Molina Healthcare Inc

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

Good morning, and welcome to Molina Healthcare's third quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Kaczewski, and our CFO, Mark Kahn. A press release announcing our third 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 are as of today, Thursday, October 27, 2022, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures for 2022 can be found in our third quarter 2022 press release. We are unable to provide a reconciliation of our adjusted earnings outlook with GAAP measures for the years beyond 2022 without unreasonable efforts due to the difficulty of predicting the timing and amounts of various items within a reasonable range. During our call, we will be making certain forward-looking statements. including but not limited to statements regarding our 2022 guidance, our long-term growth strategy, our recent RFP awards and RFP submissions, and the projected revenue and earnings growth associated with these awards, our outlook with regard to both fiscal year 2023 and 2024, our acquisition and M&A activity, the COVID-19 pandemic and redeterminations, and our current and future competitive earnings power and margins. 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 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 third quarter 2022. Our full year 2022 guidance in the context of our third quarter results. Our growth initiatives and our strategy for sustaining profitable growth. Our outlook on 2023 premium revenue and earnings growth. And lastly, given our recent new business success, an early outlook on premium revenue for 2024. Let me start with the third quarter highlights. Last night, we reported third quarter adjusted earnings per diluted share of $4.36, representing 54% growth year over year. Our earnings growth reflects strong premium revenue growth, sustained target margins, and the realization of a meaningful portion of our 2021 embedded earnings. Our third quarter 88.4% consolidated medical care ratio, 6.9% adjusted G&A ratio, and 4.3% pre-tax margin demonstrate strong operating performance even as we navigate prolonged pandemic-related challenges. Our year-to-date performance, highlighted by an 87.9% MCR, a 6.9% adjusted G&A ratio, and a 4.5% pre-tax margin, is squarely in line with our long-term targets. This reported pre-tax margin increases when normalized for the effects of revenue pass-through payments and the marketplace prior year risk adjustment drew up previously reported. Medicaid, our flagship business, representing approximately 80% of enterprise revenue, continues to produce very strong and predictable operating results and cash flows. The rate environment is stable. COVID costs have tempered, and we are executing on the sound fundamentals of medical cost management. The year-to-date reported MCR of 88.2% is at the lower end of our long-term target range, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high-acuity Medicare niche, serving low-income members representing 12% of enterprise revenue, continues to grow organically and demonstrates strong operating performance. The year-to-date reported MCR of 87.4%, even with sustained cost pressure from COVID-related care, is squarely in line with our long-term target range. Marketplace, at 7% of enterprise revenue, continues to track towards a return to profitability in 2022 on a pure period basis. We have succeeded in keeping the business small, keeping it silver, and keeping it stable. In summary, we are very pleased with our third quarter and year-to-date performance. We executed well, delivered solid operating earnings, and continued to deliver on our growth strategy. Turning now to our 2022 guidance. We now project our 2022 premium revenue to be approximately $30.5 billion, or $500 million, above our previous guidance. From the time of our pivot to growth in 2019, this updated 2022 revenue guidance represents a three-year 23% compound annual growth rate. Excluding the estimated impact of the redetermination pause, our three-year compound annual growth rate is 19%. In addition, we have increased our full year 2022 adjusted earnings per share guidance to at least $17.75. This represents a 75 cent per share increase compared to our initial 2022 guidance, despite absorbing an additional 50 cents per share from the net effect of COVID and 44 cents per share for the prior year marketplace risk adjustment true up. As we prepare to head into 2023, we have a very solid earnings baseline off of which to grow. Turning now to an update on our long-term strategy for sustaining profitable growth. We are executing well on the many dimensions of our growth strategy. On the RFP front, we continue to build on our track record of success in both retaining our existing Medicaid contracts and winning new ones. The quarter's highlights were many. In Mississippi, Molina was selected to continue serving Medicaid members across the entire state. In California, we not only retained our current footprint, but were also selected to serve the important county of Los Angeles, which will add significant membership and premium revenue. In Iowa, we were awarded a new statewide contract, entering as one of three managed care organizations serving a total managed Medicaid population currently at 800,000. And we were awarded a new statewide contract in Nebraska as one of three managed care organizations serving a total managed Medicaid population currently at 360,000. Once it commences in January 2024, the California Contract Award is projected to provide membership growth measured on current membership roles in excess of 1.2 million members. as well as the associated significant premium revenue growth. This projection is based on the state's own published county by county Medi-Cal membership count. We were one of two plans selected in each of Sacramento County and San Diego County, which are existing Molina counties, but where we now expect additional membership in 2024. We were also selected to be the sole commercial health plan in Los Angeles County. which is a two-plan model county. Finally, we also won awards in both San Bernardino and Riverside counties, known as the Inland Empire, where we expect our current membership levels to remain the same. With awards in each of these five California counties, we were successful in being selected in every county on which we bid. We are very confident in our ability to operationally prepare for this expansion. We have a deep knowledge of the Medi-Cal program, and we have an existing long-term presence in Los Angeles. We have already commenced the 15-month build-out for this significant expansion. In combination, all of these contracts will expand our Medicaid portfolio to 20 states. These new contracts are expected to add approximately $5.8 billion in annual premium revenue and at least $3 of earnings per share. once we achieve full run rate margins. Looking forward, our RFP response has been submitted for Texas Star Plus. It is pending evaluation and subsequent award announcement. We believe we are well positioned to retain this contract due to our track record of operational and clinical excellence, standing and reputation, cutting edge innovation, and the demonstrated ability to write winning proposals. With multiple new state RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts. We have submitted our proposal for the LTSS contract in the state of Indiana and have many other new state business development initiatives well underway, including the potential for returning to New Mexico and expanding to our former nearly statewide footprint in Florida. In summary, our track record of success validates our long-term revenue growth strategy and its value creation potential. Before I turn to some further particulars regarding our outlook for both 2023 and 2024, I want to briefly put a point on the magnitude of the company's achievements in the third quarter and what those achievements mean for the future of our company. Stated at a high level, the new business wins will have a profound impact on our company over the next few years. As a matter of year-by-year sequencing, in 2023, we will be busy scaling our proven operating infrastructure to service this new revenue, incurring front-end implementation costs. In 2024, we expect to achieve full run rate contract revenue with earnings beginning to emerge from this significant new revenue. And finally, in 2025, we expect to achieve our full one rate target margins. Against the background of this sequencing and high-level view, I will now provide some color regarding our 2023 outlook. 2023 will be an important year as we prepare for our new revenue growth. We will be hiring and training additional staff to expand our already expert teams and extending our systems to ensure ample capacity. We expect that the one-time non-recurring expense in 2023 associated with this robust growth will be 75 cents per share. Given our strong current performance, we are raising our 2023 core earnings outlook, the earnings that would have been produced by our company before these recent wins, from at least $20 per share to at least $20.25 per share. This core earnings outlook, a meaningful measure of underlying performance, represents 14% growth on today's updated 2022 guidance of at least $17.75 per share. When we include the one-time non-recurring $0.75 per share implementation costs, our reported earnings per share outlook for 2023 is now at least $19.50. Turning now to our premium revenue outlook for 2024. While it is far too early to provide specific financial guidance for 2024, we do have line of sight to many of the premium revenue growth drivers that we expect to materialize in 2024. First, we expect to continue to grow organically in our current geographic footprint. Second, we expect our recent RFP wins in California, Iowa, and Nebraska, as well as our AgeWell and MyChoice Wisconsin acquisitions to be operating at or near full run rate revenue. And third, we expect that these growth drivers will be partially offset by the impact of redeterminations and two potential pharmacy carve-outs. Combined, these revenue building blocks create an attractive growth trajectory and path to at least $37 billion in premium revenue in 2024. With over a year to go, additional M&A announcements and new Medicaid procurement wins would add to this already attractive 2024 premium revenue picture. A few words on our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023. As previously described, The $5.8 billion in incremental revenue in 2024 from our recent RFP wins adds at least $3 per share in incremental earnings. These earnings are anticipated to begin to emerge in 2024 when all of our new RFP wins will then be operational. With this $3 per share addition, our total 2023 embedded earnings power is now nearly $6 per share. This is strong latent capacity to achieve our near and long-term earnings objectives. In summary, we are very pleased with our business performance and the exciting developments over the past few months. Combined, this has created a solid and growing financial profile. At least $20.25 per share of core earnings in 2023. $37 billion of premium revenue in 2024. 2023 embedded earnings power of nearly $6 per share, and all of this is before any impact from the continued execution of our growth initiatives. Of course, we could not accomplish all of this without our excellent management team and dedicated associates, now approaching 15,000 strong, who, in concert with our hallmark proprietary operating model and management process, have produced these results. To the entire team, I once again extend my deepest thanks and heartfelt appreciation. With that, I will turn the call over to Mark for some additional insight on the financials. Mark?

