Molina Healthcare Inc

Good day, and welcome to the Molina Healthcare Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please see the 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 telephone keypad. To answer your question, please press star then two. Please note, this event is being recorded. Now I'll turn the conference over to your host today, Jeffrey Geyer. Please go ahead.

Good morning, and welcome to Molina Healthcare's fourth quarter and full year 2024 earnings call. Joining me today are Molina's President and CEO, Joe Zabreski, and our CFO, Mark Skine. A press release announcing our fourth quarter and full year 2024 earnings was distributed after the market closed yesterday and is available on our industrial 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 of you who listened to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, February 6, 2025, On 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 the fourth quarter and full year 2024 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2025 guidance, the estimated amount of our embedded earnings power and future earnings realization, expected Medicaid rate adjustments and updates, our projected MCR, our recent RFP awards, our acquisitions and M&A activity, revenue growth related to RFPs and M&A activity, and our long-term growth strategy. 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, Files with the SEC, as well as our 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 Zabreski. Joe?

Thank you, Jeff, and good morning. Today, I will discuss several topics. our reported financial results for the fourth quarter and full year 2024, our growth initiatives and related increases to embedded earnings, and our full year 2025 premium revenue and earnings guidance. Let me start with our fourth quarter performance. Last night, we reported adjusted earnings per share of $5.05 on $10 billion of premium revenue. Our fourth quarter results in performance metrics did not meet our expectations, but we did demonstrate a continued ability to maintain operating discipline while navigating industry-wide headwinds. Our 90.2% consolidated MCR was higher than expected due to medical cost pressure in our Medicaid and Medicare segments. In Medicaid, our fourth quarter 2024 guidance assumed a moderate increase in trend off an elevated cost baseline from the third quarter. However, the medical cost pressure experienced in the fourth quarter was higher than anticipated, with risk corridors providing no material benefit. Medicare continued to experience higher medical costs consistent with prior quarters, and Marketplace performed very well despite the late-in-year medical cost seasonality we typically experience. For the full year of 2024, we reported adjusted earnings per share of $22.65, representing 8.5% year-over-year growth. Our full-year premium revenue of $38.6 billion represents 19% year-over-year growth, and our pre-tax margin of 4.3% was well within our long-term target range. While our fourth quarter performance resulted in our full year results falling below our guidance, we have a solid earnings jump off point heading into 2025 and continue to be very bullish on the growth opportunities within all of our businesses as evidenced by our increased embedded earnings. In Medicaid, our flagship business representing nearly 80% of revenue, we reported a 90.3% MCR for the full year, or 89.8% when adjusting for the impact of higher MCRs on new stores and the prior year California retro item. With respect to observed medical cost trend in 2024, it was certainly a tale of two halves. In the first half of the year, medical costs trended slightly higher than our initial expectations. primarily due to the acuity shift caused by redeterminations. However, MCRs remained lower in the first half of the year because the acuity shift impact was moderated by our medical cost management, risk corridor protection, and rate increases. In the second half of the year, we experienced higher than expected utilization among the continuing population. The second half rate increases and risk corridors were not sufficient to completely offset the higher medical cost pressure that continued into the fourth quarter. In Medicare, the full-year MCR was 89.1%. The business performed as well as we could have expected, given some of the dynamics the industry has experienced. In Marketplace, the MCR was 75.4% for the full year and significantly outperformed our long-term target range. This was the second consecutive year Marketplace outperformed its long-term target margins. This outperformance allowed us to reinvest excess margin into 2025 pricing to drive higher growth and sustain mid-single-digit pre-tax margins. Our G&A ratio performance has been excellent at 6.7% for the full year. We continue to have the discipline to harvest fixed-cost leverage manage our internal resources effectively, increase productivity, and negotiate attractive vendor contracts. Turning now to our growth initiatives. 2024 was an extraordinary year for securing future growth on top of the reported 19% premium revenue growth, starting with recent acquisitions. On February 1st, we closed our acquisition of Connecticut from Emblem Health and this year expect $1.2 billion of revenue, mostly in marketplace. With respect to new contract wins, in Georgia, the state announced its intent to award us a Medicaid managed care services contract. This was a significant win, with an estimated $2 billion in annual premium revenue based on expected market share. We also had significant new contract wins in our dual eligible and integrated product businesses. We successfully procured dual contracts that will expand our footprint in Ohio, Michigan, Massachusetts, and Idaho. The incremental revenue from these new contracts is over $3 billion, an increase from the prior estimate of $1.8 billion we had shared at our November Investor Day. 2024 was also a year in which we successfully defended RFPs in key states. We retained traditional Medicaid contracts in our Michigan, Florida, and Wisconsin businesses. These contracts represent over $2 billion of