could move us in the top end of the range or act as a buffer against other things that we need to forecast in the future.

That's right, Justin. So as Joe mentioned, you know, guidance is smack in the middle of the range. 3.3 is in the middle of the range of 3 to 3.7. So next year, that's $2.75. is certainly upside. The flip side is we grow our business, we stack on M&A, we add new procurements. Those tend to come in a little lower in margin in the early years, and you've always got the impact of organic. So what we always say is it's certainly not guidance. It's just an accounting of some of the things that are depressing earnings this year. There will be other things to add in next year, but it's certainly a good tailwind into 2023. All right.

Thanks for the call.

The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the question. I was wondering if you could just elaborate a little bit more on what drove the higher COVID headwind estimate that's now incorporated in guidance. It seems like it may be related to just a more conservative forecasting on non-COVID utilization trends. Just wondering if you could kind of go into more detail on what you've seen, you know, in March as COVID cases have died down and how we should think about kind of the 2Q and the go forward there. Thank you.

Sure, Nathan. The first thing I would say is when I say it subsided during the quarter, it did so dramatically. Our COVID direct costs of care in January were the highest since the beginning of the pandemic. In February, those costs were cut to one-third. of the January actual, and in March, cut yet another one-third in March off of February, so dramatic decline. But the BAQ is out there, and while the infection rate is high, the severity and the treatment protocols are actually quite light. However, we never know whether it's going to resurge, and we wanted to be, as you suggested, cautious with our outlook for COVID for the year, particularly Because in the recent past, utilization curtailment has nearly offset the entire direct cost of COVID-related care. We never have full assurance that that will continue. Second point, on what we call core medical cost trend, just the routine of cranking up our medical economics engine and truly understanding all the different dimensions of medical costs, we saw nothing in the quarter that surprised us or was unusual. All the things that you've read about and are being reported on where orthopedic procedures coming back with joint replacements, the ambulatory and outpatient settings are back in business and we're seeing an uptick, but nothing unusual. We see spikes in pharmacy costs here and there as some of our state single preferred drug lists sometimes promote the use of branded drugs. Nothing unusual and nothing surprising. It's the normal mini inflection points here and there, but we wanted to remain cautious. We are hopefully on the tail end of a pandemic, and we usually are cautious in our medical cost forecasting and want to see Q2 results before we put a better fine-tuned estimate on it.

Thanks very much. The next question comes from Michael Ha with Morgan Stanley.

Please go ahead.

Hey, thank you guys. Just want to dive a little deeper on redeterminations. So with the redemption of redeterminations being pushed out further and further into the year, just in terms of timing and cadence of recapturing those lives into your exchange book, as those lives drop off, would you anticipate more of a, I guess like an immediate turnaround on recapturing them or Is it more reasonable to assume those lives might take a couple or a few months to sign up and on the net impact on those lives? On one hand, I know you price for sizable margin improvement on those new lives. They should be coming in more profitable, but as these lives come onto your book later in the year, it becomes more difficult to properly risk score them. So just want to get your thoughts on that.

Well, Michael, we always characterize the redetermination phenomenon as, you know, when it's going to happen is really just a mathematical exercise of when the membership attrits and revenue follows, you know, which fiscal years is it going to hit? Right now, we're going to enjoy that membership and revenue for a longer period of time in 2022, and more of it will fall off in 2023. I think we think the real key point is how much of it persists beyond the redetermination period. And our forecast is that we grew 750,000, even slightly higher than that, of organic growth in Medicaid since the beginning of the pandemic. We forecast to retain half of it. We believe the revenue growth associated with that was $2.9 billion, and we'll continue to have $1.6 billion of that when the redetermined process is complete. We also expect, because CMS has now given clear guidance and is concerned with people being orphaned without health care, that they've made it a lot easier for us to work with our state customers to warm transfer members off of Medicaid if they're no longer eligible into Marketplace and or Medicare. And these are products we continually enjoy. So that's sort of the strategy. We have operational protocols in place to handle all this. We are concerned with the individual state's ability to handle a tremendous amount of volume, 80 million people going through redetermination, re-eligibility, inside of one year is a huge undertaking, but we are really confident in the forecast that we've given on how much membership we will retain and potentially warm transfer into marketplace. Mark, anything on the year over year comparison?

Joe, I think you hit the key points there. The only thing, Michael, that you also asked about is just the timing of them coming over from redetermination into Marketplace. That will vary. In certain places, we have really good operations to proactively reach out to people, help them with their redetermination. And to the extent they lose Medicaid eligibility, immediately get them signed up in Marketplace. In other cases, members may fall off and after a month or two come back on. So I think state by state, as the rules slightly vary, exactly how those transitions work will vary as well.

But I think you've hit the big points. The next question comes from AJ Rice with Credit Suisse.