Thank you, Joe, and good morning, everyone. Today, I will discuss some additional details of our third quarter performance. our strong balance sheet, our updated 2022 guidance, and some additional color on the revenue and EPS building blocks driving our outlooks for 2023 and 2024. Beginning with our third quarter results. In Medicaid, our reported MCR was 88.5%. This strong performance, squarely in line with our long-term target range, was driven by strong medical cost management. The net effect of COVID in the quarter was a modest 10 basis points within our reported MCR. Year to date, our reported MCR was 88.2 and at the lower end of our long-term target range. In Medicare, our reported MCR was 88.7%, a figure which is above our long-term target range, driven by higher COVID and non-COVID utilization. During the quarter, the net effect of COVID increased our reported MCR by 350 basis points. Despite continuing COVID-related utilization, our year-to-date reported MCR of 87.4% was squarely in line with our long-term target range. In Marketplace, our reported third quarter MCR was 86.3%. Similar to previous quarters, the MCR was impacted by higher utilization and approximately 90 basis points of net effect of COVID. We remain on track to return our marketplace business to profitability on a pure period basis in 2022. Though it varied by business, in aggregate, the net effect of COVID was consistent with our expectations and decreased net income by 59 cents per share in the quarter. Our full year outlook for the net effect of COVID remains unchanged at $2.50 per share. Additional drivers of our strong third quarter results include a 6.9% adjusted G&A ratio, a 40 basis point improvement over the prior year third quarter, and higher net investment income from recent increases in interest rates. Turning now to our balance sheet, Our reserve approach remains consistent with prior quarters, and we continue to be confident in this reserve position. Days and claims payable at the end of the quarter was 50, consistent with prior quarters. Our capital foundation remains strong. Debt at the end of the quarter was 1.7 times trailing 12-month EBITDA, and our debt-to-cap ratio was 44.2%. On a net debt basis, net of parent company cash, these ratios fall to 1.5 times and 41% respectively. Our leverage remains low. All bond maturities are long-dated, on average eight years, and our weighted average cost of debt fixed at just 4%. We harvested $120 million of subsidiary dividends in the quarter. Parent company cash at the end of the quarter was $298 million. With substantial incremental debt capacity, cash on hand, and strong free cash flow, we have ample cash and capital to drive our organic and inorganic growth strategies. Now, a few comments on our updated 2022 guidance. We increased our full year premium revenue guidance by $500 million to approximately $30.5 billion, driven by three components. Approximately $200 million for the third quarter outperformance, approximately $200 million for the addition of AgeWell, which closed October 1st, and approximately $100 million to reflect the impact of the latest extension of the public health emergency through January and the related delay in resuming redeterminations, which we now expect to begin in 2023. We also raised our full year 2022 adjusted earnings guidance by $0.15 per share to at least $17.75. The increase is driven by several items. Third quarter outperformance of about 15 cents per share, margin on the additional revenue from the extension of the public health emergency, which we estimate at about 5 cents per share, and additional net investment income of approximately 10 cents per share in the fourth quarter, driven by the recent rise in interest rates. Partially offsetting these items is approximately 15 cents per share of expected higher G&A, driven by fourth quarter marketing and open enrollment activities, as well as the recent new contract wins. Turning now to our earnings outlook for 2023. Based on the expected timing of the known revenue building blocks, our initial outlook for 2023 premium revenue is approximately $31.5 billion. We are increasing our 2023 core EPS outlook, the earnings before the one-time non-recurring implementation costs, to at least $20.25, or 14% growth compared to our updated 2022 guidance. Our earnings growth outlook reflects several drivers. First, we expect a portion of our 2022 embedded earnings to emerge in 2023. Second, the effective growth in our current footprint and the associated margin, partially offset by potential pharmacy carve-outs, will yield incremental earnings in 2023. Third, a combination of new operating catalysts should enhance our 2023 earnings growth, including our recently renegotiated PBM contract, our expected real estate reduction, And finally, we expect higher interest rates to translate into correspondingly higher net investment income. Recognizing the one-time non-recurring implementation cost of $0.75 per share on our new contract wins in California, Iowa, and Nebraska yields our updated outlook of at least $19.50 per share for 2023. Our evolving outlook for 2023 will be informed by our performance in the fourth quarter of 2022, as well as the enrollment season for Medicare and Marketplace, and the ongoing execution of our strategic initiatives. As Joe mentioned, our 2023 embedded earnings power is nearly $6 per share, made up of the following components. We start with our previously reported 2022 embedded earnings of $3 per share. We add at least $3 per share of earnings from our recent new contract wins. We decrease it by a dollar that is now in our 2023 outlook. And finally, we add the implementation costs for new contracts of 75 cents per share to recognize the one-time nature of IT platforms, program enhancements, and several months of staff ramp up. Now, some additional color on the premium revenue outlook for 2024. The following building blocks provide a path from our expected 2022 premium revenue of approximately $30.5 billion to $31.5 billion in 2023, and to ultimately at least $37 billion of projected revenue for 2024. First, we expect approximately $5.8 billion of premium revenue from our three recently announced Medicaid contract wins. This projection includes a conservative estimate of the impact from redeterminations and is composed of $3.6 billion in California, $1.6 billion in Iowa, and $600 million in Nebraska. Based on contract inception dates, we expect a portion of Iowa premium revenue to emerge in 2023, while we expect the premium revenue from California and Nebraska to be realized in 2024. Second, we expect organic growth in our current footprint of $1.7 billion, consistent with underlying growth in rates and membership. Third, the incremental premium revenue for the full-year impact of AgeWell and the MyChoice Wisconsin acquisitions is expected to be approximately $1.4 billion, most of which will emerge in 2023. Partially offsetting these growth drivers are two regulatory impacts. Approximately 1.6 billion for the impact of redetermination, which we expect to emerge evenly between 2023 and 2024, based on the latest outlook for the end of the PHE in January. And approximately 700 million of pharmacy carve-outs, most of which will emerge in 2023. Of course, continued execution of our strategic initiatives creates upside to this revenue outlook. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Josh Raskin at Nefron Research. Please go ahead.

