Q3 2019 Earnings Call
Good morning, and welcome to Molina Healthcare's third quarter.
2019 earnings conference call.
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I would now like to turn the conference over to Julie Trudell Senior Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining Molina Healthcare's third quarter 2019 earnings call.
With me today are Molina, President and CEO , Joe Zubretsky, and our CFO Tom Tran.
The press release announcing our third quarter earnings was distributed yesterday after the market close and the releases now post super viewing on our Investor Relations website.
A replay of this call will be available shortly after the conclusion of the call through November step.
The numbers to access the three player in the earnings release.
But those who lives in the <unk> rebroadcast of this presentation. We remind you that the remarks made herein are as of today Wednesday October Thirtyth 2019, and we have had not been updated subsequent to the initial earnings call.
In this call we will refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter press release.
During our call, we'll be making forward looking statements, including statements about our growth prospects are 2019 guidance and our long term outlook.
And those are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that can cause our actual results could differ materially from our current expectation.
We advise listeners to view our risk factor discussed in our Form 10-K annual report for 2018 filed with the FTC as well as the risk factors listed in our other reports and filings with the FTC.
After the completed prepared remarks today, we will open up the call to take your question.
I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky Joe.
Thank you Julie and thank you all for joining us this morning.
Late yesterday afternoon. After we issued our press release for the quarter, we learned the outcome of the Texas start plus RFP Award.
Before we discuss our quarterly results. We will first provide you with the information we have at this time.
We were awarded contracts in two regions.
Our existing Hidalgo region.
And one new region the northeast region.
Given the real time nature of this information a full analysis of the membership and revenue impact.
That is likely to occur in late 2020.
Is currently underway and will be completed shortly.
We are naturally very disappointed in this initial outcome and are currently seeking more information from age H S. C with respect to be awards.
We will then decide on the course of action and exploring all of our options relating to the decision.
Now, let's turn the discussion.
To our third quarter results.
Last night, we reported reported earnings per diluted share for the third quarter of $2.75.
We reported pre tax earnings of $233 million.
Yeah, the after tax earnings of $175 million.
Resulting in pretax and the after tax margins of 5.5% and 4.1% respectively.
Based on our third quarter and year to date performance, we're raising our full year earnings per diluted share guidance to a new range of $11.30 to $11.55 for the full year.
I will now provide some detail on our performance through the first nine months of the year.
Premium revenue was $12.1 billion and inline with expectations.
As our membership remains relatively stable.
Our rates remain sound.
And our retention about risk premium continues to improve.
Our medical care ratio was 85.7%.
Despite some cost pressures in select markets. This MCR level demonstrates our continued ability to manage medical costs effectively.
Improve our claim payment practices.
And execute other profit improvement initiatives.
The Gionee ratio was 7.6%.
Also in line with expectations.
As we efficiently managed our resources to provide excellent service to our members and providers.
We continued to harvest dividends from our operating subsidiaries.
Resulting in nearly $800 million of excess capital at the parent company.
After paying down debt.
We have a very strong balance sheet in a simplified inefficient capital structure.
We have attained a fairly attractive earnings profile.
Our medical care ratio for the first nine months of your remains on track at 85.7%.
As the portfolio performed slightly better than expected.
Total company after tax margins, a 4.5% are supported by 3% and Medicaid.
7% in Medicare and 12% in marketplace.
We have produced average quarterly earnings per share of over $2, a 90 cents.
With minor seasonal fluctuations.
We have approximately $800 million, a free cash, which when combined with undrawn debt creates a 1.7 billion dollar investment capacity.
And for the full year, we are on track to report EBITDA of approximately $1.2 billion.
For a 7% EBITDA margin.
I would like to provide some comments with respect to R.
2020 outlook.
At our Investor day, we forecasted in organic premium revenue growth rate of 7% to 9% for 2020.
Which now May change with the news on Texas.
However.
Many of the elements related to that growth rate are still intact.
Medicaid growth in 2020 will reflect the annualized impact that the RFP awards that we implemented this year.
Along with some expected Medicaid expansion.
In Medicare, we expect growth in our decent product from the expansion of our existing footprint.
