Molina Healthcare, Inc. (NYSE:MOH) Q2 2023 Earnings Call Transcript

Molina Healthcare, Inc. (NYSE:MOH) Q2 2023 Earnings Call Transcript July 27, 2023

Operator: Good day, and welcome to the Molina Healthcare Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Investor Relations. Please go ahead.

Joe Krocheski: Good morning, and welcome to Molina Healthcare’s second quarter 2023 earnings call. Joining me today are Molina’s President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our second 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 listen to the rebroadcast of this presentation, we remind you that the remarks made are as of today, Thursday, July 27, 2023, 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 can be found in our second quarter 2023 earnings release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2023 guidance, Medicaid redeterminations, our recent RFP awards and related revenue growth, our recent acquisitions and M&A activity, our long-term growth strategy and our embedded earnings power and margins. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as the risk factors listed in our Form 10-Q and Form 8-K filings with the SEC.

After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Joe Zubretsky: Thank you, Joe, and good morning. Today we will provide updates on our financial results for the second quarter 2023, our full year 2023 guidance in the context of our second quarter results, Medicaid redeterminations and our growth initiatives, and our strategy for sustaining profitable growth, including our 2024 premium revenue growth drivers. Let me begin with the second quarter highlights. Last night, we’ve reported adjusted earnings per diluted share for the second quarter of $5.65, or 24% year-over-year growth on $8 billion of premium revenue. Our 87.5% consolidated MCR in the second quarter demonstrates continued strong operating performance in medical cost management and was at the low end of our long-term target range.

We produced a 5.3% adjusted pre-tax margin or 3.9% after tax, a very strong result that was above the high end of our long-term target range. Year-to-date, our consolidated MCR is 87.3% and our adjusted pre-tax margin is 5.4%. We note that investment income produced higher than expected results due to the increasing yield environment. In the second quarter, we continued to generate excellent margins in our Medicaid business with an MCR of 88.3%, bringing our year-to-date MCR to 88.4%. This result was in line with our full year guidance and long-term target range. As expected, the medical cost impact of redeterminations was negligible, although we are in the very early stages of that process. In Medicare, our reported MCR was 89.2%, which is above the high end of our long-term target range.

We are experiencing some cost, pressure and professional and outpatient services and higher first year MCRs associated with growth. With a year-to-date Medicare MCR of 88.6%, the book of business continues to produce attractive margins. In Marketplace, our reported MCR was 73.7% for the quarter and 71.2% year-to-date. This result reflects the successful implementation of our pricing, metallic mix, and membership continuity strategies to restore this business to mid-single-digit target margins. In summary, our second quarter results built on our strong start to the year. Medicaid, our flagship business representing over 80% of revenue continues to produce strong, predictable operating results and cash flows. Our high acuity Medicare niche serving low-income members continues to grow organically and our Marketplace business is now well positioned to achieve target margins.

Turning now to our 2023 guidance. Based on our strong second quarter results, we are increasing our full year 2023 adjusted earnings per share guidance by $0.50 per share to at least $20.75 or 16% growth year-over-year. Consistent with our long-term earnings per share growth target of 15% to 18%. Our earnings per share guidance is now $1 per diluted share higher than our initial guidance issued in February. Our pre-tax margins are exceeding our expectations. The Medicaid MCR is right on target, Medicare slightly behind target and marketplace substantially better. We note that these target ratios produce best in industry margins. Then of course, the interest rate environment has allowed us to produce investment income that has provided a short term earnings boost.

Now, a few words on Medicaid redeterminations. During the second quarter, all but four of our states began disenrolling members with the remaining states initiating disenrollments on July 1. Our Medicaid membership declined by 93,000 members during the quarter, which was well within our expectations. Although the medical cost profile of members who have left is slightly more favorable than the portfolio average, the impact on our overall Medicaid MCR was negligible and within our expectations. We continued our outreach to members to minimize procedural disenrollment. We also continued to work with our state partners to ensure rates remain actuarially sound to account for any potential shifts in acuity. To date, all of our states have expressed a willingness to adjust rates as needed to account for any changes in acuity or trend.

Mark will provide more color on redetermination during his remarks. Turning now to an update on our growth strategy. At our May Investor conference, we laid out our strategy for sustaining profitable growth. We plan to grow premiums at 13% to 15% through a combination of growth in our current footprint, strategic initiatives and accretive acquisitions. We also established a 2026 premium revenue target of $46 billion. We already have significant momentum toward achieving these growth goals. Our five recent state RFP wins drive more than $5 billion in incremental premium revenue. A portion of this incremental revenue is included in our 2023 guidance attributable to our Iowa contract, which we successfully launched July 1 with approximately 200,000 members consistent with our expectations.

Most of the remainder emerges in our 2024 revenue outlook and a small component in 2025. We are also executing on the M&A component of our growth strategy consistent with our strategy of acquiring capitated government-sponsored assets. In June, we announced the acquisition of Bright HealthCare’s California Medicare Business for an attractive purchase price of approximately 28% of expected 2023 premium revenue. Bright’s Medicare business serves approximately 125,000 MAPD, D-SNP and C-SNP members across 23 counties in California with 60% membership overlap with Molina’s Medicaid footprint. We expect the transaction to add approximately $1.8 billion of premium revenue, deliver $1 of adjusted earnings per share at full run rate, but no earnings contribution in the first full year of ownership.

