Molina Healthcare, Inc. (NYSE:MOH) Q3 2023 Earnings Call Transcript

Molina Healthcare, Inc. (NYSE:MOH) Q3 2023 Earnings Call Transcript October 26, 2023

Operator: Good morning, and welcome to the Molina Healthcare Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President of Investor Relations. Please go ahead.

Joe Krocheski: Good morning, and welcome to Molina Healthcare’s third 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 third quarter earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks made are as of today, Thursday, October 26, 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 third quarter 2023 earnings release. During the 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 2024 outlook, 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 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 Zubretsky. Joe?

Joe Zubretsky: Thank you, Joe, and good morning. Today, I will provide updates on several topics. Our financial results for the third quarter 2023, our full year 2023 guidance, Medicaid redeterminations, our growth initiatives and our strategy for sustaining profitable growth and our 2024 premium outlook. Let me start with our third quarter performance. Last night, we reported adjusted earnings per diluted share for the third quarter of $5.05 or 16% year-over-year growth on $8.2 billion of premium revenue. Our results reflect the continued execution of our strategy for sustaining profitable growth. Our third quarter 88.7% consolidated MCR and 4.6% adjusted pretax margin demonstrate continued strong medical and operating cost management.

Our year-to-date consolidated MCR of 87.8% is squarely in line with our long-term target range and our 5.1% pretax margin is above the high end of the range. We note that investment income continues to bolster our year-over-year earnings growth and already a strong margin profile. Our Medicaid business performed as we expected. Our 88.8% MCR was within our long-term target range. Medical cost trend including the net effect of redetermination acuity shifts in corridors in several states was within our expectations. Medicare’s results came in below our expectations with a reported MCR of 92.4%. In the quarter, we continue to experience higher utilization of outpatient, professional and in-home services, all of which we believe we appropriately addressed in our 2024 bids.

And finally, marketplace with a reported MCR of 78.9% continues to perform well. Medical cost trends are in line with our pricing assumptions, and our improved risk adjustment performance is meaningful. Our small silver stable strategy is working. In summary, our third quarter results build on our strong first half performance. Turning now to our 2023 guidance. Based on our third quarter results, we are affirming our full year 2023 adjusted earnings per share guidance of 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 fourth quarter outlook takes full account of our year-to-date performance and considerations for seasonality and conservatism. Now a few words about Medicaid redeterminations.

As of July, all our Medicaid states have begun disenrolling members. Despite the redetermination activity, our third quarter Medicaid membership was nearly unchanged from the second quarter. Growth driven by the initiation of the Iowa contract and the closing of the My Choice Wisconsin acquisition offset the $200,000 member decrease from the net impact of redeterminations and new enrollment. While many uncertainties remain on the ultimate impact of redetermination, we now believe it prudent to lower our retention assumption from 50% to 40%. Mark will address implications for revenue and our unchanged outlook for $38 billion in premium revenue for next year in his remarks. Although, the medical cost profile of members who have left the Medicaid roles continues to be more favorable than the portfolio average.

When combined with the impact of corridor offsets in several states, our overall Medicaid MCR was within our expectations. Mark will provide more color on redeterminations during his remarks. Turning now to an update on our growth initiatives and our strategy for sustaining profitable growth, beginning with our recent state wins. The implementation of our new California contract, which will nearly double the size of our current membership in the state and add approximately $2 billion in annual premium is proceeding as planned for a January 1, 2024 start date. In July, we finalized our contract for the Texas STAR+ program, retaining our entire existing footprint. With numerous new entrants likely attracting low share, we expect our share of membership in the state to grow, driving incremental annual premium revenue of approximately $400 million.