renewed premium revenue. While we are disappointed in the Virginia contract loss, this award is under protest, and the current contract will extend well into 2025. We are very pleased with the execution of our 2024 growth initiatives. And in that context, we further note when all of the aforementioned contracts are in force, we are well on our way to meeting our target of $46 billion of premium revenue in 2026 and at least $52 billion in 2027. With our current footprint contributing its average annual growth and now fully considering all of our recent growth successes, the path to achieve these growth milestones is very clear. And most importantly, all of this recent activity has allowed us to increase our embedded earnings to $7.75 for 2026 and beyond after harvesting $1.50 of embedded earnings in our 2025 guidance. Having embedded earnings of at least 20% to 25% of run rate EPS is an attractive benchmark to support future EPS growth. Now, at approximately 30 percent, we are very well positioned to meet our long-term targets. In short, we are solidly on track to achieve the growth outlook we projected at our recent investor day. Turning now to our 2025 guidance. We project 2025 premium revenue of approximately $42 billion. and adjusted earnings per share of at least $24.50, which is approximately 8% year-over-year growth, highlighted by an 88.7% consolidated MCR and a 4.1% pretax margin. Similar to the situation we encountered in 2023, this $24.50 EPS guidance is burdened with $1 of contract implementation costs related to yet another significant future revenue growth cycle we secured this year. These are complex programs, with a new contract in Georgia and fully integrated duals product launches in at least four states. These are not speculative investments, but investments that have near-term and certain realizable value. Mark will take you through the detailed earnings guidance bill in a few minutes, but let me offer some high-level segment commentary. First, in Medicaid, Medicaid is projected to be nearly back to performing within our target ranges with an 89.9% MCR. For 2025, we project a continuing elevated medical cost trend during the year. Our 2025 Medicaid rates, most of which are known, are expected to be sufficient to capture this elevated trend. Whichever 2024 MCR you observe, Q4 at 90.2, second half at 89.9, full year at 89.8, or our 2025 guidance at 89.9, our flagship business is hovering around the 90% mark, nearly 100 basis points off our long-term MCR target. The business is expected to produce an excellent pre-tax margin of 4.3%. When the broader market receives the rates it needs to bring itself back into balance, we expect to be operating well within our long-term ranges, and we believe that will be in the very near future. Next, in Medicare, we would characterize 2025 as a year of transition and some early growing pains as the business transforms to serve the increasingly integrated and high-growth dual-eligible populations. We expect our 2025 Medicare MCR to be slightly above our target range for three reasons. First, utilization pressure from the second half of 2024 is expected to continue into 2025. Second, recent rates have not kept pace with trend. And finally, while our long-term outlook for Bright's earnings accretion is unchanged, we expect that it will be slightly below break-even in 2025. Finally, in Marketplace, we are projecting to grow premium at 60% in total, half of which is organic. Two consecutive years of exceeding target margins have allowed us to reinvest several hundred basis points of excess margin into pricing in order to grow. Our product is competitively positioned for this year, and we are very pleased with our early enrollment results. We expect the business to produce an MCR in the middle of our target range and a solid pre-tax margin of 6% in 2025 while continuing to sustain mid single-digit pre-tax margins over the long term. Our businesses are positioned to produce an earnings per share outlook of $25.50 in 2025. This is a meaningful measure of underlying performance and represents 13% growth on full year 2024 results. When we include the new contract implementation costs of $1, our adjusted EPS guidance for 2025 is at least $24.50 per share. This is a solid foundation off of which to grow and realize the embedded earnings power of the opportunities we have already secured. Turning now to the political and legislative landscape, the facts are The Republicans control Congress with a very narrow majority and have the White House. Two budget reconciliation bills are likely to be passed in 2025. And political parties in the state legislatures and the governor's offices did not change materially in the last cycle, and the states will weigh in heavily on any policy changes. The question, and it is a question, that has been posed and remains is whether cuts to Medicaid funding will be part of these legislative packages. We continue to believe that any changes to the Medicaid program as we know it today will be marginal. Neither side of the aisle wants to see an increase in the number of uninsured, a reduction in benefits for those relying on government assistance, or the related impact to providers. While our fourth quarter results fell short of our expectations, I am pleased with our team's ability to manage through the many industry-wide headwinds in all of 2024. Our revenue growth has exceeded our long-term targets. We have produced a consolidated pre-tax margin within our long-term target range, and embedded earnings has reached a new high. The 2025 earnings profile is solid and perhaps industry-leading in managed Medicaid. All of this allows us to remain very confident in our ability to achieve the long-term targets that we shared with you at our November Investor Day. Finally, I want to thank our 18,500 dedicated associates who worked tirelessly on behalf of our members and our stakeholders. Their day-to-day efforts, particularly in the face of difficulty, danger, and natural disasters, are, in a word, heroic. With that, I will turn the call over to Mark for some additional color on the financials.

