Q3 2019 Earnings Call

Welcome and thank you for standing by for the third quarter 2019 earnings call.

This time all participants are in a listen only mode. During the question and answer session. Please press star one on your Touchtone phone today's conference is being recorded if you have any objections you may disconnect. At this time now I will turn the meeting over to Joe Bob been thinking you may begin.

Good morning, and thank you for joining Magellan health third quarter 2019 earnings call.

With me today are Magellan CEO , Barry Smith, and our CFO Jon Rubin.

We're also fortunate to have our incoming CEO Ken for Sola on the call is well.

Well, we won't be taking any questions. Today is first dad Magellan will be November 14th and he'll be on or 2020 guidance call in December .

The press release announcing our third quarter earnings were distributed this morning.

A replay of this call will be available shortly after the conclusion of the call through December 1st.

The numbers to access the replay are in the earnings release.

For those who are listening to the rebroadcast of this presentation. We remind you that the remarks made here in our as of today Friday November 1st 2019 and have not been updated subsequent to the initial earnings call.

During our call will make forward looking statements, including statements related to our growth prospects enter 2019 outlook.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control.

These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors discussed in our press release. This morning, and documents, we filed with or furnished to the FCC.

In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results specifically, we refer to segment profit adjusted net income and adjusted EPS, which are defined in our SEC filings and in today's press release.

Segment profit is equal to net revenues less the sum of cost of care cost of goods sold direct service costs and other operating expenses.

And includes income from unconsolidated subsidiaries. The excludes segment profit from non controlling interests held by other parties stock compensation expense special charges or benefits as well as changes in the fair value contingent consideration recorded in relation to acquisitions.

Adjusted net income and adjusted EPS reflects certain adjustments made for acquisitions completed after January Onest 2013, do exclude noncash stock compensation expense, resulting from restricted stock purchases by sellers changes in the fair value of contingent consideration amortization of identified.

Acquisition intangibles as well as impairment of identified acquisition intangibles.

Please refer to the tables included with this mornings press release, which is available on our web site for a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures.

I'll now turn the call over to our CEO Larry Smith.

Thank you Joe Good morning. Thank you all for joining us today on our call. This morning, I'll comment on the financial results for the quarter and a reduction to 2019 guidance.

Also highlight business and operational developments, including progress on our margin improvement initiatives.

The third quarter of 2019, we reported net revenue of 1.8 billion net income of 21.3 million EPS of 86 cents per share.

Our adjusted net income was 30.2 million for $1.23 cents per share.

We achieved segment profit of 72.2 million.

Results for the quarter was solid at MCC in pharmacy, but we are lowering our 2019 earnings guidance, primarily due to the following two factors.

Cost of here pressure in our behavioral and specialty health business and severance charges related to our operational improvement initiatives.

As I will discuss these pressures or short term in nature, it should not affect progress towards our margin goal of at least 2% adjusted income like 2021.

Luckily the call Joe will provide additional details on a quarterly financial results are updated 2019 screens guidance and some initial commentary on our outlook for 2000.

Now, let me highlight some specific developments within our business during the third quarter and the progress we are making towards our margin improvement plan.

Within our Magellan complete care portfolio of managed Medicaid health plans, we continue to execute against our medical action plans towards the goal of achieving industry competitors margins.

In addition to reducing costs our team remains focused on improving the quality and associated outcomes from the medical services provided to our members.

In Virginia Im pleased to report that our efforts to improve the cost of care continue to show progress our medical loss ratio ratio for the quarter wasn't a low nineties.

The focus of our medical action plans has not changed in Virginia.

We need to drive value through the appropriate management inpatient outpatient and personal care services as well as claims payment integrity reviews.

For example, we've been successfully managing outpatient behavioral health services, where we approach care coordination on the member centric basis.

He is understanding what's best for the member and proactively connecting them through the appropriate care, while avoiding waste and duplicative surfaces.

He's appfluent interventions also for the increases in inpatient hospitalizations and Youre visits.

We still have work to do to reach out to our target margin to reach our target Morgan margin in Virginia, We feel good about the continued progress we've made to date in 2019.

Regarding or New York plan, we highlighted are a second quarter earnings call. You'll recall that we were awaiting updated capitation rates for the current fiscal year.

I'm pleased to report that we receive these new ways and they are largely inline with our expectations.

Moving and update to our risk scores to reflect increased acuity of our population.

Now turning to our behavioral and specialty health services, we have experienced an increase in cost of care.