Also in July, we successfully launched our Iowa health plan serving approximately 180,000 members, consistent with our expectations. Our Nebraska implementation is tracking to a successful launch on January 1, 2024, and will contribute estimated annual premium of $600 million. In August, we announced that we will once again be serving Medicaid beneficiaries in the state of New Mexico. We expect the new contract to begin mid-2024 and produce approximately $500 million in annual premium revenue. In Indiana, the state deemed us not to have met the readiness requirements for a Medicaid contract due to our Medicare DSNP product becoming available in the state on January 1, 2025, and not by January 1, 2024, as required. We are proud to have won the initial award as testimony to our proposal skills, but disappointed we did not meet that one readiness requirement.

Our growth agenda is in full gear. Even with the development in Indiana and changing assumptions for redetermination retention, all of these new contract wins and reprocurements combined keep us on track to approximately $38 billion of premium revenue in 2024, as previously forecasted. Shifting to our M&A activity. In early September, we announced the closing of the My Choice Wisconsin acquisition. Recall, this transaction adds approximately 40,000 mostly MLTSS members and approximately $1 billion in annual premium revenue. The regulatory approval process for the Bright Medicare acquisition is proceeding as planned. We continue to work with Bright management on satisfying the remaining closing conditions and continue to expect to close by the first quarter of 2024.

Now looking ahead to 2024. Assuming a timely close of the Bright Medicare acquisition, we remain confident that all of the known building blocks provide line of sight to approximately $38 billion of premium revenue in 2024, which represents 19% year-over-year growth, even before executing on additional strategic initiatives. While there are many positive earnings catalysts going into next year, which Mark will speak to in a moment. There are also some factors, which has not yet fully developed. As is customary, we will provide our specific earnings guidance with you in February. Recall that at our Investor Day earlier this year, we announced our long-term financial targets, the centerpiece of which is a long-term earnings per share compound annual growth rate of 15% to 18%.

With the visibility we have into our earnings trajectory, we are comfortable in reaffirming our commitment to that compound annual growth rate target over the next three years. As always, I would like to thank our management team who worked tirelessly every day to deliver these results. Our team has evolved to keep pace with our growth and to execute each stage of our strategy. Recall that most recently, we promoted both Jim Woys and Mark Keim to the position of Senior Executive Vice President with Jim adding the title of Chief Operating Officer. In further shaping our lineup under Jim and Mark, two Molina veterans, Executive Vice President, Deb Bacon; and Dave Reynolds will now lead our flagship Medicaid business. We are also adding additional management talent in our Medicare and Marketplace businesses and scaling up our integration platform, all to support our substantial growth.

Marc Russo will be leaving the company with our thanks for his service. Not only our executive team, but all of our colleagues throughout the enterprise and across the nation are vital to our success. I want to extend my special thanks to our nearly 18,000 associates who are dedicated to deliver access to high quality healthcare to our members. It is my privilege to serve with such a committed and capable group of professionals. In summary, we are very pleased with our performance this quarter. We have maintained our attractive margin profile during this unprecedented industry-wide redetermination process, while continuing to generate double digit growth. 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’ll discuss some additional details of our third quarter performance, the balance sheet and our 2023 guidance and embedded earnings. I’ll also provide an update on redeterminations, our 2024 premium revenue outlook and some early thoughts on the drivers of 2024 earnings. Beginning with our third quarter results. For the quarter, we reported adjusted earnings per share of $5.05 and a consolidated MCR of 88.7%. In Medicaid, our reported MCR was 88.8%. The MCR included a moderate impact from the net effect of redetermination acuity shifts and corridors in several states. Our third quarter MCR was also slightly elevated from a provisional retroactive rate adjustment in New York State.

Across our Medicaid segment, the major medical cost categories were largely in line with our expectation and normal quarter-to-quarter trend fluctuations. In Medicare, our reported MCR was 92.4%, above our long-term target range. During the quarter, we saw a continuation of increased utilization of outpatient professional and in-home services. Recall, we observed these trends emerging in the first and second quarters in time to inform our 2024 bids and benefit design. We are confident our 2024 bids will produce target margins next year. In Marketplace, our reported MCR was 78.9%. This strong result reflects our pricing strategy to return this business to target margins. Our enhanced focus on silver and renewal members helps us to drive strong performance and risk adjustment.