We expect the transaction to close by the first quarter of 2024. The closing is subject to the solvency and continued operation as a going concern of Bright Health Group throughout the pre-closing period, as well as federal and state regulatory approvals and other closing conditions. Based on known building blocks, we now have line of sight to approximately $38 billion of premium revenue in 2024 or 19% growth before executing on additional strategic initiatives. Our new store embedded earnings is now $5.50 per share, providing meaningful visibility into our future earnings growth potential. We see additional embedded earnings upside if and when the several remaining COVID era corridors are eliminated. Two short months ago at our Investor Day, we reaffirmed our long-term financial targets, the centerpiece of which is the long-term earnings per share annual growth rate of 15% to 18%.

Our performance this quarter supports that outlook. The revenue base and new store earnings profile continue to build with highly accretive new contract wins and M&A. Our second quarter and year-to-date operating results provide a very solid earnings base off of which to grow, and we have seen nothing in the early stages of the Medicaid redetermination process that changes our view of the earnings trajectory of the business. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Mark Keim: Thanks, Joe, and good morning everyone. Today, I will discuss some additional details of our second quarter performance, the balance sheet, some thoughts on our 2023 guidance, including an update on redeterminations and our 2024 premium revenue outlook. Beginning with our second quarter results, our consolidated MCR for the second quarter was 87.5%, reflecting continued strong medical cost management. In Medicaid, our reported MCR was 88.3%, a strong result that was in line with our expectations and long-term target range. The major medical cost categories were largely in line with our expectation and normal quarter-to-quarter trend fluctuations and COVID-related costs have largely subsided. Second quarter Medicaid membership is down 93,000 from the first quarter, largely attributable to the expected initial impact of redeterminations.

In Medicare our reported MCR was 89.2%, which is above our long-term target range. During the quarter, we saw increased utilization of outpatient and professional services, as well as the continuing expected impact from strong growth in our D-SNP and MAPD products, due to the normal lag in new member margins. We make note of two key dynamics of our year-to-date Medicare performance and implications for 2024 bids. First, our MMP block of business representing half of our Medicare premium is not tied to annual Medicare bid process. And second, we were conservative in our trend assumptions in our 2024 bid process. In Marketplace, our reported MCR was 73.7%. This strong result reflects our pricing strategy to return this business to target margins prior year risk adjustment true up benefiting the quarter, as well as normal seasonal patterns for utilization.

We call our pricing strategy increased our premium yield by approximately 9% this year, and with three quarters of our book in renewing members and two-thirds in silver metallic products, our risk scores should be appropriately valued. We feel well positioned to achieve our mid-single-digit target margins in this business for the year. Our adjusted G&A ratio for the quarter was 7.4% and includes the expected new business implementation spending, ahead of new contract wins incepting in July and next year. Turning now to our balance sheet. Our capital foundation remains strong. We harvested approximately $150 million of subsidiary dividends in the quarter, and our parent company cash balance was approximately $0.5 a billion. We expect to fund the acquisition of Bright HealthCare’s Medicare business in the first quarter of 2024 with cash on hand.

Debt at the end of the quarter was unchanged at just 1.6 times trailing 12 month EBITDA with our debt to cap ratio at 40%. Net of parent company cash, these ratios fall to 1.3 times and 35% reflecting our low leverage position and ample cash and capital capacity for additional growth and investment. Turning to reserves. Our reserve approach remains consistent with prior quarters and we continue to be confident in the strength of our reserve position. Days in claims payable at the end of the quarter was 47. Now some additional color on our 2023 guidance. We increased our 2023 adjusted earnings guidance by $0.50 to at least $20.75 per share. This increase is driven by second quarter operating and investment income performance above our expectations and higher expected investment income in the second half of the year, partially offset by some continued conservatism.

As Joe mentioned, our current new store embedded earnings are $5.50 per share, comprised of $4 per share for our recent new contract wins in California, Iowa, Nebraska, and Indiana, plus a $1.50 [ph] per share for the acquisitions of AgeWell and My Choice Wisconsin and now the recently announced acquisition of Bright Health’s Medicare business, all achieving their full run rate accretion. Elimination of the remaining COVID era with corridors would provide upside to the $5.50 of new store embedded earnings. Turning to redeterminations. While the redetermination process differs from state to state and is quite complex at this early stage, we have not observed any emerging trends that would change our membership or financial outlooks. We have built robust tracking and monitoring systems to maximize retention of members that meet the eligibility criteria and to also promptly understand any financial impacts of redeterminations.

Some early observations include the following, starting with membership. Our outreach protocols have been successful in helping eligible members remain in the Medicaid program. Each state has implemented an ex parte membership renewal program from state to state. We see automatic re-enrollment rates through these ex parte programs ranging from 20% to 70% of members reviewed. Data suggests and states have verified that two-thirds of those disenrolled have been procedural rather than due to verification of ineligibility. Many of these members potentially remain fully Medicaid eligible and will have a high likelihood of reconnecting to the Medicaid program. Members have 90 days to 120 days to reconnect depending on state policies. Once reconnected, Medicaid coverage and premiums reinstate retroactively to the date of disenrollment.

As we interact with members who lose eligibility, we seek to warm transfer them to our Marketplace team for potential enrollment in that product. This process is in its beginning stages. Turning to early observations on the financial impact of redeterminations. Terminated members have slightly lower medical costs than the portfolio average. However, these impacts are well within our expectations and our overall MCR outlook for the year. Of course, as trends emerge, we’ll be working with our state partners to ensure rates reflect any impacts of redetermination either prospectively in the normal fiscal year rate cycle, off cycle or retrospectively if necessary. We are still in the early stages of the Medicaid redetermination process. States representing half of our Medicaid revenue just began the process in June, and states representing a third of our revenue are now initiating disenrollments in July.