And entry into two new states.
South Carolina.
Hi.
In marketplace. Our analysis suggests that both our rates and broker compensation structure are highly competitive.
Taken together these factors give us confidence in our ability to grow membership.
[noise] inorganic growth prospects will continue to be an important dimension of our long term growth strategy because of the positive operating leverage resulting from membership growth.
And the synergies derived from our proven turnaround skills.
Two weeks ago, we announced that we signed a definitive agreement to acquire door care health plan.
Non for profit plant in upstate New York.
Youre care services 46000, Medicaid members in seven counties in Western New York contiguous to our Syracuse based upstate plant.
This transaction, which we expect to close in early 2020 is indicative of the type of bolt on tuck in acquisitions that we discussed at Investor day.
Turning now to our updated full year 2019 earnings guidance.
Our year to date performance gives us confidence and raising full year earnings per share guidance to a range of $11.30 to $11.55.
This earnings per share guidance implies an after tax margin of 4.3% to 4.4%.
Supported by after tax margins of approximately 3% for Medicaid, 7% for Medicare and 11%.
For marketplace.
Before turning the call over to Tom.
We'd like to say another worried about the Texas news.
If in fact this development does create a future revenue shortfall.
Bear in mind that this team has demonstrated the ability to overcome many challenges.
The team has grown margins to industry, leading levels, even in the face of a significant revenue decline in 2019.
We are committed to meeting the challenge again, and we'll continue to pursue the revenue opportunities that lie ahead.
Now I will turn the call over to Tom Tran for more detail on the financials.
Tom.
Thank you Joe and good morning.
We report third quarter's earnings per diluted share up $2.75 supported by net income up $175 million and an after tax margin of 4.1% with premium revenue of $4.1 billion.
Let me provide some additional detail on the quarter.
My commentary will be focused on a sequential comparison.
The consolidated M.C. offer a third quarter up 2019 was 86.3% compared to 85.6% in the second quarter of 2019, primarily due to the seasonality of the marketplace MCR.
Prior period reserve development in a quarter was negligible.
The gionee ratio for our third quarter up 2019 improved by 20 basis 0.27, 0.6% compared to 7.8% in a second quarter of 2000 a 19.
The improvement in our DNA ratio was mainly due to the sequential increase in revenue.
Interest expense was flat at $22 million compared to the second quarter up 29.
Let me provide some additional commentary on outperformance in a third quarter by line of business.
In a Medicaid business.
Ill MCR for the quarter were sequentially flat at approximately 88% producing an after tax margin of 3.4%.
These results were in line, but I'll expectations.
We continue to produce our targeted margins in Medicaid.
While experiencing isolated medical cost pressures in certain markets, primarily due to acuity mix shift benefit carbons and some large claim activity.
We fully expect that these cost pressures will continue to be manish and will ultimately end up in our premium rice.
Our Medicare business, comprising opt out this net and MMP products.
For the quarter continue to perform well and was in line what I'll expectation.
The MCR for the quarter up 85.6, Bustan was fairly stable compared to 85.2% in a second quarter appointing 19, producing an after tax margin of 6.4%.
More specific more specifically on Medicare.
We continue to demonstrate excellence in managing high acuity members.
Providing access to high quality healthcare at our recent reasonable cost.
This been close our market, leading management up long term service and support benefits, which are embedded in our MMP product.
We continue to see the result about quality and what's the adjustment efforts as our Medicare risk scores are becoming more commenced the rate would acuity of this population and wish that just been revenue has increased.
And now attractive Medicare margin profile allow us to reinvest in additional benefits, which should help us maintain our product competitiveness as we position this business the growth in 2020 and beyond.
Finally, a marketplace business continues to perform well and is generally in line, but I'll seasonal expectation as we reported an MCR for the quarter of 71.2% compared to six to 7.2 person in the second quarter of 2019.
As a reminder, the margin profile of the marketplace business allow us to eased up on raised five 420, 20 inquiries value added benefits and offer more competitive commissions. So we can growth membership next year at a lower more sustainable but still attract.
That margin.
Turning to our balance sheet cash flow and cash position for the quarter.