Mark? Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details on our fourth quarter and the full-year performance, the balance sheet, and our 2025 guidance. Beginning with our fourth quarter and full-year 2024 results, for the quarter, we reported approximately $10.5 billion in total revenue and $10 billion of premium revenue. with adjusted EPS of $5.05. On a consolidated basis, our fourth quarter MCR was 90.2 and our full year MCR was 89.1, reflecting higher than expected medical costs in the second half of the year in both Medicaid and Medicare. In Medicaid, our fourth quarter MCR was 90.2, consistent with the third quarter the Medicaid MCR reflected higher utilization, particularly for LTSS, pharmacy, and behavioral health services. We previously expected 50 basis points of trend in the fourth quarter off what we considered to be an inflated baseline in the third quarter. However, fourth quarter net trend was approximately 1.2%, and we saw no material benefit from risk corridors. For the full year, the reported Medicaid MCR was 90.3, which restates to 89.8 when adjusting for the prior year California retro item and the impact of new store businesses. Given the unprecedented challenges of rates and trends in the year, we demonstrated strong operating performance with that MCR just 80 basis points above our long-term range. In Medicare, our fourth quarter MCR was 93.8, and our full-year MCR was 89.1, both above our long-term range. Higher medical costs in the quarter reflected continued higher utilization of LTSS in pharmacy, as well as higher outpatient utilization within our D-SNP population. The fourth quarter also reflects the seasonal impact of CMS annual facility fee schedule increases and the revenue recognition of certain risk adjustment items. As Joe mentioned, we remain confident in our 2025 bids and believe our pricing strategy was conservative enough to protect against higher medical cost trend that occurred in the second half of 2024 and is expected to continue in 2025. In Marketplace, our fourth quarter MCR was 83.3, reflecting normal latent year seasonality. Our full year Marketplace MCR was 75.4 and well below our long-term target range for the second consecutive year. This allowed us to reinvest excess margin into pricing to achieve significant growth for 2025. Our adjusted G&A ratio for the quarter was 6.3, and our full-year adjusted G&A ratio was 6.7. This was the second consecutive quarter we benefited from renegotiated vendor contracts and several one-time items. We are very pleased with the disciplined cost management, productivity, and leverage we continue to demonstrate. Turning to the balance sheet, Our capital foundation remains strong. In the quarter, we harvested approximately $327 million of subsidiary dividends. Our parent company cash balance was approximately $445 million at the end of the quarter, a portion of which was used to fund the Connecticut acquisition, which just closed earlier this week. During the quarter, we repurchased 1.7 million shares at a total cost of $500 million. In November, we closed a bond offering of $750 million of senior notes due in 2033. Debt at the end of the quarter was 1.7 times trailing 12-month EBITDA, with our debt-to-cap ratio at about 41%. We continue to have ample cash and access to capital to fuel our growth initiatives. Days and claims payable at the end of the quarter was 48%, consistent with the third quarter and well within our normal range. We remain confident in the strength of our reserves. Our operating cash flow for the full year 2024 was $644 million. This was lower than 2023 and primarily reflects the impact of risk corridor payments made in 2024. Recall that earlier this year, we made several large corridor settlements related to prior years. Now, some additional details on our 2025 guidance, beginning with membership. In Medicaid, we expect new membership growth from recent contract wins and growth in our current footprint to add over 100,000 members. We expect 2025 year-end membership of approximately 5 million members. In Medicare, we expect to begin 2025 with approximately 217,000 members based on strong open enrollment in our DSNP product, somewhat offset by our exit from MAPD in 13 states for 2025. The acquisition of Connecticut adds 39,000 members. Combined with organic growth in our Medicare business, we expect to end 2025 with approximately 250,000 Medicare members. In Marketplace, based on very strong open enrollment, we begin 2025 with approximately 546,000 members, representing 35% growth in our legacy business. To that, we add the acquisition of Connecticut with approximately 66,000 members. Effectuation rates among renewing members were in line with prior years, while the effectuation rates on our new members are stronger than in recent years. We expect smaller levels of SEP growth throughout the year compared to 2024 and forecast the year to end with approximately 580,000 members, almost 50% growth year over year. Our 2025 premium revenue guidance is approximately $42 billion, representing approximately 9% growth from 2024. Our expected premium revenue growth is comprised of several items. $2.1 billion from growth in our current footprint, $1.2 billion from the acquisition of Connecticut, and $600 million of revenue tied to recent RFP wins. Partially offsetting these growth drivers are minor headwinds due to the annualized impact of last year's Medicaid redeterminations and reduction in our Medicare MAPD footprint. Our 2025 guidance assumes the extension of our Virginia Medicaid contract well into 2025, while we expect the start of Texas Star CHIP contract to be delayed to 2026. Moving on to earnings guidance, We expect 2025 full-year adjusted earnings of at least $24.50 per share. Our EPS guidance reflects approximately $1.50 for the underlying organic growth in our legacy footprint, realization of $1.50 of new store embedded earnings, and $0.90 benefit from lower average share count in 2025. These items are partially offset by approximately a dollar due to higher interest expense driven by the bond offering we completed in November, as well as lower net investment income. These components put our earnings outlook at $25.50 a share, an increase of 13% over 2024 full year. When we include the contract implementation cost of a dollar, for the recent Georgia and Medicare dual contract wins, our adjusted EPS guidance for 2025 is at least 2450. I will note that these implementation costs are just 1% of the more than $5 billion in revenue we expect to see from the Georgia new contract win and the duals wins in four states. Turning to our 2025 MCR guidance. We expect consolidated MCR of 88.7. Medicaid MCR at 89.9, 90 basis points above the high end of our long-term range due to known and estimated rate increases just keeping pace with expected trend. This is almost in line with the 2024 normalized MCR of 89.8, which excludes the impact from new store businesses and the California retro items. We expect full-year rate increases of 4.5% with 75% of our full-year premium already known at approximately 5% and the remaining 25% estimated at 2.5%. Our Medicaid MCR guidance includes trend assumption of approximately 4.5% and no impact from risk corridors as they remain constant over the two-year period. Favorable second half rates versus our conservative estimates, any off-cycle rate adjustments, and further moderation and trend present upsides to our 2025 guidance. We expect Medicare MCR of 89%. The MCR reflects our conservative approach to 2025 bids and the expectation that utilization experience in the second half of 2024 will continue into 2025. In Marketplace, we expect MCR of 79%, squarely within our long-term target MCR range of 78% to 80%. Moving on to select P&L guidance metrics, we expect adjusted G&A ratio of 7%, which reflects 20 basis points of new business implementation costs and 20 basis points due to a higher mix of marketplace membership, partially offset by leverage and increased scale of our business. Normalizing for these items, our guidance G&A ratio falls to 6.6, again, demonstrating continued operating leverage year over year. In other guidance metrics, we expect effective tax rate of 25.3%, adjusted pre-tax margin of 4.1% within our long-term range, weighted average share count of 55.6 million shares, and we expect quarterly earnings to be evenly distributed throughout the year. Turning to embedded earnings. At our recent investor day, we had $6 of new store embedded earnings. To this, we add $1.25 for the Georgia Medicaid RFP win, $1 for our additional dual contract wins in four states, and the contract implementation costs of $1, leaving us with $9.25 for acquisitions and new contracts. Our 2025 guidance includes the realization of $1.50 to yield embedded earnings of approximately $7.75 going into 2026, giving us high confidence in our 13% to 15% long-term growth rate. This concludes our prepared remarks. Operator, we're now ready to take questions.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time you would withdraw your question, you may press star, then 2. We ask that in consideration of the others, you limit yourself to one question and a follow-up. If you have additional questions, you may re-enter the question queue. So with those instructions in mind, we will pause momentarily to assemble the roster. And this morning's first question comes from Andrew Monk with Barclays.