Typically for inpatient admissions within our behavioral health business.

We're currently working on action plans to mitigate the impact.

I'd also note that our customer contracts allow for annual resetting of capitation rates to reflect emerging experience and anticipated future trends.

So while these cost pressures affect our 2019 earnings outlook, we do not expecting material ongoing impact in 2020.

With respect to product development, we have recently deployed and industry, leading automated prior authorization solutions called decision points.

To provide clinical guidelines pretty true is the medical necessity of certain imaging procedures to inform for lighters and enable authorization determinations in real time through full integration at the point of care.

Because providers are increasingly accountable for the cost of care patients. We see this is a new growth generally are currently piloting the program with a number of provider groups.

Yeah, Let me provide you with some quarterly operational highlights for Magellan Rx.

Throughout 2019, we've been actively working towards our strategic priority of lowering the cost of goods sold through negotiations with our network pharmacies manufactures and wholesaler.

I'm pleased to report that to date, we haven't renegotiated, 98% of the supply chain, creating savings where customers while also improving our gross margin.

Our pharmacy team has also been broadening and deepening our specialty carve out services to retain existing and attract new customers.

We continue to evaluate therapeutic classes of drugs, where there has has is an increase in conflict in competition, which enhances our opportunity to develop management strategies that create savings, while maintaining or improving quality of care.

The U.S. food and drug administration has recently reported that biologics are the fastest growing class a therapeutics.

Earlier this year in response to the growing biologic spend.

Expanded our formulary management program into therapeutic classes, such as oncology bio Similars and medical management Biologics medical benefit biologics to treat asthma.

It reparations, where the expanded market entry of oncology bio Similars. We've also extends our medical pharmacy management programs into a comprehensive solution that aims to educate consumers customers numbers and providers.

These expanded products and services are already gaining solid traction with our clients days.

In our PBM book of business, we continue to see traction with large larger employer accounts in our core middle market employer business.

Hi, good about our prospects for 2020 organic growth and retention rate.

We will share more details such a plan is finalized in early December .

[noise] agents and we're pleased to share that Magellan Rx management was recently credited bike ensiki way for utilization management.

This recognition reflects the high quality of medical management that we provide to our customers and their members.

You know quirky business our bid rates were below the benchmarks in three out of four regions that we did and as a result, we estimate to routine 80% to 90% of our current membership in 2020.

As we mentioned in the past our entry into the PDP business was primarily designed to gauge the necessary experience to serve the managed care PBM market.

One of the key elements to our multiyear margin improvement strategy is reducing our administrative costs.

We continue to review and execute against opportunities to improve efficiency across all of our businesses your efforts to consolidate platforms redundancy and rightsize operations.

As I noted earlier, we plan to incur severance charges later this year, which reflect the anticipated 2020 implementation of several of these initiatives.

Some of these savings will contribute to our future mortgage margin expansion target.

And another is will be used for funding investments for business.

We'll provide more details during our 2020 guidance calls in December .

Before turning the call over to John I'd like to emphasize that the headwinds facing us this year, our short term in nature and should not affect the pace of our margin.

We continue to see significant long term opportunity for both growth and our health care and pharmacy businesses.

And we remain focused on improving the adjusted net income margin for the company to at least 2% like 2021.

Now I'll turn the call over to our Chief Financial Officer, Jon Rubin Jones.

Thank you Barry and good morning, everyone.

On today's call I'll review, the third quarter results discuss our revised outlook for 2019 and provide some initial commentary on our 2020 business plan.

For the quarter revenue was approximately $1.8 billion, which is relatively consistent with the same period in 2018.

Growth in MCC, Virginia.

Business, we're essentially offset by MCC of Florida, and Medicare part D footprint reductions as well as previously discussed PBM health plan contract was doing acquisition.

Net income was $21.3 million.

This was 86 cents.

This compares to net income in excess of $27.1 million.

Nine respectively for the third quarter of 2018.

Adjusted net income was $30.2 million, an adjusted EPS was a dollar and 23 cents.

This compares to adjusted net income of 36.2 million, an adjusted EPS of $1.45 cents for the prior year quarter.

Segment profit was 72.2 million.

Third quarter compared to 88.3 million in the prior year quarter.

[noise] health care business segment profit for the third quarter of 2019 with $44.7 million versus 61.7 million in the third quarter 2018.

Health care results for the current quarter include net favorable out of period adjustments of approximately $4 million compared to 22 million of net favorable out of period adjustments in the prior year quarter.