Based on our experience to date, our current outlook on the impact of redeterminations on our business remains consistent with our previously stated expectations. Through the end of the first quarter, we estimated we had gained approximately 800,000 Medicaid members organically since the start of the pandemic. We continued to expect to retain roughly half of the members gained with no assumption for marketplace recapture. We expect the premium impact of members disenrolling to be approximately $1.6 billion and at portfolio average margins, the earnings impact could be approximately a $1 per share, split one-third in 2023 and two-thirds in 2024. Lastly, some additional color on our 2024 premium revenue outlook. As Joe mentioned, we have line of sight to the building blocks that are expected to deliver approximately $38 billion in projected revenue in 2024 or 19% growth off our 2023 premium guidance of $32 billion.

These building blocks include $1.1 billion of organic growth in our current footprint, plus $4 billion from our recent state contract wins and approximately $2.3 billion of acquisition related premium, consisting of the full year of My Choice Wisconsin and the recently announced California Medicare acquisition. Partially offsetting these growth drivers is $1.4 billion for the impact of redeterminations and known pharmacy carve-outs. In summary, we are very pleased with our second quarter performance and the momentum we have established toward achieving our growth targets. This concludes our prepared remarks. Operator, we are now ready to take questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin: Hi. Thanks. Appreciate all the color on the redeterminations. That’s where I’ll start. So could you just sort of speak to the discussions that you’re having with the states? I know it’s early and, four of them, you know, literally started this month, but just the conversations around rates and the impact from reverifications. You mentioned this slight mix shift that you’re seeing, but could you just walk us through sort of the timing of potential rate adjustments and, how you think that plays out over time? And then is there a scenario where you can accrue higher rates based on discussions with the states, or are we going to need to see, you know, something in writing or something, formally passed at the state level before you can match, your rates to the change in acuity?

Joe Zubretsky: Sure, Josh, I’ll start and then I’ll kick it to Mark for some color. First of all, the rate cycle in terms of the – our portfolio of states and how the rate cycles emerge actually couldn’t be better positioned for how the redetermination process is going to unfold. 25% of our revenue has rates that renew between April and July, another 25% in the early fall and 50% on January 1, which gives us good opportunity to have great visibility into any potential impact of redeterminations and engage in those discussions with the state, which are already occurring. Now as you know, and I’ll note the impact of acuity shifts is a normal rating criteria. Rating criteria includes a credible medical cost baseline, a trend off the baseline, benefit changes, plus or minus, and any potential acuity shift.

So the fact that there’s an acuity shift that’s speculated to occur is actually part of the dialogue we’re already having in the states. Now only a handful of states actually implemented rates between April and July. And I’ll hand it over to Mark and he can give you some color on how those discussions went.

Mark Keim: Hey, good morning Josh, so in July, we had five states representing about 10% of our revenue move into a new pricing cycle. About half of those states led with a proactive concession for what’s going on with redetermination. The other half said, gee [ph], we have no data yet. But as data develops, we will either retro or mid-cycle make an adjustment. I think the overarching theme here, it is still so early, even here in late July to be looking at data-driven conclusions on redetermination. So all states have made the commitment that rates will be actuarially sound. And just about all states have said that mid-cycle, they’ll make a mid-cycle adjustment or a retro adjustment to do a catch up if needed. And of course, we’re in there talking with states that on normal rate cycles, we’re getting things proactively where we need it.

The other part of your question, our accounting policies require that we have specific documentation on rates – so we’ll book them as they actually get confirmed by the states.

Josh Raskin: Okay. So bottom line half are reflecting this already in some sort of perspective, we see it coming and the other half are going to make you whole at some point?

Mark Keim: Of the states in July, that is correct.

Josh Raskin: Yes. Okay. Thank you.

Operator: Thank you. And our next question today comes from Justin Lake at Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. Just a couple of questions on numbers. First, on the exchanges, can you tell us what the potential benefit was or what the actual benefit was to second quarter in terms of the 2022 final risk adjustment true-up. And then you said there that you’re confident in mid-single-digit target margins your MLR looks to me like it’s down 10% plus in the first and second quarter. Last year was flat. So it looks like you’re on target to do well better than 5%. And am I missing something there? Or is the back half going to be kind of flat year-over-year on an MLR basis?

Joe Zubretsky: Justin, it’s Joe, I’ll kick it to Mark for some color. The marketplace business, our strategy of keep it small, silver and stable, plus starring in a 9% price increase for the year clearly has us on track for mid-single-digit margins. In fact, our guidance contemplates about just over 6% pretax margin for the full year. Now to your question, while you’re at 71.2% for the first half, that must mean you’re at 85% for the second half. Two factors. One, we’re taking on special enrollment period membership as the year goes on. So as the year progresses, more – higher mix of your membership is special enrollment membership, which carries a higher initial MLR and second, a greater proportion of our book is in higher deductible products, which makes the seasonality toward the back half more dramatic than it has been in the past. 71% first half, 85% second half, 78% for the year. Mark, do you want to talk about the drop?

Mark Keim: Sure. I saw some analysts right on this topic. And some of them, we’re throwing around some pretty big numbers as much as $66 million in positive development of December 31. Just on risk adjustment. And what those analysts miss is that about half of that benefit a little more is tied up in margins. For those of you that follow the accounting, when we hang up an actuarial liability for risk adjustment, we try to identify the liability, but we also book a margin associated with it in case we’re wrong. More to the point, we also book a margin for risk adjustment data validation or RADV. So that $66 potential benefit that folks were looking at is roughly cut in half, a little bit more than cut in half just by the retention of margins that don’t fall to the bottom line.