Thanks. Good morning. Question, I want to stay on L.A. County on the wind there, and maybe you could speak to the preparations for that contract implementation. I'm specifically interested in network development and provider contracting and then infrastructure build-out, and I'm curious if there's a potential deal with the incumbent to help accelerate that readiness, or you think you guys can do it all on your own?

Josh, this is Joe. First, I would answer your second question first. All that is to be determined. As you know, in past contract wins, both here and in the industry, that is certainly a possibility. But I'll leave that to further discussion. On the preparation, you know, we've been in California for 40 years. We know Sacramento and San Diego very well. Our membership is likely to double there. We'll scale up. And so we don't see much of a big and heavy lift for Sacramento and San Diego. Bear in mind, we are in LA County. We're a subcontractor to the current commercial plan. We know the providers, we know the landscape, and we're really confident that with 15 months to prepare, we have the three things that you need to be ready on day one. We have the time, we have the money, and we have the know-how. And we will be fully ready on 1-1-24 to handle the significant new membership in LA County.

Perfect. And then just that $0.75 then, is that a charge that you guys expect to be taken, or is that just additional cost borne through the P&L that you're calling out?

Well, I think managerially it's a charge. I mean, it's cost that has to be incurred in advance of the revenue showing up, but we have to take it through earnings. A third of it is IT scaling. The other two-thirds is staff. You know, take the variable cost of running $6 billion of revenue and look at having two to four months of that cost paid for, trained, and ready to go in advance of the contract. And you can see how easily it's going to cost $60 million pre-tax and 75 cents a share.

Perfect. Thanks. Thank you. And our next question today comes from Justin Lake at Wolf Research. Please go ahead.

Thanks. Good morning. First off, maybe you can walk us through the components of the $1.7 billion of organic growth, maybe just price and membership growth along your three business lines.

Sure, Justin. I'll turn it over to Mark, and he'll be able to peel that back for you.