Hi, good morning. At the investor day, I think you gave us an illustration of what's needed to deliver on 89% Medicaid MLR in 2025. Can you give us a little bit more color on the components within that between rates, trend, and corridors that came in better or worse than expectations resulting in Medicaid MLR, 90 basis points above that? Thanks.

Sure. Andrew, I'll frame it, and then I'll turn it to Mark. The MLR guide for 2025 and Medicaid is basically flat with 2024. We have good visibility into rates. We're projecting a 4.5% rate increase and a 4.5% trend off the 2024 baseline. That rate increase, 75% of it is known at 5%, 25% of it is estimated at 2.5%, blending to 4.5%. On the trend number, We fully considered the second half pressure as we trended into 2025. All the pressures we saw in the second half of the year continuing into the fourth quarter, we included in our outlook for medical costs in 2025. That puts us only 90 basis points above the high end of our long-term range, which we feel really good that we're maybe a rate action or two, not a rate cycle, but a rate action or two away from being at the top end of our long-term range at 89. Mark, any color?

Yeah, I'll just do a quick reconciliation of where we are now versus what we said at IR Day. At IR Day, we were jumping off the second half of the year, and we wound up 60 basis points higher in the second half of the year for the results of the fourth quarter. Per Joe's comment, we also thought that the combination of rates, corridors, and trends would give us about 20 BIPs. they wound up being pretty much break-even. So we got about zero out of that. So about 60 basis points worse on the jump-off point and pretty much didn't get the rate versus trend benefit of 20 bps that I was looking for at investor day.

Got it. And then in the prepared remarks, I think you said risk corridors didn't provide a material benefit. Can you help us understand how the geographic pressure played out such that there was no corridor benefit in the corridor? Because I think you cited about 100 basis points remaining at the third corridor call. Thanks.

It's a matter of geography. As we've always said, we're almost loathe to give a number of how deep we are in the corridors because while it is a hedge, it's an imperfect hedge. If you have underperformance, it depends where that underperformance happens, whether you get the benefit of the corridor. And in the fourth quarter this year, while we had forecasted, I believe, 50 basis points of trend pressure absorbed by the corridors, it didn't pan out that way. Mark, anything to add?

No, that's exactly right. We're in 21 states, and the benefit of the corridor is not evenly distributed across 21 states. So what really matters is where does the trend pressure show up versus where is corridor protection remaining? And that can either help you significantly or it can leave you no benefits. which is more or less what happened in the fourth quarter. Thank you.

And the next question comes from Stephen Baxter with Wells Fargo.

Hi, thanks. I appreciate the color on the full-year Medicaid MLR and the components impacting it. I was hoping you could give us, you know, also the fourth quarter breakdown, if there's any lingering impact from new store, any impact from retro is either positive or negative, and then to the extent maybe there was any negative development in the quarter to potentially spike out in Medicaid, just trying to understand the jump off point a little bit more clearly to think about the achievability of guidance. Thank you.

On the Medicaid MCR in the fourth quarter, it actually was merely a case, not to oversimplify it, of fourth quarter dates of service trending at 1.2% versus a forecast of 50 basis points. There was no one-time items There were no retros anticipated or received. It was, from an accounting perspective, very, very clean. Trend outpaced our estimate. Cordless protection provided no benefit. The typical suspects, higher utilization among the stayers population, particularly for LTSS, pharmacy, and BH. BH inpatient was up. And look at, on the pharmacy side, It's not only GLP-1s that are causing the pressure, but other high-cost therapies. The trend pressure in the fourth quarter was the same as we experienced in the third quarter and was not muted, benefited, or detrimented by any one-time items or artifacts.

Okay. And then just as a follow-up, would you be able to share the IB&R balance at the end of the year just to help us evaluate the reserve picture? Thank you.

Absolutely. On medical claims payable, you might have seen we were at $4.6 billion. The DCP, which is an imperfect measure, but I know why you guys use it, was $48. Just to put that in context, over the last three years, DCP averaged $49. At the low, it was $47.25. At the high, it was $51.25, but averaged $49.00. The biggest driver of volatility around DCP and IBNR is how fast cash goes out the door, right? Because the actuaries have a very consistent process of accruing liability. Having said that, cash payments are a little bit lumpy. So we're at 48. That's the same sequentially, quarter over quarter, well within the middle of our range. I think that's a good proxy for the IBNR.

Thank you. And the next question comes from Josh Raskin with FN Research.

Hi, thanks. Good morning. Seems like the marketplace MLR was worse in the fourth quarter. I'm not hearing much commentary around that. So maybe what the specific drivers were there relative to what you guys have put up at Investor Day. And then just back on the Medicare Advantage, maybe if you could give us a little bit more of the specifics on the Medicare Advantage pressures in 4Q, especially in the acquired book from Bright and maybe what changes you made in 2025 to give you confidence in the bids.

I'll turn it to Mark for the Marketplace commentary on Q4. Mark?

Absolutely. Hey, good morning, Josh. Look, nothing more on Marketplace than normal seasonality. As you know, because of deductibles, copays, things like that, Marketplace is fairly seasonable and tends to be running hotter later in the year. Look, we were at 83.3. Maybe it's a little bit higher than we thought, too. But on a full-year basis, coming in at a 75, we feel pretty good about the year. Just chalk it up to a little seasonal noise.