Please go ahead. Hi, everybody. Just maybe to continue on discussion about the marketplaces, obviously the enhanced subsidies under the ACA are potential to go away at the end of the year if Congress doesn't act. Do you have a sense of how much of your marketplace membership today might be impacted by that? How is that, if the possibility that might go away, how is that impacting your thinking about exchanges, recapture of re-verifications and so forth next year. Is there any contingency either in your bid approach or otherwise that you can put in place and you're thinking about?

AJ, it's Joe. Just at a very, very high level, we believe that the impact to Molina's marketplace business will more or less reflect what happens nationally. So, you know, if there's 14 plus million members in marketplace today across the industry, estimates have the enhanced subsidies causing an attrition of slightly more than, but just about 3 million members back down to 11. I also would remind you that there's this family glitch fix that will move the other way. Estimates say that there's 5 million families in the United States that might at least be eligible Our view is probably only 20% of that will actually come back into the product. So 14 minus three plus one, maybe it's a $12 million membership portfolio nationally. And we have no reason to believe that our membership will react any differently than that. Look, it's an important product in the portfolio because we consider it to be an adjunct of Medicaid, not only operationally but strategically. And I think when these members redetermine this year, it's going to be the proof point that if we can warm transfer them into a marketplace product and enjoy their membership for another year or two, then its position in the portfolio is validated. We like it at 7% of revenue at $2 billion. Maybe that flexes up and down here with these two industry phenomenon you described. But our goal is to maintain this business at mid single digit margins, and we will let the revenue flex up and down with the goal of hitting mid-single-digit pre-tax margins.

Okay, great.

Thanks a lot.

The next question comes from Scott Seidel with Stevens. Please go ahead.

Hi, thanks. Good morning, everyone. I wanted to stick on the marketplace and get your guys' perspectives just on the sort of broader underlying

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Scott Seidel, you are unmuted now.

Okay, thanks. Well, I guess we'll try it again. Hey, good morning. Just wanted to ask about your thoughts on the underwriting cycle in the exchange market that we've seen in the last couple of years had considerably more capacity coming into the market. Some of that pretty irrational in terms of some of the pricing strategies and just trying to think about sort of where we're sitting in that dynamic heading into 2023. We've seen one of the most aggressive players in the market already talk about pulling back from a number of their state footprints and clearly, you know, losses for several of these actors have gotten pretty extreme, right, over the last year or two. So just interested in how you guys are thinking about, you know, the competitive dynamic for the exchange market for 2023 and maybe how that presents itself around some of your strategy around, you know, pricing and growth for next year.

Sure, Scott, and then I'll kick it to Mark for color, but As I said, it bears repeating. The strategy is this is an adjunct to Medicaid. It leverages the Medicaid network. And it's a residual market for people that are no longer eligible for Medicaid but still need subsidies to afford health care. We follow our Medicaid footprint. So the strategy is very, very well understood here at the company. And the financial profile, again, bears repeating. We will allow revenue to flex up and down. whether it's trend-related, whether it's new CMS rules-related, or whether it's competitive forces, we will let revenue flex up and down with the goal of maintaining this business at mid-single-digit margins, given that the financial complexity of it is more complex than the other products we have in the portfolio.

Scott, your question's well-placed, though. With many players not having a great experience with SEP, how will they price going forward is a really good question. As Joe mentioned, we will clearly prioritize our target margins over volume. As Joe said, revenue will flex up, flex down accordingly. But what I like about our strategy is we're in 14 states And I can't predict who's going to price how in any one of those states. We'll put our best pricing out at, you know, our target margins. And with the diversification of 14 states, can't predict any one of them. But across those states, we'll be well positioned in some, maybe less competitive in others. But we should have a pretty good portfolio outcome at the target margins we're shooting for.

Okay, thanks. The next question comes from Steven Baxter with Wells Fargo.

Please go ahead.

Yeah, hi. Thanks for the question. So it's been a while since the 50% Medicaid retention figure was introduced. I was hoping you could give us a reminder of what your analysis looks like to arrive at that figure. And then maybe some context about, you know, what metrics you're monitoring. And essentially the question is, you know, why or why not? You know, has this metric changed as a result of the really strong employment market that we're seeing in the subsequent quarters and some significant improvement in employment levels there? Thank you.

Sure, Stephen. I'll make some framing comments and then kick it to Mark. One of the things we like to remind people when they look at our 50% retention assumption, our membership organically grew approximately 25% since the beginning of the pandemic. If we say we're going to keep half of it, that implies a growth rate net of attrition of about 12%. I think what a lot of us forget is that during the period of time, if the pandemic never happened, the Medicaid rolls will have grown or would have grown anyway, just due to the natural growth in the population of the U.S., particularly at the end of the economy, the low-wage service end of the economy. So in our view, the amount of membership we're going to retain from the organic growth during the pandemic is not that much more greater than the natural growth that the industry would have experienced since the beginning of the pandemic. Now I'll kick it to Mark about how we went state by state and really tried to drill down and understand the microeconomic effects in each state in order to arrive at our estimate.