Our reserve approach is consistent with prior quarters and I'll reserve position remains strong.
Days in claims payable represent 50 days up medical cost expense compared to 40 day eight days in a second quarter of 2019, and 53 days in a third quarter of 2018.
The sequential increase in days in claims payable is primarily due to seasonal factors.
As of September Thirtyth 2019.
Ill health plans have total statutory capital and surplus of approximately $1.8 billion, which equates to approximately 335% of risk based capital.
We do see outstanding balance of the convertible notes by $55 million during the quarter and $240 million since the beginning of the year and only 12 million up the convertible notes remain outstanding and will be redeemed in early 2020.
Capital deployment actions have result in lower interest expense again, I'll repayment of the convertible notes and a lower share count on a fully diluted basis in a quarter, which decreased by 6% to 63.6 million share when compared to the same period.
In 2018.
Operating cash flow for the nine months ended September Thirtyth 2019 amount to $398 million and he is higher year over year, primarily due to timing of government payments.
Shifting to outlook, we raised our full year 2019 earnings guidance to a range of off $11.30 to $11 from 55 cents per share from a range of $11 in 20 cents to 11050 cents.
This implies a fourth quarter range of Twod awesome 50 cents to $2.75.
This concludes our prepared remarks.
Operator, we're now ready to take questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble a roster.
The first question comes from Scott Fidel of Stephens. Please go ahead.
Hi, Thanks, and good morning.
First question, just if you can maybe expand a little bit.
The commentary on seeing some cost pressures in certain markets and in the Medicaid book.
Maybe just sort of discuss how many markets and geographies products you are seeing that.
And that sort of.
What type of rate traction you're seeing.
Around some of those those issues right now.
Sure Scott I'd say, the the cost pressures that we're experiencing in various markets.
Come across.
Three dimensions.
One we did see in the quarter, some aberrant an anomalous large case activity.
Which will abate.
Second.
We have seen and acuity mix shift due to some redetermination efforts, particularly in the state of Ohio.
And those are primarily the reasons for it for the cost pressures.
We believe that ultimately acuity mix shift ends up in rates in fact, the state of Ohio has been very reasonable and rational and on a rate discussions.
And we believe that.
Normal operating protocols, such as utilization control care management.
And looking at our network contracts harder ore will arrest some of the large claim activity. So there are pressures in various markets. Some of the behavioral carbons actually caused some rate pressure are you are never sure you're getting the right capitated rate when a benefit gets carved in so we certainly saw some behavioral cost pressure in Washington that'll.
End up in rates.
So acuity mix shift benefit carbons and some large claim activity, but all very manageable as evidenced by a very flat sequential Medicaid managed care ratio of 88%.
Got it in and follow up question, just I guess sort of related maybe not just around the trends on the reserve development side and you mentioned you sort of had negative negligible reserve development in the quarter. I know you guys have had some pretty ft development.
Sort of trending over the last call four to six quarters. So you know maybe sort of just update update us on on sort of the reserves and how you feel the adequacy is at this point did the reserve development get impacted by some of these issues in Medicaid or are there other factors.
Consider as well just around.
Our development trends.
He could to Tom in a moment, but I was the reserve practices that weve from that we undertake have remained consistent I.
I would say in the third and fourth quarter. Your prior year Reserve development should abate.
Last year I thought was an exception we had from.
Reserve development in the fourth quarter off the prior year I think that was an unusual phenomenon. So the fact that reserve development is over $100 million for the year on a pre tax basis.
It has abated here in the third and fourth quarter is not unusual Tom anything to add no nothing nothing more to add to that Joe I was their practice amend very consistent we feel that reserve balance is very strong.
You can see DCP have gone up two days and.
None of these the issue on a cost pressure you see there M&A into any particular issue for our reserve.
Bounce at all.
Okay. Thanks.
The next question comes from Peter Costa of Wells Fargo. Please go ahead.
Good morning.
Question about Texas.
Your your loss ratio in Texas is higher than some of your other loss ratios.
The government programs loss ratio.
But it's hard to tell given the mix of higher acuity business that you might have in Texas, where that's more profitable or less profitable than average.