And the only thing I'll add to that is when you're coming in at 75 for the full year, we now have two consecutive years of being able to invest what we call excess margins, margins that came in at 10% pre-tax, into the growth of the product. We're now one or two priced silver in 50% of our geographies. As Mark said, we ended the year with 400. We're going to start the year with 600, end the year with 580,000 members. It's a great story, and we believe that given the dampening effect of special enrollment during the year, unlike last year, that it's a very stable book of business, and we have high confidence in the 6% pre-tax margin and the 79% MCR we're projecting for next year, for 2025. The Medicare question, Mark?

Yeah, absolutely. We reported a 93.8 on Medicare. Part of that is just the industry-wide trend that everybody's seeing. You know, Joe mentioned the driver's a trend in Medicare. LTSS, both skilled nursing facility and in-home, a variety of pharmaceuticals. And then the inpatient and outpatient both have a number of drivers in them. Again, that's not unique to Molina. I think we're seeing that just about everywhere. Part of the story, too, which compounds the MLR, is on the revenue side, we wound up adjusting some of our risk adjustment ultimates. The way risk adjustment works is, obviously, you do a lot of provider in-office risk adjustment. We also do a lot of in-home assessments, the combination of those. We adjusted our ultimate and took down some of the revenue a little bit. That's kind of a one-time item. You know, the knock-on question, Josh, which I would expect you to ask is how does that tee you up for next year? And I think, look, rates aren't great for next year. We're pretty conservative on trend based on what we saw, Q3, Q4. So what you're seeing is not a strong move in MLR year over year. Just reflecting a lot of that, you'll see us pretty much a little bit over the top end of our range for guidance rates. But nevertheless, we feel we're pretty conservative on trend, just given what we saw at Q3, Q4.

The only other comment I'd add on Medicare is the bright business. While we have full confidence in the 1,300 basis point turnaround to get to the full dollar of accretion, we're not going to be quite at break even this year. It'll be slightly lower, which is putting a little bit of pressure on the margins. But at 89% MCR for next year, a 2.2% pre-tax margin on nearly $6 billion of revenue, keys us up nicely to take advantage of the growth aspects of the duals and the integrated products. So we're quite bullish on our prospects here at Medicare. And with the early 2026 rate notice, I think we're keyed up for margin expansion in 2026 and beyond.

Thank you.

Thank you. And the next question comes from Sarah James with Cantor Fitzgerald.

Thank you. It sounds like you're assuming 4.5% cost trends in 25 down from the 6% you were experiencing in 3Q. What was 4Q cost trend, and what's driving your assumptions of cost trend lowering in 25?

Let me do full year-over-year, and then I'll kick it to Mark, because it can get quite complicated depending on which period you're comparing. In 2024, in Medicaid, our cost cost trend was 6.5%, half of which was the acuity shift due to redetermination, and half of which is what we call core utilization, higher utilization of the continuing population. Comparing that to the 4.5% trend in 2025, the acuity shift doesn't recur. So we're actually projecting a 4.5% core utilization trend in 2025 compared to a 3.25% core utilization trend in 2023, which is 125 basis points higher. Now, depending what period you compare, but we think that is a very clean and clear way of looking at it. We considered every nuance of utilization trend in the third and fourth quarters to inform that trend. Property by property, DRG by DRG, and we're very confident in that projection. Mark, anything to add?

I would just repeat that, Joe, because it's a big point. Last year was 6.5% trend. Half of it was directly because of mix of redetermination. So the other half was just hot users, the stayers. So three and a quarter, I'll call it. This year, we're projecting 4.5% trend, which is directly comparable to that 3.25% number last year. So you can see we've got a pretty strong trend baked into our 2025 outlook. Now, I think that's prudent based on where we are. But if the second half of last year was the new normal, that's assuming a pretty strong trend above what we've seen in other kind of normal quote-unquote years. So pretty strong trend at 4.5%. And as we've also mentioned, offsetting that trend to 4.5% in 2025 is roughly 4.5% of rates. Now, when we think about rates, we parse known versus estimated. 75% of our rates are known for 2025 at 5%. 25% we're still estimating, but we feel conservative at those rates at 2.5%. So they weighted average to 4.5. I know most of them, and I'm pretty conservative on what I'm estimating. But the high-level news for 2025 is 4.5% trend assumption, 4.5% rate mostly known, some assumed.

That's helpful. Maybe just one more clarification. Since you know 75% of the rates and you have a pretty good view of where margins lay, does that mean that you could get into your long-term expectations goals for Medicaid margins for the whole of 2025, or would it be more exiting 2025?

We would need, we conservatively estimated the 25% of rates we don't know at two and a half, and the 75% we do know came in at five. Is it conservative? Perhaps. So there could be some upside if we get rate increases north of the two and a half that we estimated. By the way, we never forecast retros, and our rate advocacy process, which is really robust, advocating for actual sound rates in all of our contracts, could provide some retroactivity in 25 on 24, but we never forecast it. That would be additional upside if we achieve that.

Thank you. And the next question comes from Justin Lake with Wolf Research.