Based on our year-to-date performance, we are well positioned to exceed our mid-single-digit target margins for the year. Also in Marketplace, we recorded a non-recurring charge in the quarter on our Texas Marketplace risk adjustment receivable from 2022 due to the financial difficulties of one major program participant in that state. While we have made our best estimate of the shortfall in collections, we will continue to pursue regulatory paths to collecting the full receivable due to us. Given it’s unusual and one-time nature, we have excluded it from our adjusted earnings. Our adjusted G&A ratio for the quarter was 7.1 consistent with our expectations. This result includes new business implementation spending for new contract wins in Iowa, as well as several new contracts beginning in 2024.

Turning now to our balance sheet. Our capital foundation remains strong. We harvested approximately $175 million of subsidiary dividends in the quarter and used a similar amount for our Wisconsin acquisition leaving our parent company cash balance unchanged quarter-over-quarter at approximately $0.5 billion. Debt at the end of the quarter was unchanged at just 1.6x trailing 12 month EBITDA with our debt-to-cap ratio at 38.3%. Net of parent company cash, these ratios fall to 1.3x and 33.2% 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 51, elevated from normal levels due to the inclusion of My Choice Wisconsin and our new Iowa plan. Adjusted for this temporary impact, our reported DCP would have been consistent with Q1 and Q2 levels. Now some additional color on our 2023 guidance and embedded earnings. We’re affirming our full year 2023 adjusted earnings per share guidance of at least $20.75. Our full year guidance now effectively the remaining fourth quarter reflects our third quarter results, which were largely consistent with our expectations and includes considerations for seasonality and conservatism. New store embedded earnings remains unchanged at $5.50 per share, comprised of $4 for our recent new contract wins and $1.50 for acquisitions.

The $4 per share for our new contract wins now includes approximately $0.50 for the combination of Texas STAR+PLUS and New Mexico replacing the same amount previously expected from the Indiana contract. The $1.50 per share of acquisition earnings includes achieving full run rate accretion from AgeWell, My Choice and Bright Health’s Medicare business. Turning to redeterminations. As we discussed on prior calls, we have built robust tracking and monitoring systems to maximize retention of members who meet the eligibility criteria and to also promptly understand any financial impacts of redeterminations. Across our states approximately one-third of our members reviewed have been termed, of which over 70% have been procedural disenrollment rather than due to verification of actual ineligibility.

As a result, we are seeing nearly 30% of those termed being reconnected, and we expect these numbers to grow. In the quarter, we estimate that we lost approximately 200,000 members due to the net impact of redeterminations bringing the year-to-date figure to approximately 300,000. Given the high number of procedural terminations and increasing state and CMS interventions, we expect reconnects will likely continue decreasing currently reported membership losses. As we interact with members who lose eligibility, we seek to warm transfer them to our Marketplace team for potential enrollment in that product. Throughout the process, we are seeing an increasing rate of former Medicaid members, both ours and our competitors enroll in our Marketplace products.

Turning to our observations on the margin impact of redeterminations. We see that terminated members have lower medical costs than the portfolio average. However, combined with the impact of corridors in several states, the net effects from acuity shifts remains well within our expectations and our overall MCR outlook for the year. Of course, as trends have emerged, we are working with our state partners to ensure rates reflect the impact of redeterminations either prospectively in the normal fiscal year rate cycle, off cycle or retrospectively if necessary. In our states through the end of September 10 of 12 with draft or final rates have included an acuity adjustment with several considering retroactive or mid-cycle adjustments. Lastly, some additional color on 2024 starting with our premium revenue outlook.

As Joe mentioned, we have line of sight to the building blocks that are expected to deliver approximately $38 billion in premium revenue for 2024 or approximately 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 approximately $4 billion from our recent state contract wins with the expected premium from our Texas STAR+PLUS and New Mexico contracts, largely replacing the approximately $500 million that we had previously projected from Indiana next year. This we add approximately $2.4 billion of acquisition related premium consisting of [Audio Dip] of My Choice Wisconsin and the Bright California Medicare acquisition. Partially offsetting these growth drivers is $1.6 billion for the impact of redeterminations and known pharmacy carve-outs.