Sure. When we think about the 1.7 of organic growth, that was a two-year number from our build. So that's looking over two years. You know, Justin, we typically think of 3% to 4% organic growth on an annual basis. Generally, that's about half membership and about half rate. In a year, that's more or less. We're in a lower rate environment right now, which certainly matches trend. But you can do a little bit of math on our current book and work with those organic growth numbers. You know, the other thing that you'd want to stack on top of this as you think about that organic growth rate is you have to adjust for some of the pass-throughs that we have in our book right now. We've got about $500 million of pass-through revenue this year. So, of course, that's going to make a year-over-year comparison less than it might otherwise look because that's not a recurring item, right? Right. Then the only other thing to think about in organic growth is, as Joe mentioned many times on Marketplace, our Marketplace strategy is not to grow ambitiously. So I would not put a meaningful growth rate or any growth rate necessarily on Marketplace year over year. But I think if you add those things together, you'll get very close to the 1.7 number I talked about.

Great. And then just lastly, there's – I know the – The folks that didn't win in California are trying to get a stay from a judge on the award and then go to court. Is there anything that you could share with us on timing on when we might hear from that and how that might play out?

No, Justin, this is Joe. We won't comment specifically on the protest process itself, but with all three awards, we believe that the RFPs were thoughtfully designed and well executed by the various states and that our proposals were effectively judged on their merits. We are very familiar with the protest processes in these various states and are actively engaged and well resourced to handle it. And right now we're heads down preparing for day one implementation. We're pretty confident that many of these protest processes will not be protracted and come to a culmination and an answer in due course very soon.

Great, thanks.

Thank you. And our next question today comes from Nathan Rich at Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for the questions. If I could ask a follow-up on the new contract wins. Could you talk about how the margins on that contract ramp up in 2024 and beyond? It looks like you're targeting about a 4% margin on that new business. Can you talk about maybe what we should expect in 2024 versus the years beyond that?

First, Nathan, this is Joe. Your map is correct. The $3 sort of implies a 4 percentage point pre-tax margin, $3. percentage points after tax. And the first thing I'll say before kicking it to Mark is we generally do not impute fixed cost leverage on either our acquisitions or new contract wins. So that's a fully loaded margin, fully burdened with all the fixed costs to run the business. Obviously, with $6 billion of incremental revenue, growing our Medicaid book of business by 25% in a short span of time We expect to get a significant amount of fixed cost leverage off these installations, but we kind of hold that back. We'll report it when we realize it, and it'll either drop to the bottom line or potentially offset perhaps other pressures in the MLR. Mark, anything more on the margins on the new wins?

No, that's exactly right, Joe. The 3% is fully loaded. As we've said numerous times, with fixed cost leverage, we would ideally see a few bips go to the G&A ratio. But this is conservative and assumes maybe that you give a little bit back in rates. But nevertheless, a conservative view on outlook. Now, part of your question might have been 24 ramp into 25 run rate. The 3% is a conservative view of run rate. On the 24, how does that ramp up? You know, it's interesting. Some markets, if folks are new to Medicaid, they can come in, you know, hot in the 90s for the first couple of quarters. Other markets where people have been in Medicaid and are quite used to the product and on normal utilization, they'll come in more at the normal run rate. So to be conservative, I'd say that the MORs will be a little bit hotter than we aspire to. Remember, 88 to 89 is our longer-term Medicaid outlook. Would they come in a little hotter than that in the first year? Maybe, but I wouldn't think too much. And so conservatively, we say, you know, it takes a year to get to our run rate there.

Great. And if I could just ask a follow-up, you called out some continued pressure from COVID in the quarter, I think particularly on your Medicare business. Have your expectations changed at all for COVID and maybe flu as we think about the fourth quarter and then into 23, both on the COVID front as well as non-COVID utilization? Any changes there to your assumptions?

No, I think our outlook for COVID remains the same. It's going to cost us $2.50 a share. And generally what's been happening is the direct cost of COVID-related care, which have been pretty modest quarter to quarter, have been nearly entirely offset by what we call COVID-related utilization suppression. And therefore, the net COVID cost has been the amount of outperformance in our Medicaid contracts that goes into the risk-sharing corridors. So our outlook on that hasn't really changed. Yes, we are expecting a normal flu season for 2022 into 23. 40 million plus is a normal flu season for us. It went to nearly zero in the first flu season after pandemic. It's now increased to about half the normal size at about 20 million, and we expect it to go back to 40 million plus into next year, fully baked into our forecast.

Thank you.

Thank you. And our next question today comes from Stephen Baxter, Wells Fargo. Please go ahead.

Hey, thanks for all the color and congrats on the Medicaid wins. I think you guys mentioned in the prepared remarks, you know, potentially this being a little bit of a lower rate environment on the Medicaid side. I was hoping you could give us a sense of how you're thinking about the outlook for rates inside of your guidance for the next couple of years. And then separately, I was hoping you could give us an update on the total amount of Medicaid premium return you expect to see in 2022, both for COVID era provisions and also for any pre-existing provisions that were in the states. Thank you.

Stephen, I think the summary comment on the rate environment, it's continued to be stable and rational. The traditional process of establishing a credible medical cost baseline, a trend off that baseline, adjusting for changes in the acuity of the population and carve in and carve out the benefits has been tried and true and supported this business well for decades and that's the traditional process that is used. As we indicated many months ago, the risk-sharing corridors that were introduced during the pandemic to capture software utilization have generally subsided. There's three remaining, and we'll play it by ear in terms of whether those persist into the future or not. So the rate environment is very stable, very traditional process of establishing a cost baseline and a trend off that baseline, And I would say the overall rate environment is stable. I had trouble hearing your second question, but I'll kick it to Mark. I think he has it.