Thanks. Good morning. I'll ask another question on trend just because you guys have done such a good job of kind of laying it out for us at the investor day. And today the, if I look at the investor day deck, you're, you're saying in the third quarter, sequentially, you had a 2.6% increase in trends, fourth quarter. Now you're saying 1.2, right? So just annualizing that, that back half into the first half of next year, If I'm doing the math in my head correctly, it should be like a 2% trend, you know, kind of just catch up as you annualize. So I'm just trying to think, Joe, like maybe you could talk to us in a similar way that you did as you did at the investor day. And today, like, just like, what are you really expecting for quarterly trend? If you think about those little, you know, kind of green bars you put at the investor day deck. for trend, what would you like? I would think they might only be 50 basis points a quarter to get the four and a half percent because you still got to annualize the back camp of this year. Am I thinking about that incorrectly?

Oh, as I said, when Sarah asked her question, it gets really complicated depending on what period you want to use. Obviously, if you use just the second half, the four and a half percent trend number is a lower number for 2025 than it is for 2024. to oversimplify the case. I'll turn it to Mark. We do have a lot of analysis on the quarterly progression of this.

Mark? Hey, Justin. So last year, we mentioned 6.5% trend across the year, full year. But at Investor Day, to your point, we also jumped off a second half of the year view just because we said, gee, maybe the second half is the new normal. So let's baseline off that. If you look at our guidance, full year over year, we said 4 1⁄2 of rates, 4 1⁄2% of trend. If you jump off of second half in the framework like we did at Investor Day, it would be more like 2% rates, 2% trend. And now that 2%, you can start to think more like in quarterly increments, and you're probably closer to your 50 bps a quarter that you're thinking about.

Perfect. Thanks. And then... Just a couple of quick numbers questions here. You talked about some one-time benefit in SG&A. Can you give us some more color on that? And then, Joe, you said you're not rates away. You said you're rate actions away in one or two places. Can you tell us, like, can you give us any specificity? It sounds like it's a couple of states that you need some rate updates from. Are those larger states? Or are there smaller states where you need big rates or larger states where you're just waiting for some drawbacks there?

First thing I would say is the 2.5% that we projected on rates that we don't know about is perhaps conservative. But let me frame it this way. The rate action versus cycle comment was merely to reflect we're operating, no matter which way you cut this, second half Q4 full year or 2025 guidance. we're operating 100 basis points above the high end of our long-term range, 100. Based on analysis that we've done, external reports, regulatory filings, we believe that many market participants are operating at two, three, maybe even 400 basis points above an acceptable MCR range. That might take a rate cycle, but when you're 100 basis points above the long-term energy range, maybe a rate action or two will get you there. That's my point. I don't think this has to cycle through one or two times in order to get there. 90 basis points is, yeah, it's $4 a share on $32 billion of revenue. So if we can get back to the top end of our range, when the market gets the rates it needs to get back into balance, we will comfortably be operating in the high 80s, paying into the corridors like we were before all this happened,

that's exactly where we want to be high 80s and paying into the corridors to provide that 200 basis points of protection thank you and the next question comes from aj rice with ubs uh hi everybody um first i just wanted to ask about um quarterly progression across 25 if there's anything you can do to help us think about that obviously You've got the dollar of startup costs. I assume that's more back-end loaded. You've got the rate updates, which we've been talking about on Medicaid. Maybe you have a positive progression there contributing to EPS. And then you've got more publicly staged business, which is going to exasperate the fourth quarter, it sounds like. Any way you can give us a little bit of flavor for how you think quarterly earnings lay out over the course of the year?

Sure, I'll turn it to Mark, but you have the items appropriately captured that factor into the seasonality projection of the business. Mark, color?

Hey, AJ, good morning. Yeah, so normally we're a little bit front-end loaded with EPS. And what I'm saying this year is we'll be 50-50, very evenly distributed quarter to quarter. So what's different? The first big driver is you've got a specific accounting of where we are on rates within the year, quarter to quarter. We talked about how we know 75% of them, but we also know specifically when they come in. We also have a specific view on that trend number of four and a half, how it seasonalizes. So you've got that as one of the bigger drivers. Next, you've got just a little bit of carryover from new stores last year. It's not as big a phenomenon as it was last year, so we're not going to call significant attention to it, but you've still got a little bit of that going on. So that more or less levels MLR quarter to quarter in the year. Now, the other thing that's going on is G&A. I heard your statement, but believe it or not, we're front-end loaded on G&A this year with a lot of the initiatives we have. We have a bunch of go-readies. January 1st of 2026. And a lot of the IT spend, a lot of the upfront investment comes in early, which frontends our GNA. So those things are a little bit different this year. I take your point on more marketplace, which is typically a little bit backend loaded on MLR. Yes, that's true. But you put our three businesses together, we've got a pretty even outlook on our margins and therefore our APS.

Okay. All right. That's helpful. Um, And then I just wanted to ask, I know you guys mentioned in the prepared remarks about keeping an eye on what's going on in Washington. Obviously, there's a lot of chatter about potential Medicaid reform. Is it a situation where at this point you're having some discussions with the states about how they might respond to some of these scenarios and maybe relying on history to Does it tend to push the states to put more of the people that they haven't put in managed Medicaid into managed Medicaid? Is there enough flexibility in the benefit design that if there's pressure on Medicaid funding that they tweak benefits? And how does that impact your business? Any thoughts you can give us along those lines?

I can. I can't give you any answers, but I can give you our thinking. And you're absolutely right about the way you're focused on it. Look, the market really focuses on the how, right? You know, if you come up with a per capita cap scheme, FMAP match floor reduction, FMAP match reduction on expansion, block grants, whatever the mechanism is, the CBO can score it. That's not the issue. The issue is, what are you going to reduce in terms of where the money goes? You've got 25 million people in marketplace, 92% subsidized, 20 million people in expansion, 100% subsidized at 90%. and 25 million uninsured population, 9.5% of the eligibles. Tell me which number you want to see changed. Neither side of the aisle wants to see more uninsured. It's below 10% of eligibles for the first time in decades. Reduction in benefits, reduction in enrollment, reduction in payments to providers, or none of the above, and I either have to, as a state, decrease my education budget or raise taxes. None of those solutions is politically tenable. That's what to focus on. The way to cut a cost is actually actuarially and financially determinable. Where that would go is where the political tension exists. It's either gotta be membership, benefits to existing membership, reductions of payments to providers, or higher taxes for the citizens in a state. Neither of those approaches is politically tenable. That's why we conclude that any changes to manage Medicaid as we know it today would be marginal.