My question is is the contracts that you standalone is more profitable or less profitable than your average profitability and then the second question just.
What was it that gave you the confidence.
At the Investor day, that's a 7% to 9% organic growth rate would be there if you sort of weren't sure about the Texas result at that point in time.
Let me let me answer the second question first on to be clear at Investor Day, We said that the 7% to 9% revenue forecast for 2020.
Assumed status quo in Texas, so it didnt it didn't assume any increment or decrement due to a gain or loss.
We very very clear on that point, so now as I said in our prepared remarks.
As we redo our forecast for 2020.
If this award sticks.
And it Incepts and on September Onest, we would therefore adjusted to 7% to 9% to allow.
For that four month revenue shortfall in Texas, Tom you want to answer the question about profitability sure. You know, we obviously do not a petition now profitability of by specific market than even down by line of business of market, but I will provide a following general comments.
Acuity.
The population, Texas generally higher because of the a significant portion of a BD and MMP population in that state. So almost by nature is much higher revenue PMPM, if you will.
So.
So with that generally we run the types that you saw we disclosed that at a 91% MCR in a in the press release however.
The businesses profitable overall, I'll Medicaid business as you know overlaying around 3% plus or minus on an after tax so in some say it may be less some state maybe more than that midpoint us so but the business. There is profitable beta fact that it may be slightly less than a midpoint.
Because of a high acuity of that nature of the population.
Thank you.
The next question comes from Josh Raskin of Nephron Research. Please go ahead.
Hi, Thanks, just want to follow up on a comment that you made show with the first question around Texas I think you said.
That you will explore all your options I wanted to make sure is that just with regarding protests and Texas, specifically or is that a broader molina healthcare commentary around you know as you kind of rethink about the long term.
Then was meant to refer to exploring our options in Texas.
There's a there's 10 business days to file a protest that's usually routine in these types of matters, but I was referring to exploring all of our options.
To review the scoring the Texas Awards and then to.
The rights that we have two to pursue an additional award we would pursue vigorously.
Okay, which I guess leads to my second question, which is you talked last quarter around long term targets of 10% to 12% revenue growth still being.
You know.
Consistent with your views long term understanding the 2020 lumpy in that range and EPS targets, a 12% to 15% does and I know you don't have the scoring so you don't know exactly what happened in Texas, specifically, but is there anything that's that's occurred sort of with that Texas, where you guys I'll have to take a step backs rethink long term targets rethink.
Molina as long term strategy or anything else.
In terms of just overall views for the company.
The managed Medicaid duals high acuity, we do this really well we're disappointed in Texas Award and we'll look at the scoring and as I said well.
Pursue our rights.
But nothing changes in our long term outlook for the attractiveness of the business were in or the target margins is that weve outlined for you.
Theres, an inherent growth rate in this business.
That is very attractive as well I produces significant excess cash flow.
And although we are disappointed this award.
We'll reset our 2020 numbers and will grow off of those.
And profit perfect. Thanks.
Thanks.
The next question comes from Justin Lake of Wolfe Research. Please go ahead.
Thanks, Good morning.
Just one follow up a couple of questions on Texas first in terms of the.
You've got a pretty big exchange footprint, there, Joe I would assume big news as it looks like Youre. Your store footprint is pretty similar deals start flowing footprint till we get fair to say that even if you were to be sure yeah it'd be the a region that Andy you announced Canadian Star plus you would still have enough skilled at all.
To want to successful exchange strategy, there's always you wouldn't need to exit.
So you'd be extended decent catching any material.
The case.
We have a lot of our exchange membership eyes in Dallas and Houston, we've proven in new Mexico that you can run a really profitable.
Exchange business without being in Medicaid.
And as you suggested we still have.
The star Chip contract and we think we have enough network girth and scale to participate in the marketplace business going forward and the Texas marketplace business has been a profitable and an attractive growth opportunity for us.
Right and then.
In terms of.
It would be the losses, I mean, I know you're still going through the numbers up you know I've come up with something you know estimating close to just under $1 billion or revenue that at this little premium that this looks like.