So then you’re working with a little bit less than half of that. The other thing is, as these risk adjustment liabilities ultimately emerge, most of you are aware that a service called Wakeley [ph], which anonymously combines the inputs from everybody so that we can all get some insights as we move along. As a result, quarter-to-quarter, we’re accruing and getting pretty dialed in on the ultimate liability. So this big number we’re potentially talking about more than cut and half, and largely recognized in first quarter with a little bit in the second quarter. The only other thing I’d say on the topic is this is normal development of risk adjustment kind of like IBNR, you always book it, but you expect it to roll off slightly favorable.

So I wouldn’t call this necessarily an anomaly, but it is spread between the first and second quarter, and it’s in our numbers.

Joe Zubretsky: And Justin, the last thing I would say on the topic, the return to mid-single-digit margins is really a result of that disciplined strategy that has worked and was executed perfectly for the year, 6% pretax for the full year not because of accounting adjustments, but because of the pricing discipline and the positioning of the book. Thank you.

Justin Lake: That’s great detail. Thanks. I’ll – can I squeeze in one on investment income, Joe? What’s the expectation for the full year? And then you said some of this is temporary. What should we think about normal investment income as we take out to 2026?

Joe Zubretsky: Well, the way we look at it, first of all, your pick on the yield curve would determine for the most part, what that would look like. But what we try to remind folks is that of our $8 billion portfolio, half is in intermediate term securities where we won’t be immediately responsible to interest rate changes and the other half is in cash, which will be immediately responsible to interest rate changes. That’s the first fact. And make your yield curve pick for the rest of the year. We certainly are forecasting lower interest rates for the back half of the year on our cash balance, which also will be reduced between mid-year and end of the year due to the payment of some significant government payables that we need to get paid. Mark, any more color?

Mark Keim: Joe’s got it right. Half of the portfolio is in cash, we made close to 5% on that cash in the second quarter. Now if anybody’s guess what the Fed does here. But our balance sheet is obviously very responsive to changes in Fed short-term rates. So 5% of that cash in the second quarter, but it’s anybody’s guess where these rates go third and fourth quarter. And as Joe mentioned, I’m also forecasting a slight decline in cash balance as we pay out some payables and some other true-ups on our balance sheet.

Justin Lake: Thanks.

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

Stephen Baxter: Yes. Hey, I appreciate all the color on redeterminations and the procedural terminations that we’re seeing out there. I guess I wanted to ask on the ex parte reviews and the success getting some members reenrolled. I’d love to get a sense of what percentage of members getting terminated for procedural reasons are actually getting these ex parte reviews? Is it all members that are terminated for those reasons or some kind of subset, and then is your expectation that going forward, more of these reviews will be happening ahead of disenrollment – my understanding was that’s generally how it’s supposed to work. So I’m surprised there’s so much focus on it now occurring on the back end? Thank you.

Joe Zubretsky: Let me just reframe the numbers, and I’ll keep it to more. Our states have all have executed ex parte processes. The automatic renewal rates have ranged from 20% to 70%, which is actually quite high. On terminations, at least two-thirds of the terminations have been procedural, in some cases, up to 75%, which then means – and this is the important point on the procedural terminations. The number of reconnects of the members that will reconnect to the process within the 90- to 120-day grace period is actually expected to be quite high since the procedural termination rate was also quite high. Now we haven’t seen that yet. Because this process just started. But we believe throughout the third quarter into the fourth, we’re going to see significant reconnection activity, which will carry with it retroactive premium back to the initial data disenrollment. Mark, some color on the detail numbers?

Mark Keim: Absolutely. So, ex parte, 20% to 70% of folks reviewed, just to be clear, that’s in advance of any loss of membership. It’s obviously a way to avoid folks losing their eligibility. There’s a few resources out there that have published views on this 40% of members when they go through eligibility verification, are losing their eligibility. 60% are retaining eligibility. It’s estimated that 50% of the 60% that retain get it through ex parte. So it’s obviously very powerful, and CMS is encouraging states to step it up and do more ex parte. Finally, as Joe mentioned, with two-thirds of the folks losing eligibility due to procedural reasons, this reconnects is really important. States are giving between 90 and 120 days for folks that lose eligibility to become aware of it, refile and get back on rolls.

And if they do it within 90 to 120 days, their eligibility goes retro to the day they lost it. So we cover any claims in the interim, but also the premium for us goes retro back to the day they lost their eligibility. So very powerful on these reconnects. It’s too early here in July for us to really see good data on reconnects. Most of our markets started in June, which means reconnects will just start coming in the next month or two, but a really powerful part of these enrollments.

Stephen Baxter: Thanks. And just one quick follow-up, if I can. You mentioned the medical cost profile on the early disenrollment slightly favorable. I guess at this stage, how are you thinking about what that could look like for the reconnects. Thank you.

Joe Zubretsky: Didn’t get the last part of your question. But yes, on the members that are disenrolling the medical loss ratio is slightly more favorable than the portfolio average as expected. All contemplated within the 88.5% medical care ratio that we projected for the Medicaid business for the full year. We have seen nothing that suggests that we will not be able to hit that. And bear in mind, as we mentioned many other times, we also have, in many of our states, either a corridor or a minimum MLR, that carries with it a rather significant liability that we’ve already recorded. Any medical cost inflection that happens in the back half of the year would be first absorbed by any corridor or minimum MLR liability before impacting our earnings. Mark?