Yeah, just on the Medicaid revenue build, I'll work off 2024 just for the full picture. We talked about $5.8 billion from the three new states. The acquisitions will add $1.4. That's age well, which is about a half a billion on top of this year. And my choice, which will be the full 900 coming in, full 900 million. Other components of Medicaid revenue build, redetermination across the two years, I see revenue headwinds of 1.6. And we mentioned in the prepared remarks that would be split between the two years pretty evenly, we expect. Okay. Then finally, we have mentioned two pharmacy carve-outs that will affect our Medicaid revenue for about $700 million across the two years. You put your best assumption on the organic growth for Medicaid, and I think that would give you the components of the Medicaid building blocks.

Thank you. And our next question today comes from AJ Rice of Credit Suisse. Please go ahead.

Hi, everybody. I know you're saying that particularly for next year on the marketplace, you're not assuming a lot of growth there. Any comment on where you think margins will go and what your objective is there longer term as well? Any updated thoughts?

Sure, AJ. Our outlook for the margins on the marketplace business is mid-single digits on a pre-tax basis. This year, we expect to be profitable on a pure period basis, eliminating the effects of the prior year risk adjustment true-up, which we experienced in the second quarter. We break even in this business at around 84%. So if we can operate between 80% and 83%, we think we can push the business to mid-single digit pre-tax margins. And I will mention two things. The SEP membership that we are attracting this year is far lower than the SEP membership we attracted last year. We are attracting 25, 30,000 a month last year. It's barely 25 to 30,000 a quarter. That SEP membership, as we said last year, usually comes in with higher acuity. So that's in check. And secondly, as a reminder, we put 13 to 14 points of rate into the market. We've looked at our competitive positioning and looking at where our product now stands against the competitors, and we're pretty confident that we've maintained our competitive position in many of our larger markets and have no reason to expect that our membership will meaningfully increase or decrease as a result of our competitive positioning.

Okay. And I know in your prepared remarks, you... talked a little bit about re-verification impact being spread over 23 and 24. Any updated thoughts about looking at it today? Obviously, we did have a three-month delay on the PHE, and I don't think you guys have talked. Any updated thoughts about how much would be in 23 versus 24 and where you ultimately land? And then I don't think you've talked much about recapture with your marketplace offering. Do you think you'll recapture any of the lost lives?

On the second point, our redetermination forecast on how much revenue we will likely lose as a result of people becoming ineligible does not include a recapture on Marketplace. We're holding that as upside. It's very hard to forecast who is going to be eligible for a highly subsidized Marketplace. We believe many of them will. We have operational protocols in place to warm transfer ineligible Medicaid members over to our marketplace business, so it remains upside to our forecast. I'll turn it to Mark to give you how the revenue emerges over a two-year period.

Yeah, just as a reminder, the most recent extension was in October, mid-October to mid-January. We expect that the earliest states would start to redetermine that a month later in February and expect them to do it in a straight-line basis, more or less, across the year. CMS has required states to be done in one year. Whether they can do that or not remains to be seen, but let's assume that they get there across 12 months. We're currently carrying roughly 750,000 members since the start of the pandemic. Our assumption, AJ, is that at the end of the year we will have retained 50% of them and lost only 50% to redetermination. I model a PMPM across the book of about 375 on these. So when I do the math, the total revenue loss would be $1.6 billion. But remember, that's spread across two years. While the membership comes down this year, the revenue is half this year and half next year if you look at the member months. So call it 0.8 this year, 0.8 next year. Factor that into your revenue models. And, of course, the member months will support all that.

Okay, great. Thanks so much.

Thank you. And our next question today comes from Kevin Fishback at Bank of America. Please go ahead.

Great, thanks. I just wanted to make sure I understood the $6 earnings power fully. So I guess first you guys said, I believe, that you started with the $3 that you have this year. Add the $3 from the new business. That makes sense. But then you said, You took a dollar out of the existing $3 and added back to $0.75. I just want to know where that dollar that you're taking out is from. Is that from the COVID bucket, from the deal bucket? How should we think about that? And then I guess we're applying this to the $6 to the 1950s. I want to make sure we have the right base to think about with the earnings power.

Yeah, Kevin, I'll turn it to Mark. The $0.75 charge actually creates a little bit of accounting complexity here. But it's either $5 per share or $5.75. depending on whether you're proforming the 1950 or the 2025. So we're just under $6 per share at 575 of embedded earnings when compared to the $19.50 of reported earnings for next year. Mark?

Yeah, so let me walk you through that. In our last call, we talked about $3 of embedded earnings. As Joe mentioned, we're increasing that by an additional three to recognize the run rate of the three new states. So we're at six currently. The dollar that comes down, we're going to put a dollar into our outlook for next year. It's a combination of the acquisitions. and the net effect of COVID. I'm expecting about 50 cents to come off the net effect of COVID that we're currently carrying. I'm expecting to realize about a dollar of the acquisitions that are in our embedded earnings. And then finally, on redeterminations, 50 cents will go the other way. In my embedded earnings, I'm carrying a dollar, a negative dollar on a redeterminations, 50 cents of that's going to go into our outlook for next year. So you add that up, that's the dollar Then finally, we're recognizing the $0.75 of one-time costs. So that gets you to $5.75. The sixth, a dollar for what we're putting into our outlook. Increase it for $0.75 for the implementation costs. That gets you to $5.75. And to be very clear, that $5.75 is off the $19.50 of adjusted earnings outlook. The other thing I would say about

The other thing I would say about embedded earnings, just to put a point on it, I just want to make sure we don't get too caught in what I call false precision here. Our embedded earnings concept, given the historic nature of the pandemic and then the incredible growth we've had due to acquisitions and new contract wins, is to give our investor base a view of the future earnings power of the business, whether it's 5 or 5.75 or 6. it's sitting on top of $19.50 or $20.25 of earnings per share of 2023. It should give you a pretty good leading indicator of where the business is headed. Now, I would further say on embedded earnings, embedded earnings is really only theoretical unless you have a history and a track record of harvesting it. And when you look at our earnings per share track record of going from $13 per share to $17 and now to $20, this is not theory. This is actual embedded earnings due to timing, which is yet to be harvested. And we have every full intention of pulling that through.