No need to comment on that because I know you've talked about Texas in terms of the potential for delivery the leveraging on the yesterday and they saw it. If this were to go out to go against you and I just wanted to kind of follow up on that in terms, if that number isn't right ballpark or.
You do lose a billion dollars or revenue.
You could offset that SGN they install hit your targets or do you think that would also be already above and beyond just the margin contribution God that's at risk.
Various scenarios on what this might mean for revenue, but I would say the number that you articulated is certainly in the neighborhood of what could happen.
If we kept everything we have an dabo and the northeast gets split let's say evenly between two players those numbers are in the right neighborhood.
Well.
Stranded overhead is certainly a phenomenon in this business or just the fixed costs nature of the business, but we don't tolerate stranded overhead here and we've proven that in 2019, if you recall in 2018 with the tech with the Florida in New Mexico losses.
We said we had stranded overhead that we had to get at and I think when you look at north of 4% margins across the board in this business. We've proven that we don't allow stranded overhead will get up to fix cost when we when the revenue disappears.
And will restore ourselves to our target margins.
Great. Thanks critical.
The next question comes from Kevin Fischbeck of Bank of America. Please go ahead.
Great. Thanks wanted to ask about the exchanges you've had a couple of competitors talk about their bid strategy in their expectation for margins for next year kind of coming down.
And and at least one of them, specifically, saying that.
Their view about the minimum adelaar really was a main reason why they were doing that but they're operating at much lower margins than than your operating at just wanted to just kind of we check with you and make it you see what your thoughts were about.
Whether that at all of the is a barrier to growth and either next year.
The next couple of years in certain markets, just trying understand why you're up into higher margin the not saying the same.
Potential cap to.
Growth.
Well the first thing I would say Kevin is.
It's obvious that 18 to 19 have been very profitable years first in the marketplace in 17 was quite the opposite.
So 117 rolls off the three year average in 20.
That will certainly put certain markets.
Up against the minimum anymore. The other thing I would say is it depends on how your portfolio performs.
Hi averages can be misleading it really depends on how your individual properties are performing.
We have some that are performing really well and others less well and so we will bump into the minimum minimal are probably in a few markets, but we certainly considered that when we filed our prices for 2020.
We certainly considered that when we were loading in additional value added benefits to put value into the product.
The than paying rebates.
And we took all that into consideration as we filed our rates for 2020 and our preliminary analysis now that everybody's rates are public.
Is that we have very additive physicians number one and number two and about 75% of our key markets and our flagship silver product in our brands product, which is.
The products that we want to be competitive so we're still feeling really good about our growth prospects and marketplace for 2020. As a reminder, we said we're going to grow the business, albeit at a lower.
Favorable and still attractive margin.
And you said a couple of times on the call today that.
Your broker compensation is also.
Yes, I guess strong is that a change this year that did you do something differently are you paying more now in 2024 2020 than you you have in the past or is this just to comment that you consistently been doing this.
Say, we are paying market now.
We are paying more but we're paying market.
We weren't competitive on our broker commissions in a few markets last year and we've corrected that so although we're paying more we're not paying above market. We are now paying market.
And is there anything that you can kind of cross share with us about that dynamic like in those markets, where you're paying below.
No.
Any view about what that means to go from below marketer to to being in market.
Well I mean, as you know about 50% of the business come through Dot Gov and the other 50% comes through brokers and brokers want to be paid market Commission. So.
We believe we'll have good broker well too we have a strong network.
And now that we're paying market conditions it should.
Enhance the growth rate.
Okay, great. Thanks.
The next question comes from Steven 10 out of Goldman Sachs. Please go ahead.
Good morning, guys. Appreciate the color, especially this early on the Texas RFP and I guess on just wanted to follow up on kind of the comments a stranded overhead Jed I was helpful. But I guess, if there is it sort of fair to expect the earnings impact will be closer to the direct loss of what you're getting today as opposed to something larger than the state makes available in a sort of financials for free.
The company that I guess, a direct impact somewhere in the ballpark for like 5% of Vps for looking at all that right using margins for the last reported fiscal year. So is that lead managed to kind of just just losing that direct in fact or should we actually think all even if you cut some stranded overhead the impact could be greater for whatever reason.