We have revised our original 50% retention assumption to 40% reflecting the earlier redetermination activity we have seen and a generally conservative approach to forecasting. While this changing assumption will lower 2024 premium revenue by $300 million, we expect that gains in marketplace through increasing cross-sell and SEP and an expected strong OEP will effectively offset this result. We maintain our $38 billion in premium revenue outlook for 2024. Finally, some early thoughts on the drivers of 2024 earnings. We note the following elements that will positively influence our 2024 earnings trajectory. We have a solid 2023 earnings baseline off of which to grow. Our new store embedded earnings remain unchanged at $5.50 and continue to provide meaningful visibility into our future earnings growth potential.

Investment income will likely continue to be strong. We believe our Medicare performance will improve as a result of our 2024 bids. And the impact of new business implementation costs of $0.75 a share this year go away as we begin recording premium revenue on our new business wins. However, there are some remaining variables as we close 2023 and move into 2024. First, our 2024 outlook will be better informed with another quarter of redetermination activity observed. Second, rates impacting 60% of our 2024 Medicaid premium revenue are still unknown, but we are confident that the principle of actuarial soundness will prevail, including appropriate acuity adjustments for redeterminations. We do note that rates have been finalized to date have generally been satisfactory.

Finally, the first year earnings contribution from the Bright acquisition is still under review. In summary, we are very pleased with our third 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.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Josh Raskin from Nephron Research. Please go ahead.

Josh Raskin: Thanks. Good morning. I want to pick up on that last thread around the exchange growth from the redeterminations and what you’re seeing early. I’m curious in terms of trends and members coming in. And then is it fair to assume that that would be better risk? They’re coming into your product and they’ve probably been previously insured, right, coming out of Medicaid? And then I’m just curious if this early experience, I understand a little less retention, does that change your view of the exchanges in 2024? I think last quarter you said that they would be relatively low growth in terms of premiums for 2024.

Joe Zubretsky: Josh, when it comes to the exchange business in the special enrollment period, we are seeing an increase in special enrollment, monthly special enrollment. It was averaging 8,000 to 9,000 a month until the redetermination process happened, and it’s increased to 12,000 a month and growing. So we are getting membership flow into the Marketplace from Medicaid redeterminations, not only from our book of business, but from competitors’ book of business. We do have a product and every place we have a Medicaid footprint. But in many cases that product isn’t as competitive – competitively priced as competitors. So where we’re competitively priced we’re getting Medicaid membership from other competitors, and we’re getting Medicaid – Marketplace membership from our own book of business.

So we’re pretty pleased that we did not forecast Marketplace membership growth. We continued it upside to our membership case and we’re seeing a nice result there. Mark, anything to add?

Mark Keim: Sure. Josh, I added about 40,000 members through SEP in the quarter compared to the 200,000 net we lost in Medicaid. So if you put some conversion rate on how many of the 40,000 came from our Medicaid book or someone else’s Medicaid book, that conversion rate is pretty good. Call it, 15% or 20%. On the rate that they’re coming in at, it looks like they’re coming in pretty much at our portfolio run rate within Marketplace. We’re not seeing pent-up demand or anything like that. So we’re liking the pickup and the implications for future volume and those margins, so far are looking pretty good to us.

Joe Zubretsky: The second part of your question, Josh, you asked about the retention percentage. We just followed the data and with 300,000 membership losses to date, the first thing we say is it’s ill-advised to extrapolate any current result. Many of our states front loaded the process and by front loading we mean they specifically targeted members more likely to lose eligibility. And the fact that 70% of the terminations were procedural means that the reconnect rate has been high averaging 25% and now moving to 30% of those members who have lost eligibility. So we just followed the data and we originally said we would lose 400,000 of the 800,000 members we gained during the pandemic, and now that number has increased to 480,000. And I suppose that would mean that it is likely that whatever we’re seeing in terms of Marketplace pickup would likely increase as well.