Joe, I just put a point on that. A year ago, we had more than $6 of embedded earnings, and four of that went into current year performance. So it's quickly converting into real earnings.

That's really helpful. And I guess just as far as the redetermination dynamic, we're still talking about a revenue dynamic. You guys still feel pretty comfortable that there shouldn't be You know, any margin implications from redeterminations? And I know you shared some data in the past. Is there anything that you would point out, too, as kind of giving you confidence that there won't be a margin implication from a risk pool dynamic?

Oh, we continue to look at the data. And we do see increased duration across our products. It's not as much as you might think because the disenrollment rate is still pretty high. Non-utilizing members are up, but only up modestly. And longer duration members do have more favorable MLRs. This really doesn't affect the ABD population because they're chronic. That's a third of the revenue. And so if we do have any pressure, we're likely to see it in the expansion population, but we expect it to be minimal. Mark?

That's exactly right. I studied this across the second and third quarters quite in depth. You know, on members that are with us for longer than one year, of course they're up. But as Joe mentioned, they're not up as much as you might think because the disenrollment rate is actually quite meaningful still. It's not like no one leaves. We still have meaningful disenrollment rates. So what we look at is the members with no claims. It's up a little, but not that much. Some folks have also looked at the members in the 0 to 25 MLR range. That's up kind of like the no claims cohort, but not that much. When we then model through what the impacts are, as Joe mentioned, ABD really hasn't changed. That's a very stable group of folks. It's really in the expansion population that we expect to see some impact. But that's 30% of our revenues on a weighted average basis. I'm not seeing a meaningful impact here.

Can I just follow up on that? The point about zero utilizers, I guess it doesn't take much of an increase in zero utilizers to have an impact on MLR. Like if you had 90% MLR and then the following year 50 basis points, more people had zero utilizers, wouldn't that take your MLR down by 50 basis points and take your Medicaid earnings up by over 10%. When you say there's just not a big delta in your utilizers, what are we talking about? Are we talking about 10 basis points? Are we talking about 100 basis points? And when you say that, do you mean just the expansion, or do you mean overall across the entire book of business?

In expansion, it's fairly slight. But the other thing is... what are they changing to? If there are zero utilizers now, if they go to 90%, to your point, that's a big impact. But if they're going to anything in between, obviously the weighted average impact, not so much. And again, more to the point, if it's mostly an expansion, which is 30% of our book, the impact gets greatly diluted.

And of course, the underlying assumption is that even if those low utilizers, the percentage did change, the underlying assumption is that is being made is those are the ones that are gonna leave, and there's really no evidence. We always have zero utilizers, we always have low MLR members, and there just is no statistically relevant data that suggests that that's gonna put pressure on the MLR.

Thank you. Thank you, and our next question today comes from Stephen Valliquette at Barclays, please go ahead.

Great, thanks, good morning. Just regarding the L.A. County Medicaid contract award, every state's a little bit different in how they handle the outcome of a successful appeal under that scenario. So I guess my question really is just around the scenario analysis, just to confirm that one way or the other. I guess is the scenario that your new award in L.A. County could be 100% completely reversed by a successful appeal by the incumbent, or under the other scenario, does Molina stay in place as a new plan sponsor no matter what? And the incumbent would just be added back in as an additional plan sponsor over and above the existing awards and just sort of dilute the membership you would gain otherwise. Just curious to get the thoughts on that. Also for the other state awards too, does any just high level color on that as well? Thanks.

I'll answer the last part of the question first because there's an important data point that just emerged Tuesday. And that is the one protest in Nebraska was denied Tuesday that's public information so I'm not announcing anything that's private and whether that goes through an appeal process or other administrative processes I don't know but that was that protest was denied on Tuesday with respect to your question I don't want to speculate I think it would be actually inappropriate for me to speculate what the state of California the Medicaid Department and the administration would do during the protest process I think there are ranges of scenarios of outcomes. The one we're planning for is that our award was in a well-structured, thoughtfully designed process. It was evaluated on its merits, and we are heads down preparing for day one implementation to make sure that members have access to services, providers have their questions answered, our staff is fully ramped up, and that operational excellence has been our hallmark. So I think it would be improper and perhaps even speculative for me to contemplate what the state might decide. I think there's a range of options, but right now we think that we're going to be in business in L.A. County on 1-1-24 and we're getting ready to do so.

Okay. All right. So it sounds like it's still TBD. Okay. That's helpful. Thanks.

And our next question today comes from Scott Fidel at Stevens. Please go ahead.

Hi, thanks. I was hoping maybe you could just do a quick diagnostic for us just, you know, when we look at the recent success that you just had in the RFPs and really was quite substantial. And Joe, I know that, you know, sort of fixing and accelerating the RFP capability has been a key strategic priority really since you came on board, but really just sort of seemed to just really hit its stride more recently. So, you know, if you had to pick two or three things that you think have just resonated in particular, you know, with the states and these recent awards would be helpful to hear about that and then how transferable you think those are to some of these big RFPs that are still ahead in Florida and Texas. Thanks.