Thank you. And the next question comes from Adam Ron with Bank of America.

Hey, thanks. If I could ask two cleanup questions first. I think you mentioned in 4Q you didn't get a lot of benefit from the risk corridors that you talked about in 2024. So if you could update your thinking around that and how, you know, if you have any cushion for 2025 on risk corridors still and what it would take to realize them. And then second, if I could just squeeze the second question now, on Medicare, I think you mentioned MLR would be flat year over year versus 2024, but you grew membership and Q4 was a little hot in terms of utilization. And then you have United guiding up MLR on presumably Medicare. So curious what gives you comfort there. Thanks.

I'll touch the first question first and I'll kick it to Mark. On risk quarters, what we're saying is The amount of corridor liability we have year over year is unchanged. Therefore, it's not providing a benefit or a detriment to the P&L. And when we're operating 100 basis points above our target range, we're not going to be deep into them, but we are into them in certain places. Now, bear in mind, during a year, if you don't have a lot of corridor protection because you're not deep into them, there actually is at least potential for upside if you outperform your forecast. you'll get to keep a lot of it or some of it. And so if we're projecting, if we're looking at upside during the year and we're not deep into the corridors in many places and we're in the middle of them, then at least you get some of it to drop through to your bottom line. That's where we are on risk corridors year over year. Mark, you want to take the Medicare question?

Yeah, absolutely. So on Medicare, we reported an 89.1 for 2024. Let me walk you through a couple of things to help the thinking on that. The first is, recall, we exited MAPD, traditional Medicare Advantage prescription drug, in 13 states for 2025. While the revenue impact was not meaningful, the MOR impact was. So take 40 BIPs off the 89.1 and normalize the jumping off point to 88.7. Okay, to that, we've got rates like everybody not that great for 2025. Call it 2.5% for us. And I've got trend a little warmer than that. Now, part of that's mitigated by our bid strategy. Part of it's mitigated by our medical cost management. But 2.7-ish on trend, which nets you back to 89. So it's a lot about low rates. It's a lot about us, I think, being conservative on trend. And that 40 basis points benefit of jumping off helps us. But I think no matter who you talk to, next year is a tough year in Medicare Advantage. Thank you.

And the next question comes from Ryan Langston with TD Cowan.

Hi, good morning. This is Christian Bordmeier. I'm from Ryan. Could you remind us what your assumptions are on marketplace membership attrition? Should APTC subsidies not be extended? And then following that, is there any reason to expect that the marketplace members picked up through this year's open enrollment could be perhaps any more or less sensitive to change in the ATT. Thank you.

We took all the factors into consideration in our marketplace membership projection, and whether that's SEP membership during the year, the natural attrition rate, the FTR, all those assumptions factor into a 4% reduction on a monthly basis, 4% reduction in membership throughout the year. Mark, anything to add there?

Yeah, I think that's fair. When people talk about the impacts of program integrity changes, the agent of record lock is largely behind us. FTR, everyone's debating that, but we really believe the quality of our membership, because we have a lot of renewals, 70% retention rate this year, in spite of a huge growth rate on the top line of membership, we have 70% retention in our renewal book. That and the enhanced integrity around agent or record, we feel very good about the integrity of our membership. So will we see a little impact of FTR? Maybe. But I don't think it's dramatic. And Joe summarized it best. You've got FTR. You've got effectuation. You've got normal attrition. And don't forget, SEP good guys keep coming. You roll all that together, we're modeling about 4% attrition a month. We feel pretty good about it.

Thank you.

And the next question comes from Michael Ha with Baird.

Hi, thank you. With your MA MLR, back half pressure, I wanted to ask about the risk adjustments you threw up first. How much did that actually impact your MLR? And I just want to understand the more, Mark, you provided great color in the trends onto next year, just how much was caught in MA bids since you're paring down your MAPD exposure in 13 states, conversely increasing your DSMIP. It almost feels like Your book is now more shifted toward that elevated LPSS patient utilization. So I'm just trying to gain overall better comfort in your pricing, your bids, and your margins for next year. Thank you.

Absolutely. So on DSNP, yes, we're increasing our exposure there a little bit. That's offset by the Bright book and now some of the Kineticare book But remember, these trends in DSNPs that we saw rear up largely in Q3 and Q4, we've been conservative on our outlook for DSNP pricing. And I think a lot of competitors in the market have because our competitive positioning among many brokers has not changed. So I think a lot of people are dialing back in that way. We believe our benefit design anticipated a lot of this. Again, we've got guidance going to 89% next year. We think we've picked up a lot of this trend. And more importantly, that same book of business, we have yielding a little bit over 2% pre-tax. So we think in spite of these headwinds, these are still attractive. And maybe the bigger point, Michael, is these DSNFs, We'll get by, I believe, with 89% MLR, 2% pre-tax are such a big segue, though, into 2026 when we move into the fighty and hidey environment, which just becomes a growth engine for us with significantly more revenue, significantly bigger footprint. So we like 2025 as a jumping off year into a lot of transition, which I think bodes very well for the future.