Mark Keim: Yes. Just to add to that, levers are slightly lower on MLR. We’re expecting a lot of reconnects. How will reconnects come back on MLR? Well, there’s a theory out there that reconnects many of them will only become aware of their need to reconnect because they have another claim or another doc visit, which means when they’re coming back on, they may come with a claim but they were also likely to come with two to three months of premium revenue. So I’m expecting pretty much a reversion to our mean as we see these reconnects and not a lot of volatility there.

Stephen Baxter: Okay. Thank you.

Operator: Thank you. And our next question today comes from A.J. Rice of Credit Suisse. Please go ahead.

A.J. Rice: Hi everybody. Maybe just quickly, a couple of other aspects on the reverification process. I wonder you can see the states are publishing about how many members are getting disenrolled and how much of process disenrollments, I know you’ve got a lot of outreach efforts. Is your own experience at this point different than the aggregate numbers we’re seeing states? Are you able to engage more effectively? And I’d also wonder I know these people engage with the health system, clinics, ERs and hospitals, pharmacies, et cetera. Do you have any data on how often a member engages with one of those locations that might end up being a catalyst to get renewed proactively?

Joe Zubretsky: Well, I think on the first part of your question, first of all, state mix is really important. As we said in our prepared remarks, some states moved very aggressively initially, some states more cautiously. Some states, even – three of our states pause to let the administrative processes catch up with the flow of work. So I think state mix is really, really important as you judge any one company or any one state against sort of the market average. But we have seen nothing in the process that is outside of our expectations as we said. In terms of experience, we believe that a member will be reminded that they need to be on Medicaid if and when they have to go to the doctor or the emergency room or for some procedure. And as Mark said, maybe they’ll come back with a claim, but they’ll also come back with three or four months of retro premium. And that means the reversion to the mean to the portfolio average MCR is supported by that thesis.

Mark Keim: A.J., the only other thing I’d add is so many of our members are associated with family members and the incidence of one family member over the first couple of months needing medical care of some kind is high, which means the whole family gets renewed. So that’s really a helpful fact as we think about these reconnects.

A.J. Rice: Okay. And maybe just one follow-up on the – in your comments about the Bright Health acquisition. You mentioned that one; you’ve got a solvency contingency in there. Is that related to the California plan you’re buying? Or is that related to all of Bright Health and would there be any opportunity if there is any issues for you to support the California plan as you’re waiting to get the regulatory approvals.

Joe Zubretsky: No, that comment did not relate to the properties that we acquired – the properties we acquired will carry with it the amount of regulatory capital needed to run the plan. They are underperforming on margin, but really good line of sight to membership and revenue. That comment was really to state that the ongoing, going concern in the financial solvency of the parent company would obviously be critical to their ability to close the transaction. That’s all that referred to. The properties have intact revenue and will be delivered with the required amount of capital.

A.J. Rice: Okay, thanks a lot.

Operator: Thank you. And our next question today comes from Calvin Sternick with JPMorgan. Please go ahead.

Calvin Sternick: Yes. Thanks for the question. I know it’s pretty early on the marketplace side of things, but just curious what kind of sort of trends you’re seeing in terms of applications or enrollment in June and July that you can speak to? And then maybe just one follow-up on the Bright business, $1 per share of embedded earnings, no contribution next year, but can you give a sense for what sort of the time line is to reaching run rate on that business?

Joe Zubretsky: Sure. I’ll comment on the Bright acquisition first, and then we’ll comment about the marketplace. This is the first Medicare acquisition we’ve done. And Medicare, as works on an annual cycle for star ratings, for risk adjustment for rates, et cetera. The business had its own profit improvement plan in place. So the answer to your question is unknown at the time. How much profit improvement will that business have during the period time to close, we don’t know. We are still confident that whatever is delivered to us at the time of closing, we will be able to get that to our target margins by the end of the second year. So when we said no earnings contribution early because we don’t know exactly what the financial status, the margin status of the plan that will be delivered to us will be at the time of closing.

So breakeven initially a minimum, and then we’ll build a target margin in a two year period, and we’re very confident in the $1 estimate that we’ve given you.

Mark Keim: On the marketplace question, you’ll appreciate with special enrollment period, we’re constantly picking up members month-to-month. That’s a pretty routine phenomenon here. What will be different going forward is we’ll start to pick up people that came off the Medicaid roles. Now we’ve got good visibility in special enrollment period, month-to-month, who’s coming in from Medicaid. Who’s coming in from our Medicaid plans, who’s coming in from other Medicaid plans, those numbers are still quite de minimis. Within our special enrollment period gains. But I would expect them to pick up dramatically in the months ahead. Remember, June is still the first month that most folks came off. So July, August, September, I would expect to see the marketplace numbers start to creep up. And we’re able to track those who’s coming from Medicaid and what plans.

Joe Zubretsky: And just as a reminder, our membership forecast do not include the retention of Medicaid membership losses into our marketplace product. We didn’t have a good estimate of what that would look like. We still don’t – that would be upside to our membership projection.

Calvin Sternick: Great. Thanks.

Operator: Thank you. And our next question today comes from Scott Fidel with Stephens. Please go ahead.