Yeah, our new business development capability, it's really an apparatus. I mean, it's a business unit, and there's a playbook. The playbook has you go into the state two years in advance in anticipation of an RFP developing the relationships with providers, with community leaders, and really getting an intense understanding of the hot buttons of the state and what their particular concerns are with respect to their Medicaid population and their Medicaid program. Whether it's our government affairs engine, whether it's our community involvement engine, our network developers, and Secondly, I would say that, you know, and our proposal writers, which we've proven that we can write high-quality proposals that are easy to understand and that score really well. But I will tell you the key to writing a great proposal is actually being able to stand behind it and actually perform. And the referenceability of our national capabilities, social determinants of health, managing high-acuity populations, opioid use disorder, substance abuse, and other types of behavioral conditions our ability to value-based contract. I mean, it's one thing to write well to innovation. It's another thing to be able to stand behind it with referenceability. And as a pure play Medicaid player, our skills and capabilities are entirely referenceable, are playing really well, and seem to be winning.

And if I could just ask one separate follow-up, just back on the exchanges and the I know that you're really trying to manage the membership and keep this exposure relatively limited, but obviously 2023 is going to be a pretty unusual year with some of these really aggressive players like Bright now exiting the market, which is going to put a lot of membership back, you know, sort of into the pool. So how are you approaching that? I mean, we did see in the landscape data yesterday that that 14%, you know, premium increase you talked about and that your premiums are pretty conservative versus the market, but you probably can still end up, right, with adding a lot of membership potentially. So just interested in how you're sort of thinking about that, you know, sort of incremental enrollment and then managing, you know, sort of trying to keep the business, you know, still relatively low exposure. Thanks.

Sure, Scott. And we did see that note, and we thought it characterized our approach perfectly, that we priced for margin and not to grow market share in this business. With respect to the market exits that you've read about, we've mapped our footprint to the companies that are exiting. There's not a lot of overlap there. Where there is, CMS has sort of quote-unquote assigned or at least suggested to various members that they move to a Molina product, but it's measured in the thousands, not the tens of thousands. We still don't know what the overlap is in Texas. We haven't seen the data yet. But all in all, I would say that the market exits should not have a meaningful impact on whatever our growth rate is going to be next year. The market exits should not have a meaningful impact. And, yes, you're absolutely right. We priced purposely to produce mid-single-digit pre-tax margins, let the revenue fall where it may. Okay, thank you.

Thank you. And our next question today comes from Calvin Stemmick in JP Morgan. Please go ahead.

Hey, good morning. Sort of related on the marketplace, I know you talked about positioning that sort of complementary to Medicaid and not really looking to grow it. But if you hold on to California, do you think you'd get maybe a natural lift in that business just by having the overlapping Medicaid and marketplace products in that county?

Yes, Calvin. One of the things we haven't talked about yet, because right now, job one is to scale up our operations in California to handle the Medicaid membership, job one. But yes, L.A. County in particular has a very high concentration of DSMIT members and marketplace participants. And while we have those products in California, because of our small presence currently in L.A., I wouldn't say that we have a large LA presence in those two products. But yes, we would quickly evaluate whether we would, once we're comfortable, we've got the day one readiness in place, fully scaled and operating well in Medicaid, we would absolutely evaluate whether our Medicare product and our marketplace product would follow the same pattern we followed across the country, plant the Medicaid flag, come in with our ancillary products and build a robust and diversified product portfolio. I would consider that upside to the growth case, but we have not included it in our current estimate.

And is that something that you think about as maybe being a 2024 opportunity, or is that more 2025, just given that, you know, there's the protest, it could go to court and, you know, you have to submit your Medicare bids by, you know, middle of next year. What do you think on the timing?

Well, right now we're planning that we will be implementing the our Medicaid contract on 1-1-24. That's what we're planning on. And let's assume that happens. I would say that we would not be, we haven't evaluated this yet, but I think it would be pretty quick and pretty early to then be filing two ancillary products six months later until we know that we've got the Medicaid population well serviced and operating excellently. So I would say, just off the top of my head now that you've asked, it would probably be more like a 25 filing for 26 and not 24 for 25. All right, great.

Thanks.

Thank you. And our next question today comes from Dave Windley at Jefferies. Please go ahead.

Good morning. Thanks for taking my question. Joe, I just wanted to get your updated thoughts on M&A environment in terms of opportunities, valuation expectations, but then also, you know, higher cost of capital environment, a lot of organic scaling on your plate. Just what are your thoughts about continued M&A? Thanks.

I'm sorry, Dave. I couldn't hear the last end of your question. Continuing to do what?

What are your thoughts about continuing merger and acquisition activity for you? Thank you.

Thank you. Well, with all the new contract wins, we didn't spend a lot of time during this earnings report to talk about M&A, but I will tell you the portfolio, the pipeline, continues to be very robust with the same type of bolt-on tuck-in acquisitions that have been our hallmark. We're up to about $10 billion of revenue purchased We've only allocated capital. It's only cost us about 22% of revenue, which includes regulatory capital. And we've gotten every dollar of accretion we promised and more out of these acquisitions because we turn our operational leaders and their playbook on some of these underperforming properties, and we get them to target margins rather quickly. So we have ample capacity, as Mark talked about in his prepared remark, ample debt capacity, great cash flows, We're in no way capital constrained to continue on the growth trajectory. We've had 18% to 19% growth since our pivot to growth in 2019. We promised 13% to 15% at our investor day. We've produced close to 20%. We can continue to grow at this rate either by acquisition or by organic or by new contract wins and continue to fund this growth from existing cash flow and debt capacity.

Just to put a point on that, Dave, the pipeline is robust at any given point. We're relationship building. We're in discussions with numerous targets out there. So I'm very encouraged by that. On a capital perspective, looking out over the next 18 months, I feel very comfortable with our capital position. Just organically, we can self-fund most of anything I see in the pipeline. Between the capital commitment I need for these new procurement wins, as well as the capital for some of the potential M&A, I see ample organic cash flow and capital to support all that without even going outside. Now, I wouldn't say I would never go outside to raise more capital, but with everything I see over the next 18 months, we can self-fund all that growth, and we're still looking at our M&A pipeline to see what else is there. So I feel pretty good about that outlook.