Got it. Thank you. And just one more on Exchange Marketplace, it sounds like you're very confident on still achieving mid-single-digit pre-tax margins. 44% does feel pretty strong. And I know you're investing or reinvesting your excess margins. But was that the level of growth you had been expecting heading in? And it sounds like you're starting the year at like 612,000, tracking down to 580. And I think you mentioned 4% reduction monthly. But specifically related to the FTR rechecks, How much of the effectuation rate have you identified and embedded in your guide specifically from like now through April or May when those rechecks finish? Thank you.

So whenever we give you numbers, we give it net of our effectuation and other forms of attrition so that you don't have to do additional math and hedge it. We believe we've hedged it with our best judgments on all those items. Now, I heard you mention the 44% statistic. A lot of people are throwing that around. I believe that's quarter one versus quarter one a year ago. And that's a little bit of a dangerous growth number because what happened last year is SEP was so strong through the year that the Q1 number naturally grew dramatically across the year. So if you really look at jumping off of Q4, because we grew during the year, with all the SEP gains from redetermination, it's a significantly lower growth number Q4 to Q1. It's still a very nice growth number, but it's not 44. It's more like half that. Now, the good thing is, once again, that's still a lot of growth, but with 70% renewal retention, it's a lot of growth, but it's also a lot of continuity with many of the same members. which, as you know, from so many perspectives, gives us more confidence in our margins. So, yes, a lot of growth, but if you look at all the growth that we put on Q2, Q3, Q4, not such a big statement, and a lot of continuity coming into it with a really good renewal rate. Now, we have right now probably effectuation rates in the mid-80s. We feel really good about that. That's much higher than normal, and I think for two reasons. One, we've got much more renewal retention, which means effectuation is going to be higher. But the other thing is I believe the agent of record lock really created a lot more quality of new membership or not churn membership so that members knew they were being signed up, were very active in the process. You're less likely to have lapses, nonpayments, things like that. So I think boating well for this year, both on great effectuation rates, but also great renewal retention rates.

Thank you. And the next question comes from Scott Fidel with Stevens.

Hi, thanks. Good morning. I want to just actually just follow back up on the last question. Just still on the exchange margin expectations, and I'm not sure if I'm missing something, but maybe you could help us with the bridge. Because, you know, you guys talked about around 70% of the enrollment being from retention. And when we saw, you know, your rates, you know, in terms of your same store rates, I think they were sort of flat to down in terms of yield for 24 to 25. So just trying to get to sort of the comfort with the 6% margin, you know, around sort of, I guess, the view on trend that you may have on those retained members or, you know, anything else around the product design that would sort of bridge, you know, given pretty minimal, you know, yield year over year on those members.

I'll take it to market in a minute, but we consciously, when you're producing 10% to 11% pre-tax margins two years in a row, one, you've got to remain competitive, and two, if you keep it there, you're going to run into the three-year minimum MLR. So it makes perfect sense to invest the excess margin in growth. It's a calibration. You try to set your product to be competitive and competitively positioned. As I said, we were number one or two silver priced in 50% of our geographies. We netted 130,000 members in open enrollment. We had, I think, 260,000 ads in 130 terms, which gave us a nice jumping off point. So we have high confidence in the mid-single digit margin. The membership, as Mark said, being more stable Higher percentage of it being renewal means that you know the member, you know their clinical history, which gives you higher confidence in obtaining an appropriate risk score. So the fact that we have more stability in the book, less special enrollment during the year, and consciously invested a double-digit margin into growth makes all the sense in the world, and we believe the strategy is going to work for 2025. Mark, is there anything to add?

Yeah. Hey, Scott. So we're coming off a 75 in 2024 MLR. I've got us targeting a 79 for 2025, which means by definition we're putting less rate into the market than trend, and that's exactly what's happening. I've got trend a couple hundred basis points above rate. Quite purposeful, because as Joe mentioned earlier, There's a minimum MLR out there, and I'd rather invest back into pricing and drive growth than do rebates. So we're seeing nice growth. We're seeing really good price positioning, and it's quite purposeful, putting less rate into the market than we anticipate trend to

Okay, and then just on the follow-up, I was hoping to get just two numbers on your picks on 25. I don't think we saw investment income in the guide unless I'm mistaken, so I would love if you could give us the investment income expectation and also how you're thinking about operating cash flow for 25 as well. Thanks.

Absolutely. So call it about $400 million. would be my implied investment income number within guidance, which is a little bit lower than we saw in 2024, but I'm sure you'll understand the drivers of that given the Fed's actions in this interest rate environment. So a little bit conservative there on investment income. And on operating cash flow, yeah, you know, I get this question a lot. On a full year 2024 basis, operating cash flow is down versus 2023. That is true. But if you think about it, the vast majority of the explanation is simply the corridors. In 2023, I accrued significant corridors and didn't pay much down in cash. In 2024, we accrued significantly lower corridors. You're all familiar with that story, yet paid down significant prior year corridors with cash. Therefore, That explains the vast majority of my operating cash flow. Now, for us, a growing company, operating cash flow should always be higher than net income. And what you saw in 2023, the ratio was 1.4. Last year, operating cash flow was below for the reasons I mentioned. And I think you'll see a swing in that back in 2025. What's more important, though, is cash flow at the parent level. And we have a really good history of moving cash from the subsidiaries up to the parent, which is where you can really use it. To be clear, operating cash flow isn't usable when it's in the subs. Our track record of dividend to the parent is very efficient. So I feel very good about the cash flow to the parent that I give you and our ability to deploy capital. Thank you.

And this concludes question and answer session as well as today's event. Thank you for dialing into today's presentation. You're now dismissed.