I think I understand your question, but I as I as I stated previously.
Certainly.
The the margin the.
Fully baked margin on the product on the revenue this loss will disappear.
And as I mentioned before.
There will be fixed costs that will then become stranded but we don't allow that to happen.
We've demonstrated that in 2019.
We gave you at Investor Day initial estimates of maybe $40 million to $50 million stranded overhead due to the new Mexico for to losses, and if you just look at our DNA ratios today.
Look at our margins today, I mean, all becomes fungible at some point, but we've managed our DNA ratios really really well through this dynamic and we would.
Be disciplined enough to do that yet again in late 2020, when this revenue phenomenon hits.
Perfect. Thanks to the maybe one for Tom just on in terms of the guidance revision two questions on that one could you kind of confirmed started the level of peer performance Cps Thats implied there and the other was more mechanical just the guidance like on investment in other income any reason to think thats not sort of a 100% floods there to earnings.
In terms of peer performance guidance. So I think what you referred until we is is there any any sort of restructuring costs or he kind of a gain loss on convertible <unk>. If that's what you were referring to.
And I'll I'll as.
That we provide it.
It's all in.
All of those item Moran, okay. So in other words.
We have roughly about a 12 cents.
Have you today net gain from the the redemption of the convertible.
So that's that's been the 11 30 211 55.
Okay, great and I'm, sorry to ask investment and other encompass.
Segment income, yes, I mean, certainly and we have provided guidance with a high investment and other income that's a combined to two items there.
And that's the way, we have seen little bit high investment income.
Third quarter, so thats why we upped the guidance for full year.
And does that flow through 100% sort of just wanted to understand or should we be assuming that maybe with the other income part of that flow through to earnings is not 100%.
Yes, the hub is that yes.
Okay. Thank you guys appreciate it.
The next question comes from Charles three of Cowen. Please go ahead.
Hi, Good morning, this is a concern and gone for Charles.
Yeah, just recognizing that you guys are fresh off of the Texas announcement in still working through your strategy.
How are you thinking about your appetite for M&A going forward just in the context of the Youre care acquisition and maybe some of the additional capital you'll have from pulling out of the Texas subs.
And then just more generally on M&A strategy, we think of M&A activity is being biased towards us.
Like Medicaid or Medicare.
Thanks.
Sure.
First and foremost the best use of our excess capital is to fund organic growth, we hold about 10% of premium as regulatory capital.
And the Levered and Unlevered returns on equity our superb a second we have a very very capable M&A team.
We're going to remain very disciplined we will look for opportunities in our existing markets and in Greenfield markets.
In our core products.
Particularly Medicaid.
Hi, acuity and duals.
And probably not.
Traditional Medicare advantage, so we're going to stay very disciplined to our core product line.
We.
I really do seek out underperforming businesses.
Because of our proven turnaround skills, we can harvest of those.
Performance based synergies of for our earnings stream and that's a very very attractive use of our human resource capital.
So we're going to remain very disciplined.
We still think there's opportunities out there there's orphaned plans there's provider on plans or by the one see threes.
And we are scouring the universe for attractive opportunities to deploy our capital.
To accrete earnings per share.
Great and I appreciate the commentary on the marketplace growth rates.
You know recognizing that we're still early in the enrollment period for Medicare I'm, just wondering if you're talking about any visibility for growth there next year.
All right on Medicare.
Yes.
If the question is on Medicare as you know our Medicare is primarily centered around the de snip product.
And we have expanded footprint, we have spent entered into two new markets.
So we expect to have membership growth in 2020.
We do have some visibility against our competition now and we feel that the product will grow from 2020.
Thank you.
The next question comes from Steven Valiquette of Barclays. Please go ahead.
Great. Thanks, Good morning, everybody. So in Texas I know you don't have the the scoring yet but you know breaking down the awards by region. If we look at the fed the lost in Dallas Harris El Paso backs, our Jefferson, but then you actually one brand new business in the larger Amar say northeast region.
Yes, Im just curious is there any.