Adjusting for these out of period items segment profit was $1 million higher than than in prior year quarter.

This net increase in segment profit is driven by progress on our cost of care initiatives in Virginia.

Cost of care pressure in April in specialty healthcare business as well as lower discretionary benefit expenses in 2018.

[noise] as Barry mentioned, we're seeing an increase in demand for behavioral inpatient services this year.

Currently in negotiations with key behavioral customers on our 2020 rate renewals, which will incorporate this recent experience. So we don't expect significant earnings pressure to continue into 2020.

In addition, we're continuing to strengthen and execute our care management programs, particularly in patient concurrence day reviews and targeted network initiatives.

Turning to pharmacy management, we reported segment profit at $35.4 million for the quarter ended September Thirtyth, 2019, which was an increase of 5.2% from the third quarter of 2018.

This year over year increase was primarily driven by growth and improved profitability in our Magellan Rx specialty division.

Regarding other financial results corporate costs inclusive eliminations, but excluding stock compensation expense totaled $8 million compared to 7 million in the third quarter of 2018.

Total direct service and operating expenses, excluding stock compensation expense and changes in fair value contingent consideration were 14.3% of revenue in the current quarter compared to 13.8% in the prior year quarter.

This increase was primarily due to lower discretionary benefits expenses in the prior year quarter.

James and business mix.

Stock compensation expense for the current quarter was $4.8 million a decrease of 4.5 million from the prior years quarter.

Production is primarily due to timing related divesting certain equity awards.

The effective income tax rate for the nine month ended September Thirtyth, 2019 was 31.2% versus 26.3% in the prior year.

The 2019 year to date tax rate is higher than the comparable 2018 rate mainly due to book to tax differences related to stock compensation expense, partially offset by the suspension of the health insurer fee in 2019.

We anticipate a full year effective income tax rate of approximately 31%.

Our cash flow from operations for the nine months ended September Thirtyth 2019 was $144.4 million. This compares to cash flow from operations at 34 million to the prior year period.

This year over year improvement is primarily related to favorable working capital changes and lower tax payments.

As of September Thirtyth 2019, the company's unrestricted cash and investments totaled $220.3 million compared to 130.4 million at December 31 2018.

Approximately 105.4 million of the unrestricted cash and investments at September Thirtyth 2019 is related to excess capital and undistributed earnings held at regulated entities.

Restricted cash and investments at September Thirtyth 2019 decreased to 500 million from 527.7 million at December 30, Onest 2018.

Decrease is primarily due to changes in working capital of our regulated subsidiaries.

No. It's very mentioned, we're lowering our earnings guidance and the primary drivers for the reduction our first pressure in our behavioral and specialty healthcare business, primarily related to higher than anticipated demand for behavioral information services.

Second estimate of severance and other costs that we expect to recognize later in 2019.

Specifically.

I think our 2019 full year earnings guidance ranges to the following.

Net income of $47 million to $65 million.

Yes in the range of $1.90 to $2.65.

Adjusted net income of $80 million to $98 million.

Adjusted EPS in the range of $3.35 to $4 and segment profit.

$245 million to $260 million.

We're maintaining our current revenue guidance range of $7 billion to $7.2 billion.

As I noted previously with key rate renewals and progress for behavioral health customer contracts. We believe will mitigate the majority of this earnings pressure in 2020.

We're in the process of finalizing our business plan for 2020 and will provide detailed guidance in early December .

In advance of the 2020 guidance call I'll now provide some high level commentary.

To start the midpoint of our revised 2019 guidance range for segment profit needs to be adjusted by two factors to arrive at a run rate.

First approximately $22 million of combined net favorable year to date on a period adjustments in estimated fourth quarter severance charges.

Second approximately $12 million of additional segment profit in 2020 related to the provision for Nondeductibility of health insurer fee, which we expect to be reinstated.

After adjusting for these two items, our 2019 normalize in the segment profit run rate would be in the range of $235 million to $250 million.

We expect that 2020 segment profit will be significantly higher than that normally then its normalized 2019 segment profit range.

And key drivers of segment of the segment profit increase in 2020, our continued execution against cost of care initiatives for MCC, Virginia, and other healthcare contracts.

Rate increases in our healthcare business in excess of care trend and net business growth.

In closing our results for the quarter and MCC in pharmacy were solid.

Despite the short term pressure, we're seeing that aren't behavioral and specialty healthcare business, we're making good progress on our profitability improvement initiatives and are well positioned to achieve earnings growth in 2020 and beyond.