Great. As Joe mentioned, since the start of the pandemic, we've organically grown about 25%. If we're going to keep half of that, that's about 12%. And if you look at the four or five years that that whole cycle takes, that's a growth rate of 2%, 3% a year, which is probably organically what Medicaid might have grown at anyway. So arguably, you're right back to where you were if there hadn't been a pandemic. Now, when we look bottoms up and we look at any given state, where those members came from that are in our increased roles, A good component of it is, you know, what's sometimes referred to as the woodwork effect, people that were previously uncovered, but because of the pandemic realized it's a great time to come into the Medicaid pool and get covered, they're certainly going to stay with us. Every time we see a crisis like this, the roles of Medicaid move up and never quite go back to where they were. So at a bare minimum, that woodwork effect will account for some of the increase. And again, over the four to five years, arguably you might be where you were without a pandemic coming out of it, just on normal growth rates.

And Stephen, I also point to, you know, even though the unemployment rate nationally, national averages really don't mean a whole lot. You have to actually look state by state. And look at the low-wage service economy. That's been ravaged by the economic distress that we're experiencing here in the U.S. That combined with the reservation wage, the wage at which people want to go back to work has increased dramatically. And, of course, the great resignation with people just hesitant to go back to work due to other factors. So the environment in this population certainly suggests that post-pandemic, the Medicaid rolls will be higher than they were pre-pandemic.

The next question comes from George Hill with Deutsche Bank. Please go ahead.

Yeah, good morning, and thanks for taking the question. I guess, Joe, this is kind of a broad-based question, but can you talk about how your rate discussions are going with states as you guys contemplate and think about inflation, and maybe just talk a little bit about how Molina kind of sees self-exposed inflation. Like, clearly you have wage pressure internally. Like, to what degree does providers wanting an exact price kind of take a toll in your book, if at all, given the Medicaid population? And just, like, I ask this question selfishly internally. We talk a ton about inflation here. We just love to think about how you guys are thinking about inflation impactings. kind of your business, and I'd probably ask you to focus on kind of like the ways that might not be obvious, like basically aside from wage pressure.

Sure. Yeah, I'll answer the second part first because it bears repeating. Clearly, it's been harder to keep our capacity filled, and this is industry-wide. Hiring has been very, very difficult. And, you know, people are feeling the inflation pressures And we noted some additional contract labor costs and some additional overtime costs in the first quarter. And people are feeling the stress of the pandemic. We feel that we've been very fair with our population and given them adequate merit increases to keep pace with inflation, but we continue to monitor it. Right now, we see no unusual trend or outlook for our labor costs internally. Our biggest challenge is keeping the seats filled and making sure that we never disappoint a customer because we lack the capacity to service the volume. On the medical cost side, we're not seeing it. Now, bear in mind, the basis, the chassis for our reimbursement is the Medicaid fee schedule, and we're not seeing any dramatic shifts in the Medicaid fee schedules coming out from states. Now, you also negotiate individually a percentage of that Medicaid fee schedule with the individual providers, whether they're physician groups or hospitals. And we're seeing no additional pressure there either. I will tell you that we are comfortable that if we do start to see the inflationary pressures, the real question is, does the rating process keep pace with that? And we believe the answer is yes. States are very much in tune with the trends in medical costs, as are their actuaries. And if we start to see inflationary pressures, the real question is, will rates respond? And we believe the answer is yes, they will.

That's helpful. Thank you.

And our final question comes from Josh Raskin with Nefron Research.

Please go ahead. Thanks for taking the question. I guess my question will be on Medicare Advantage then this morning. The membership growth remains very strong. I was wondering if you could just speak to where those ads are coming, both geographically and from where. Are they all coming from fee-for-service or competitors? And then Just on the yields, it looks like the yields were relatively flat. So I'm trying to figure out if that's product or geography mix or something else. And I just would have expected a little bit of inflation with risk adjusters. So curious if those were not as additive as expected.

Well, Josh, our Medicare business is growing nicely. And, of course, the margins don't get any better than this. It's a low-income, high-acuity strategy, MMP and DSNP. And our MAPD launch, we clearly aim the MAPD product at low-income individuals. So it's a low-income, high-acuity strategy. We grew $6,000 in the quarter up to $148. Some of that came in through the Cigna acquisition, and the MAPD launch was very, very successful. We have three distribution channels. We have an external broker channel, independent broker channel, a captive agent channel, and a telesales channel, and they're all really working hard to and have increased their productivity here over the last year under new leadership that we have in our distribution channel strategy. So it's growing very nicely. I mean, the yields are in line with our expectation. Look at the margins in the business at an 85.6 or 86.5 MCR for the quarter and an outlook to be at the bottom end of our long-term target range. and the rate increase that we're getting for next year. We believe our product is competitive. It has all the ancillary services that allow it to be competitive. Our star ratings are good enough that we can maintain these margins. And we're very, very bullish on the growth prospects of this business over time. We plan to grow it to 158,000 to the end of the year, which would be 10,000 growth just inside the year.

We have no further questions, so this concludes our question and answer session, which also concludes today's conference call.

Thank you very much for attending, and you may now disconnect.