Scott Fidel: Hi, thanks. Good morning. Actually just wanted to stick on the marketplace topic. And just interested in some of your early thoughts around positioning for 2024, given that if you’re going to be back at target margins here this year, I know that you’re very sensitive to managing the exposure on this business given how volatile it’s been on the margin side, but it definitely looks like there’s a pretty hardening pricing environment for individual and small group occurring – for 2024. And then if there is continued opportunity on the Catcher’s Mitt side for [indiscernible] in 2024 as well. So really just sort of thinking about where your sort of philosophy is right now on that growth versus margin question for the exchanges in 2024.

Joe Zubretsky: So Scott, our position on margin versus growth for Marketplace has not changed. We will position the business to earn mid-single-digit target margins and then allow it to grow at whatever rate can produce those margins, small, silver and stable. Now we’ve just put out a revenue estimate for next year an outlook of $38 billion or 19% growth year-over-year, which includes only a modest amount, a moderate amount of projected growth in Marketplace. So we do plan to allocate more capital to Marketplace next year, but the growth we anticipate by the prices we filed will be measured and moderate. We actually don’t need to allocate more capital to Marketplace in order to produce high-teens growth rates in the business, 19% premium growth year-over-year with only modest and moderate growth in Marketplace since Medicaid is doing so well.

Scott Fidel: Okay. Got it. And then just for the follow-up. Interested if you could maybe just walk us through what’s now factored into guidance for Medicare MLR for the back half of the year? And then just, I guess, obviously, you’re not giving 2024 guidance here, but some early thoughts on some suggestions on how we should think about Medicare MLR sort of modeling for 2024. Obviously, it’s a bit elevated this year and looking out to a pretty challenging rate environment next year and then you’ve got the Bright asset coming online as well at breakeven. So just sort of your thinking here on sort of Medicare MLR, I guess, sort of trajectory in the back half and it’s 2024. Thanks.

Joe Zubretsky: Sure. For 2024, first of all, we are – we believe we were conservative in our trend estimates that we included in our Medicare bids for 2024. Second point is, recall, only about half our business actually relies on the Medicare bidding process. The other half is the MMP business, where we get rates that are not tied to that process. When it comes to star ratings and risk adjustment and all those other features and factors, again, the fact that we’re in the half of the business is MNP is helpful to that process. And when it comes to stars, we have plenty of value-added benefits, the actuarial value of value-added benefits is significant as it is with competitors. So we believe that we can maintain margins by pulling back some of the ancillary benefits still have a very competitively priced product and a very competitively positioned product from a benefit perspective to continue to grow the business.

Mark Keim: And just to build on that, I feel good that we had a reasonable line of sight into Q2 as we put in our pricing for next year. Scott, just on your question on the rest of 2023, we’re conservative guys within our guidance is mid-to-low 88 [ph] for the rest of the year, and that’s within the guidance we’ve given.

Scott Fidel: Okay, thank you.

Operator: Thank you. And our next question today comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Sarah James: Thank you. Some of the states have filed waivers that allow you to be a little bit more hands on in communicating updated contact information. I’m wondering if you’re noticing any difference in those states with the procedural and unable to contact terminations. And then in the states that didn’t file the waivers like Florida, when [indiscernible] opened the door for more collaboration between health plans and states on that. Did that make a difference in your discussions with Florida around how to reach out correctly to eligible?

Joe Zubretsky: Well, Sarah, I don’t think we’re going to comment on any particular state, but we – our protocols that we started building a year ago on member outreach and every state was different. Some states allowed significant involvement from MCOs, some states less so. Some states allow you to actually help the member reestablish eligibility by filling out forms. Some states didn’t. Now as you know, CMS has stepped in and sort of suggested through policy statements that states should allow MCOs to be more involved in the reverification process. So I assure you that we are locked in to every single state in which we do business with the state regulatory authorities and are working hand in glove with them to make sure that everybody that should be on Medicaid is and people that shouldn’t be thrown off Medicaid aren’t.

State by state. And yes, it has had an impact on our outreach efforts and gives us really good line of sight and good visibility into the fact that if a member should be on Medicaid, we’re pretty confident between the state’s efforts and our efforts that we’ll be able to keep them in the system.

Sarah James: Great. And then just to follow up on Scott’s question around the Medicare bids. If I think about in context of the book that you’re acquiring from Bright, and your guidance of breakeven in year one, are you assuming that if there is any industry-wide utilization inflation on Medicare that, that was captured in their 2024 bid?

Joe Zubretsky: Without getting into specifics, I will answer the question this way. Our due diligence process through a clean room process allowed us visibility into their bid through an independent third party. And we are confident that the transparency that was provided in that process gives us confidence that the bid was rational, included all trend factors that should be included in a bid. And as I said, their profit improvement plan is going to be the key factor. How much of that profit improvement did they actually achieve between sign and close in terms of what we inherit is actually going to determine whether – what the bet earnings picture looks like at the point of closing.

Sarah James: Thank you.

Operator: Thank you. And our next question today comes from Michael Ha with Morgan Stanley. Please go ahead.

Michael Ha: Thank you. Just quickly, first on redetermination, Mark, I know you mentioned the state made proactive concessions and rates for redeterminations in July. Just wanted to clarify, were those rate adjustments ready embedded in your current 2023 guidance? Or does that represent upside to your guide and are you able to provide a sense on magnitude of those rate concessions?

Mark Keim: Well, a couple of things. Those couple of states that we already had rate concessions in the July 1 race. A very small part of our revenue and also done somewhat academically as the data hadn’t developed in those states quite yet. All of that is incorporated in the guidance I’ve given you. But again, such a small component. I think I mentioned five states started their new fiscal year, July 1, representing just 10% of revenue, and the states that gave those concessions were a subset within that. So not really a big deal, but in guidance.