Really anything high level the jumps out to you on what May have driven the new regional when that was different mechanically than the factors that maybe in your mind you may have drove the losses and the other regions.
So and tied into that is there any silver lining their worth pointing out with that one new when that might help you in the other protest process as well I know, it's kind of pulmonary and high well you know underscoring, but just curious running jumps out to your thanks.
The answer is no not at this stage obviously the news is 12 hours old underscoring as you suggested has not been made available.
But those are very legitimate questions and questions. We will be asking what did we learn about the scoring and the reasons, we lost and what why where we successful in a brand region for us. So no. We don't have any information at this time, but we will be seeking answers to those questions and then pursuing our rights that we have under a contract.
Okay, all right I mean, my follow up offline with more detail later, thanks sure you're welcome.
The next question comes from Matthew Borsch of BMO capital. Please go ahead.
Yeah, I'm just curious about the.
Episodes of.
MCR pressure in the Medicaid business is that something that night I think you you'd made some allusions to rate lag in the last call, but that it wasn't particularly a factor what's been the timing of this emerging and.
Hey relative to how the impact is played out is that something it was sort of accelerating into the back part of the third quarter or.
You know, where how would you characterize it.
I would characterize it as somewhat accelerating throughout the year.
And what would be very clear.
You know when benefits get carved into a program you do your best to understand the capitated rate you're getting for that benefit.
Sometimes it's right and sometimes it's it's not sufficient.
So we've seen that in Washington with respect to the behavioral carbon we've seen in Ohio with respect to the carbon at the behavioral benefit that took place over a year ago and the acuity mix shift that has occurred in their redetermination efforts, so rates always do add trend, but the good news.
Is that our customers have been very rational.
And reasonable and understanding these cost pressures.
And they have been included in recent rate discussions and in fact, we had a mid year rate increase in Ohio to offset some of this pressure so whether its large claim activity, which is aberrant whether it's the acuity mix shift whether it's a carbon benefit. This is Jeff managed care dynamics.
And can be dealt with through operating protocols.
Solicitation controls network management in the like or in rate advocacy efforts and the fact that we're still producing high eightys ml ours in the Medicaid business, 88% flat sequentially second to third quarter. I think is testimony to the fact that there's a lot going right in the portfolio, even though we're seeing press.
Sure and in some isolated places.
Joe if I could just.
If we back up and look at the broader landscape of of our plans in Medicaid.
In pressure in multiple markets.
Is there any I realize there the eligibility redetermination certainly a common factor but.
So it feels a little bit like that.
The rate development in sort of turned a little bit stingy coming into this year and now we're going through what's likely to be some bout of corrections and certainly it's extremely helpful that you have reasonable business partners in most cases, but.
Is there is that a miss characterization.
It's a legitimate question, but I think it's maybe slightly mischaracterized.
The rate discussions have been reasonable rational rates.
Appear to be Actuarially sound.
And anytime you go through as I said, the phenomenon of a benefit carven or a significant shift.
In acuity.
You get these little rate shocks, which then quickly correct I.
I think the good news on Redetermination is something we ought to really focus on.
In this business Theres been a lot of discussion over many years is how does the managed Medicaid business respond and economic cycles.
We don't have to model that anymore, we know.
And the fact that the Ohio economy is very strong the fact that.
Expansion members, who actually do work and make some money are making more money now and going back to work on that puts pressure on membership roles.
Makes an acuity mix shift happen on your existing population, but then it's correctible and rates.
That's actually a very positive phenomenon the fact that.
The part the good economy is creating pressure and one state, but then it's correctible through rates quickly.
Is there is a very positive phenomenon, we no longer have to conjecture and guess how these businesses performed through economic cycles, we know.
Right. Okay. Thank you.
The next question comes from Sarah James of Piper Jaffray. Please go ahead.
Thank you on Friday, Texas, HFC announced that came along that took over as head of Medicaid procurement, which is unusual to do just before an award and in general there's been a good amount of churn on who's running this procurement for Texas. So just wondering if there's any color you can.
Chair on how Cherilyn. This department could have influence the procurement environment and if it means that there is actually going to be a different team evaluating thus far our ftn, scoring.