Josh Raskin: Perfect. Thanks.

Operator: The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Kevin Fischbeck: Great. Thanks. I guess two questions. One, within the Medicaid business as you talked about how MLR is coming in line with expectations seems like every time we do that, you also mentioned that net of risk corridors and things like that. Is there any way to quantify what the pressure would’ve been without the offset of risk corridors? And then as far as the MA commentary, it sounds like you’re saying Q3 came in worse, but you still caught it in time for your bid. So I’m trying to figure out how MLR in Q3 could be higher than expectations, but not be a problem for 2024 if you submitted bids in June? Thanks.

Joe Zubretsky: On the Medicaid MLR, I’ll kick it to Mark here for more color. But as we’ve always said and we made a big point of this at Investor Day. On the pre-COVID minimum MLRs and corridors that set sort of an industry benchmark of medical margin performance. We have routinely outperformed those benchmarks, which gives rise to a payback to the state in the form of a liability in many of our states. And some of those corridors we’re deep into them, meaning that we’re in the 100% tier. So with that having been said, if performance deteriorates during the year for any reason, whether it’s an acuity shift for redetermination, whether it’s a trend inflection, whether it’s flu or COVID for whatever reason that liability acts as sort of the first financial cushion to absorb it before rates pick up, meaning the acuity adjustments, trend assumptions, always being baked into rates, fulfilling the concept of actuarial soundness.

And we’ve said that from the beginning of this process that this is developing exactly as planned. We knew there’d be an acuity shift, manageable and modest as it is, and would put pressure on the underlying MCR. Our corridor liabilities would act as the first point of financial cushion until the rate process takes full credit of the acuity shift and trend. And that’s exactly what’s happening today.

Mark Keim: Right. And just to put a little color around that. If in normal times you’re booking corridor expense and underlying trend increases quarter-to-quarter in our situation, I’ll just book less corridor expense. But it is important to note, I still booked meaningful corridor expense in the third quarter. So it’s not like the corridors have completely been offset. We’re still booking corridor expense and we still have a significant ultimate on those liabilities. Now, as Joe mentioned that corridor works well in the current fiscal year and that it’s about the new rate cycle. But remember, we tend to be best-in-class margins, which means that new rate cycle always works for us and replenishes our corridor position and keeps us in the mode we’re currently running.

Joe Zubretsky: Kevin, the second part of your question was on the Medicare MCR, which admittedly ran hot in the quarter at 92.4% and was running in the high 80s earlier in the year. We’re still on target to produce 2.5% to 3% pre-tax margins in that business. It should be twice that, our target is 5% to 6% pre-tax. And yes, we saw some trend inflections in the third quarter that were higher than we observed in the first part of the year. But we’re conservative pricers. We caught some of these trends early in the year, whether outpatient, professional services, screenings and PCP visits are back both on the medical side and on the behavioral side. And LTSS hours, the hours assigned to the frail members who are getting in-home services increased slightly in the quarter.

All in, we believe we captured a conservative view of medical cost trend, which right now is running at 7% year-over-year higher than we had expected, but we believe we’ve captured that in our 2024 bids and fully expect our Medicare business to be back to 5% to 6% pre-tax margins in 2024.

Kevin Fischbeck: Great. Thanks.

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

Nathan Rich: Great. Good morning. Thanks for the questions and thanks for the detail on the earnings drivers for next year. Joe, I think you kind of framed the 15% to 18% EPS growth is the average over the next three years. I guess, could you maybe just go into a little bit more detail on sort of the biggest unknowns from your point of view on that could impact growth next year relative to that that 15% to 18% range? And then just a quick clarification, on the retroactive rate adjustment in New York is it possible to quantify what impact that had in the quarter? And do you see a potential for an adjustment to this going forward potentially to be more favorable? Thank you.