Michael Ha: Got it. Thank you. And just to dive deeper into MA MLR, curious, what specific type of outpatient utilization driving the pressure this quarter? Was it pent-up demand, hips, knees, could you walk us through the progression of the utilization year-to-date? Like how much of it might have been 1Q versus 2Q? And on the – I think there’s about $27 million of unfavorable PPD in the quarter. Curious if you could help us break it out between MA commercial Medicaid. Thank you.

Joe Zubretsky: I’ll keep the PPD question to Mark, but on the Medicare MLR, it was outpatient, mostly ambulatory surgeries. Our population really doesn’t have a lot of the hips, knees and joints that you’d see in a more standard Medicare advance population. But we’re also seeing PCP visits and the typical routine preventive screenings come back. I won’t call it pent-up demand, but returning to normal, the types of services that Medicare patients and members normally get. Ambulatory surgeries, PCP visits, preventive screenings and care, a little bit of drug usage, but not a lot. And keep in mind, we’re only operating – I need to – I’m not rationalized again, 120 basis points above the top end of our range. The Medicare book is well positioned to earn a 4.5% pretax margin this year. So we’re in good shape there. Mark, do you want to talk about the PPD?

Mark Keim: Yep. Michael, what’s your question about the prior year development?

Michael Ha: Yes.

Mark Keim: Yes. So…

Michael Ha: About $27 million.

Mark Keim: You got it exactly right. So in general, overall development was favorable. We take great confidence in quarter-after-quarter, our development is favorable. The prior year portion, as you point out, negative by a small amount. Typically, we would expect that to develop positively. But whenever there’s a particular provider contracts settlement or something going on, it can create some noise. But in particular, what happened to this quarter was there’s something some of you may be familiar with California SB 510, which was a specific court ruling that held health plans liable for certain COVID expenses. We’ve recognized that charge as did some of our other competitors this quarter, and that created a little bit of the noise you’re seeing.

Michael Ha: Got it. Thank you.

Operator: Thank you. And our next question today comes from Steven Valiquette with Barclays. Please go ahead.

Steven Valiquette: Great. Thanks. Good morning. So I guess, given your comments earlier on the call to address all the investor debate as to whether or not the Medicaid MLR could be adversely impacted by just lower utilization members coming off the rolls during redeterminations and thus risk of higher Medicaid MLR on the remaining Medicaid members. Really just the conclusion around all that is what is your level of concern around this higher Medicaid MLR risk at this point, if any? Can be now put this to bed from your perspective. And also, if you could remind us, is there any preliminary buy as you can point to for your 2024 Medicaid MLR to be either better, in line or worse versus what you guided for Medicaid MLR for 2023? Thanks.

Joe Zubretsky: Well, Steven, since we haven’t changed our outlook for the redetermination process, 800,000 members up, 400,000 down, $1.6 billion in premium, one third this year, two thirds next and an 88.5% Medicaid MCR for the year. Since we haven’t changed all our acuity determination and we’re holding firm on our Medicaid outlook – Medicaid MLR outlook for the year – that’s all been contemplated. So we’re in good shape there. We see nothing that causes us to change that point of view. The fact that the MCRs of levers is slightly more favorable than the portfolio average is not a surprise, and it’s maybe not as dramatic as one might think. The other point to make and bear in mind, and we don’t disclose year-by-year how much of this we have.

But most of our states have some form of either minimum MLR or some type of corridor program that we are well into because we operate very efficiently, we historically have paid into these mechanisms. Any intra-year impact from on medical margin, whether it’s trend or whether it’s yield, would be first absorbed by the significant liabilities we have already recorded for these conventions. That gives us great confidence that the 88.5% is a very good estimate for the year, all contemplated within the $20.75 guide for the year. Mark, do you want to talk about maybe some of the bridging items in the next year?

Mark Keim: Yes, into next year, specifically around Medicaid MLRs – it will be partly a function of these pricings and rate cycles that we’re having, most of which are in front of us. 50% of our revenue comes up for our January 1 fiscal year. That – those pricing discussions, obviously, actuarial policies require that states recognize anything that goes on with redetermination. And then finally, as Joe mentioned, even into next year, those continuing corridors and minimum MLRs continue to give us great comfort on our projected margins. So not looking at a lot of volatility into next year.

Steven Valiquette: Okay. Thanks.

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

Kevin Fischbeck: Great, thanks. I want to go back to a question a couple of times, I’m not sure if you answered it. Is there a way to quantify how much the states who have built in something for rates are putting in? Is it something like 20 basis points? Is it 200 basis points? Like how should we think about how the states are thinking about the types of rates that need to be adjusted to reflect redeterminations.

Mark Keim: Yes. Thanks for the question, Kevin. I’m hesitant to give specific numbers because it differs state to state. But the real reason I’m hesitant to give the numbers is two things. One, for the most part, they were done academically, not on data they were done prospectively academically, so means they were guessing no better than all the rest of us were three months ago. So academic prospective. But the bigger point is you might get a specific concession for redetermination. But in the presence of seven or eight adjustments up and down for other reasons, it gets lost co-mingled into the grand scheme of things. We have to come back to the overall concept of actuarial soundness. And if those rates develop in a place that just aren’t appropriate, we’ll be back with our states to make sure that they are.