Great. Thank you. Appreciate the answer.

And our next question today comes from Michael Ha and Morgan Stanley. Please go ahead.

Thank you, guys. Appreciate the question and appreciate all the new guidance update details. Clearly a lot of new embedded earnings. But when I think about 23, it looks like there's potentially even more tailwinds that could drive upside to your new guidance. You know, upside from recapturing redetermined lives, it's your exchange book, that's not in your guide. Family glitch fix benefit, potential benefit to your exchange, Medicaid book if recession picks up. maybe better net investment income on rising rates. Are any of these items actually included in your new guide? Am I missing any other tailwinds that could drive upside? And on the headwinds, aside from redetermination, Florida rate cut, pharmacy carve-outs, are there any large headwind buckets that should be on our radar?

I think I'll take it and hand it to Mark to give you the tail of the tape. But as we said, when you're trying to bridge from the $17.75 of earnings per share guidance for this year to either the $19.50 reported for next year or 2025 core. The components are harvesting a component of embedded earnings, organic growth, which we have a great track record of harvesting, significant operational catalysts that Mark mentioned during his prepared remarks, and then, of course, we do expect a tailwind from interest rates given the short-dated nature of our portfolio. So, Mark, why don't you take through the numbers?

Great. As Joe mentioned, starting from 1775, as I've mentioned, about a dollar comes in from our embedded earnings. It's a little bit off the net effect of COVID. It's the M&A portion that's yet to be realized. And then it's a little bit of a headwind on redetermination in 23. Organic growth, we talked about that, which is just the recurring growth of rates and memberships. I mentioned in my prepared remarks the operational catalysts, the PBM renegotiation and the upside on that, the real estate rationalization, which I expect to address here at some point in the fourth quarter. Investment income, definitely upside on that. We manage an $8 billion portfolio today split between cash and longer-term investments. Who knows where short-term rates are going, but certainly on the cash portion, our net investment income is very responsive to those rates. So I think some nice upside there. All those things bridge you to the 2025 core number that Joe mentioned. The 75 cents gets you back to the 1950. You know, Michael, you addressed a bunch of the things that are potentially we're still working through. You know, on the marketplace, How will open enrollment work? More importantly, on redetermination, what is the cross-sell opportunity as folks come off Medicaid, maybe into marketplace? That's all upside. We don't assume any of that in our outlook. You certainly hit on the net investment income upside. We continue to work through this rate environment. As we go into the new year, most of our rates aren't known definitively. We work through that as we go. So that's something we're thinking about every day. But as Joe mentioned, those rates need to be tied to trend. um that's an actuarial requirement so um let's see where where trends and rates move uh that's one thing that's um still evolving in our outlook but overall i think you got the core components there and you you mentioned a number of the potential uh items on top of it thank you guys just quick follow-up on organic growth if i may just specifically a medicare advantage i think you mentioned last quarter seven percent revenue growth on

both yield and membership. If I'm not mistaken, that would imply roughly low single-digit to mid-single-digit growth. But based on the landscape, it looks like you're targeting pretty strong footprint expansion, doubling your accounting footprint in non-duals, moving entirely to zero premium plans, raising your maximum out-of-pocket. So overall, at first glance, it looks like your offering has improved pretty significantly. You've taken big steps in geographic expansion. So just curious, your thoughts on membership growth next year, have they improved since last quarter, thank you.

I think from a footprint perspective, counting the number of counties can actually give a misleading answer because we're only probably in about 50 or 60% of the Medicaid counties. However, we're in counties that cover 90% of the population. So we're pretty well saturated and penetrated in the Medicaid counties, which is our strategy. Follow, bring D-SNP in to where you're concentrated in Medicaid. Our strategy is very simply is to grow at low teens rates in Medicare. It's a low-income offering, D-SNP. We have our demonstrations, which are basically auto-assignment, and you roll with the auto-assignment algorithms of the federal government. And then, of course, we did launch what we call traditional Medicare Advantage, but it is a low-income strategy. We're not trying to compete with the big guys who are going after... affluent seniors, we're targeting people that have enough resources to operate just above the DSNP income levels and wherewithal levels, but still need a Medicare Advantage product. So it's still a low-income niche offering, and we expect to grow, as we said at our investor day, at low teens rates.

And just two things to put a point on that. The Service area expansion was largely for the 22 year. For 23, we're not seeing a meaningful service area expansion. And I know you know this, when you look at our growth rates on the Medicare segment, the growth that Joe's talking about is related to the Medicare Advantage and DSNP products. The other half, more than half of that segment is the MMP product, which of course has a different growth characteristic being a closed block of business. So I know you know that dynamic, but it's important to think about the two components of growth separately. Got it. Thank you, guys.

And ladies and gentlemen, our final question today comes from Joseph France with Loop Capital Markets. Please go ahead.

Thank you, Joe. I just wanted to follow up on Scott's first question and response, which were both very helpful. Would you tell us about the scope of your subcontractor relationship with the commercial plant in Los Angeles?

Sure. There's one commercial plant in Los Angeles, and we are a subcontractor, meaning in return for a percentage of the premium, we service the members. It's under 100,000 members, but we know the environment very well. But it's a very small relationship. It's only a couple hundred million dollars in premiums. And I believe that latest count that I've seen is we're probably at around 70, 75,000 members in that book of business. So it gives us familiarity with the territory. Obviously, we have a big installation there with respect to headcount footprint. So we know the area very, very well. But that relationship, while it gives us the familiarity that's going to help us scale up, it's financially very small. So it really had no bearing on the RFP itself. I couldn't comment whether it did or not, but I would suspect that that's correct.

Okay. Thank you very much, Joe.

And, ladies and gentlemen, this concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.