Sarah its.
I hesitate to comment on what's going on in the inner workings.
Of our customer certainly the the turn of the turnover phenomenon. You suggested is real everybody knows that we know it.
But I can't speculate at this point on what impact that might have had on the scoring when we get the scoring or we're going to do what we normally do we're going to evaluate it very thoroughly.
We will go through lessons learned on what we could have done better, but then we're going to pursue our rights that we have a under our contract.
Two.
If we think we were not squared accurately or favorably we will we will pursue our rights, but I can't speculate on.
What might have happened inside the department that created the scoring that impacted us.
Okay, and given where we're now on the topline for 2020 is there any additional flexibility that you have in the timing as investment spend or bringing forward any of the outsourcing opportunities time wise. So you can influence the p. singles as seen on trade fronts.
Offset some of the topline Edwin.
As we as we.
Continue to work down the path of developing a 2020 plan certainly as DNA management.
It's certainly something that's on our radar screen, we're not done yet we think there's more efficiency in our operation that became can be gain but most of the large scale outsourcing.
That is going to take place here has already occurred we did a very large scale I T outsourcing last year as you know we outsource some of our very specialized in esoteric utilization management capabilities, we outsource so outsourced our nurse advice line.
Earlier this year. So most of the large scale outsourcing has been done.
But.
Not all of that is in the current run rate and that mostly will that should be fully in the run rate in 2020, if that was your question.
Thank you.
The next question comes from Dave Windley of Jefferies. Please go ahead.
Hi, Good morning, it's Dave Styblo infer windley, Joe the team has done really a commendable job of extracting cost from the business I think to obtain a 350 to 400 million by the end of this year.
And you guys have talked about another 350 to 400 million a savings opportunities in the future I'm curious if any of those savings were earmarked for opportunities in Texas that might not now.
I have an opportunity to be addressed because of the shrinking footprint for the for the RFP outcome.
Hey, it's a fair comment I mean.
Without parsing, the $3 million to $400 million of opportunity I guess, you could just fair to say that it's evenly spread across our book of business across our products and across our geographies. So yes, if part of that was earmarked for whether its.
DNA savings payment integrity savings care management savings.
That whatever would have happened on the revenue that we lost will not happen. So I think I think thats, a fair comment, but we're not going to start allocating our profit improvement opportunities to individual states and products.
But it's a sharp your comment just on it.
Okay, and then and stepping back I know you guys has that started to talk about the revenue growth opportunities and have done that for a couple of course now with with across the different businesses I'm curious.
Are there any RFP is that our thought our larger in scale that can add chunks of revenue.
Coming up in the next 12 to 24 months that on your horizon that you guys have visibility on that you're willing to to disclose that that you'd be interested in participating in from up it perspective.
Oh, we have a.
A fair number of what I'll call special situations, which at this time are still confidential that we're working on a as you know we submitted.
A response to the Kentucky RFP, that's in process and we're told that will be announced sometime in the month of November so imminently.
And the other states. We showed you at Investor day, while RFP is haven't really dropped.
You know, Tennessee, Georgia West Virginia.
Even Iowa to some extent, we're looking at we have a ground game ongoing and various Greenfield states. We're evaluating the opportunities we run every opportunity through a very disciplined set of screens.
The regulatory environment, the ability to build a network.
The strength of the incumbency and the competition.
And we'll we'll pick our spots.
Okay, and then maybe just a last one I know you commented about some of the.
Turnover within Texas, I'm curious the the way that but to our fees are evaluated for the for the star plus and the chip Pan US what are some of the key differences that you might see there that.
Might not cause kind of a similar outcome to happen and the next RFP Award odd out the coming up in December .
No time nature of this news I, it's a very legitimate question one we're looking at but I.
I just don't have an answer specifically at this time for you, but obviously, we'll be looking at.
The similarities and differences.
In the scoring dynamics for the two programs are and will.
Take that into consideration as we build our confidence level on winning the second award.
Okay. Thanks much.
This concludes todays question and answer session and Molina Healthcare's third quarter 2019 earnings Conference call. Thank you for attending today's presentation. You may now disconnect.