Kevin Fischbeck: Okay. That makes sense. And then I guess maybe just on trend, generally speaking, – it seems like a lot of companies are talking about MA trend being higher, but not seeing it in commercial or Medicaid. Is there a reason why you look at this and say, that makes sense why it’s not broader, like MA has been below trend, but I guess Medicaid has kind of been below trend, too. So why do you think that we’re seeing an above-average return on Medicare Advantage, but not within Medicaid?

Joe Zubretsky: It’s really hard to say. First of all, our Medicare book, the profile of it is vastly different than many of the other books of business. This is not mainstream MAPD. This is high acuity, D-SNP and the demonstrations, which are the fully integrated Medicare and Medicaid product. So the population is vastly different. Look, our trends in the quarter were very simple to understand, 3% in Medicaid, 6% in Medicare, 7.5% in Marketplace. All well within expectations. And I would just say that the mix of the book of business and the profile of the book of business better said, is probably reasons for some of the differential as competitors report their results.

Kevin Fischbeck: I guess when you think about it within your own book of business, if Medicaid is come in well during COVID and Medicare came in well during COVID and now Medicare snapping back of Medicaid is not is there a reason why by case, not snapping back?

Joe Zubretsky: I don’t think there’s any discernible answer to that. The 81% of our book of business is Medicaid. The trend is behaving exactly within our expectations. And why one is behaving slightly hotter or more warm than the other, it’s hard to tell.

Kevin Fischbeck: Okay. All right. Thank you.

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

Nathan Rich: Great. Good morning, and thank you for the question. Just as it relates to the exchange opportunity from members that go through the redetermination process. It sounds like you haven’t seen much, if anything, on that front yet. But I guess in the outreach you’re doing with members, – have you had any kind of early success with potentially directing those members to a Marketplace plan who might not be eligible for Medicaid.

Joe Zubretsky: Well, the process – again, it’s early. The process is in full gear. We have robust distribution channels internally, call center employees or licensed agents who know how to do this, and the warm transfer process is enacted and in process. All we’re saying is because it’s so early, we have not seen a huge uptick in the number of marketplace members we’re getting out of Medicaid. We track what we obtain in marketplace out of our own Medicaid plans, but we also track what we get in the marketplace from other Medicaid plans. And because it’s drilling the process, all we’re saying is that monthly figure has not increased dramatically, but we expect it will as this process gets more traction.

Mark Keim: I think that’s right to build on that. Remember, two-thirds of these folks that are coming off are procedural, which means they don’t even know that they’re losing coverage. When they do, they’ll either come back on to Medicaid or what a great chance to get them on the Marketplace.

Nathan Rich: Great. And then some state Medicaid programs, I think, are looking at covering the GLP-1 drugs for obesity. I guess, have you had any conversations with states with respect to that? And what factors they might be considering and how that could be worked into state programs just as we think about what potential impact could be?

Joe Zubretsky: Yes. Right now, I think the way to look at it is Medicare doesn’t pay for off-label uses. And when it comes to the individual states, some do allow it for weight control and many don’t. But as they contemplate it, it’s a rate discussion. My view is there’s no medical cost that is inappropriate. If there’s a medical cost or a benefit that’s included in the program as long as it’s rated for that’s fine. So the trend in these prescriptions is well known and well documented. Some states already included in their formularies, others don’t. And when that conversation comes up, then it’s a conversation between actuaries in terms of the pharmacy component of the rate and whether it covers the $12,000 a year that it’s going to cost to dispense one of these prescriptions.

Nathan Rich: Thank you.

Operator: And ladies and gentlemen, our final question today comes from George Hill at Deutsche Bank. Please go ahead.

George Hill: Hey good morning guys and thanks for sneaking me in. I know it’s a small part of the business. But I guess is there a way to big picture think about like the magnitude of the change in the value of the benefit in MA for 2024 as you guys try to balance the kind of the challenging rate environment with the changes to the risk model with kind of the need to preserve the margin profile of the business or preserve the margin profile of the business. Everybody kind of talks about the kind of the like the drawing down on benefit bout just trying to get a sense of magnitude, if there’s a way to quantify that or kind of talk about it directionally.

Joe Zubretsky: George, we couldn’t hear the first part of your question. Are you talking about Medicare Advantage?

George Hill: Yes, I was. And just like with the challenging rate environment, everybody is talking about kind of like the raining and it benefits a little bit. I don’t know if there’s a way to quantify that a little bit or kind of speak to it directionally kind of the magnitude of the change of benefit.

Joe Zubretsky: Yes. No, I understand. We’re not going to begin to publish sort of the percentage of actuarial value of the product that’s represented by ancillary benefits. But it’s significant. Our products are very competitive. With all the types of benefits, vision, dental, those cash card benefits, travel benefits, gym memberships, all those things are included in the product. And our competitive intelligence and analysis suggests that we can have a zero premium product with competitive benefits if and when our star ratings aren’t necessarily benchmarked with the rest of the market. We’re not going to size that, but we’re pretty confident that we can pull in benefits marginally, still have a very, very robust product in respect to ancillary benefits and still be competitive.

Mark Keim: The only other thing I’d add, George, is when we think about benefit design, there are a number of items which for a competitive shopper are must-have. And there’s a bunch of other things, which are part of the benefit load that are nice to have but don’t necessarily influence the buying decision. You can imagine how we’re thinking about changing benefit design. But we and our decisions probably won’t be much different than the broader markets. So I’m expecting a pretty even competitive dynamic next year.

George Hill: That’s great color. Thanks guys.

Joe Zubretsky: And with no other calls, that concludes our call today. Thank you, everyone.