And with that I'll now turn the call back over to Barry Barry Thanks, John .

As we end todays call I am delighted to introduce can facility as magellan's, New Chief Executive officer to succeed me.

As of November the 14 into 2019, the board and I are all pleased that we were able to have to attract such a capable individual offense caliber who has broad healthcare experience and approval leadership track record.

Ken has had a successful leadership career spanning three decades in the healthcare industry.

Sales key executive roles actually manner.

In the health group end up losing business operations marketing and sales. Most importantly, he has served as president and Chief executive.

Vvofit or executive officer of health markets, what are the largest health insurance agencies in U.S., which was acquired earlier this year by United Health Group.

I know the board is looking forward to working closely with can and materials executive leadership team.

We ended the next phase of growth for the company I've agreed to assist with the transition as needed.

On a personal note I am grateful to the board Air Executive leadership team and Magellan's 10000 employees for their commitment dedication to Magellan Hill this members customers and investors.

Over the past seven years, the company experienced a period of expansion through organic growth and strategic strategic acquisitions.

The jealous portfolio of businesses, Magellan complete care, Magellan, behavioral and specialty health and Magellan Rx management or poised for future success I'd like to welcome to ended the call an acid in share a few congers Ken.

Thank you Barry and good morning.

Appreciate buried in the boards confidence and I'm honored to be name Magellan's CEO I'm looking forward to leading Magellan and highlight several distinct advantages will build from.

It's been said great companies, while defined by their leaders are in fact built by their people Magellan has a team of highly skilled committed mission driven employees anchored around the culture that values were back in pairing.

And proven expertise and managing complex population health across our three business line.

These advantages will serve us well on todays rapidly evolving healthcare marketplace.

Over the coming month I plan to dedicate time with key stakeholders. The board of directors and Magellan's executive leadership team to refine our strategy and lead this company into its next phase of growth.

I look forward to meeting those view on the call on the very near future and with that Barry I'll turn it back over to you right.

Great. Thank you, Ken and with that now also turn the call back over to the operator, we'll be happy to take your questions operator.

Thank you we will now begin the question and answer session, if you'd like to ask a question or make a comment press star one a record your name and you May press star to withdraw that request.

First question or comment comes from Kevin Fischbeck from Bank of America. Your line is helping.

Great. Thanks, just want to go into the at the behavioral issues in there in the quarter.

Can you talk a little bit about you said that you don't expect much of an impact in 2020.

Offset is coming in a former rate increases versus some of the operational costs and network.

Correct.

Hi, Kevin It's John Let me, let me start on that first.

Really as we think about the pressures in behavioral which were driven by demand for inpatient services.

And our means of addressing it there's really two.

Made things that we're doing one is.

Noted on the call on our prepared remarks, working with customers and as we're negotiating rates into 2020 to make sure that those rates reflect both the baseline experience that we've seen as a result of increased demand and the on the trends that we're seeing in the business. So that's that's something.

Again that that's in progress now and you know we expect to be completed.

Hopefully by the end of the year in first quarter.

Second really is.

You know the action plans on the care management side both.

You know concurrent review for inpatient stays contracts are generally per diem, although we have a mix of contracts.

We are making progress on that and and looking for further improvements and also on targeted network initiatives because we've we've identified.

Some facilities that.

Outliers and we've seen some change in mix of.

Lets services to some of the higher cost facilities, so well I'd say the relative rate weighting of those things the rates will likely has a bigger near term impact both will be important as we drive progress going forward and the only other thing I would add to John's comment is that when we see these underlying.

Shifts and the population we do have agreements with our clients that we can we go to renegotiate our rates based upon that increased demand because the population is fundamentally different and at some of our accounts we've seen it on the MCC side as well as the commercial side as well when you have unanticipated populations that have.

It's different.

That different.

Packs on utilization in demand.

Typically able to renegotiate and way that keeps us hole and allows us to have our normalized margins and so we expect to see that in this case.

And in these you know this ability to kind of re contract is is that it's in the normal repricing cycle and you caught this in time for that or you are saying that your contracts kind of allow for even.

Unexpected changes in the relation throughout the year, you haven't really to go back and every contract that.

Yes, Kevin It right now we are in the normal cycle. So it sort of way the timing is good for us because we're just heading into those negotiations and like I said in many cases with some of the.

Largest most most critical customers those are already on going so well contracts do allow reopeners under circumstance certain circumstances in this case, we're actually in the normal cycle, which actually facilitates this.

Okay and then.

The Virginia contract.

It sounds like you're you're you're doing well there. These at low Ninetys MLL R. I think the guidance. You had said was that you wanted to be at 90% MLL R. There is that still what you think the ultimate targeted are still opportunity to go below that.

Yes, I'd say, there's some opportunity to go below that I'd say, 90% would be.

Where where we think we need to at least get too to get into the normal profit margin range, but our objective would be to do 90% or better, but we think based on where we are 90% over the foreseeable future is very reasonable.

Kevin We've had great success this year in managing cost appropriately with both inpatient.

Utilization management claims integrity outpatient.

So we've seen the kinds of initiatives have material impact. The other thing is that many of the initiatives that we deployed even in late 2018, we haven't seen full yet the positive impact of those are still there's still emerging in a positive way. So we expect to see value throughout this year, but also into 2020, which gives us great hope for.

Or normalized margins in the near future there.

Great and then on the a direct side.

You know I guess, you said you've gone to 98%.

Supply chain.

How do we think about that this is something that doesn't you guys do kind of annually and it felt like maybe you're a little bit.

Later to that process this year than normal or how do we think about the ability to go back next year and get additional savings are going to be kind of the same pace and timing or should we see.

Right.

More front end loaded.

Yeah, I would say I mean, Kevin what you said, it's true I mean, it is it is a continuous process and that you're never done what I would say, though is that some of the initiatives we.

Took this year, we're beyond just the normal annual re contracting we actually did a full RFP for our wholesale or contract for example, and good change wholesalers too.

Correct.

Cost improvement.

And get the best possible terms, so you're right that it is an annual process and what I'd say is we will get the full benefit next year of what we implemented this year much of which wasnt implemented until second quarter.

This year, so we'll get we'll get some annualization of that next year and that next year you like like you said, we'll go through the normal process of as we grow the business and as we have opportunities to affect additional savings in effect is said kind of building on John's comment there, we've seen greater and greater success with larger and larger.

Clients both in the Mcl World, but also on the commercial side as well and because of that incremental incremental volumes were able to go back that back to networks particular, we have density in certain geographic areas and negotiate better better pricing with our network and also on the specialty side negotiate better deals for both our clients, which enhanced our.

Margins as well so it works well, we've seen that progress over the last several years when it really continues kicking into higher gear now that I think I've seen it in the past.

And then maybe last question on the.

You know the severance initiatives and operational improvements. So just trying to understand kind of how that impacts this year's numbers versus next year as numbers because it sounds like you've got extra costs in this year's numbers that you're not really excluding from the core results, which would go away to some degree next year plus.

Generating saving some of which gets reinvested at some of which well certainly bottom line. So just trying to understand it anyway to quantify at very least come to severance costs at your you're you're taking on this year versus kind of.

Return on those investments as you expect over the next year or two.

Yes. This is John so so to two general comments again, we'll provide more detail on next years budget in December we're still finalizing the plan. So I don't have precise numbers for you, but in terms of severance. We currently we're currently expecting order of magnitude, it's about $5 million is suffering in fourth quarter.

And that number we will refined as we.

Kind of complete our plans and go through the next month or so, but that's definitely ballpark what we're expecting at this point in terms of next year and exactly how much of these savings will be reinvested versus will accrue to our benefit short term those if those things, we're still working out and will.

And we'll kind of have.

You know updated view on as we go to guidance call. The only other note I'd make is if you recall last year when we talked.

Or even earlier this year, we said we'd have about 35 million of incremental.

Expense savings opportunities beyond what we.

Signed up for an achieved in 2019 or that won't be necessarily in 2020, but that they think about our or two or three year path to getting too.

Fully competitive margins that's order of magnitude the amount that we believe we have left and have the opportunity to achieve over the next couple of years.

Okay, and then just to make sure that to 35 to 50 kind of normalized space that you talked about for.

2019 does that does that exclude the severance cost or is that still includes the severance costs. So that excluded. So I was one of the things we adjusted out okay. Okay. So that that 235 as it is a good basis it has to separate that.

Okay. Thank you.

You bet great. Thanks again.

Thank you our next question or comment comes from Dave Styblo from Jefferies. Your line is helping.

Hi, there good morning, and I guess to start it lifts can welcome on over looking forward to working with you and Barry I guess, maybe just the last time multiple publicly here for me on the call. So just want to say thanks for perspectives and enjoyed working with you over the years.

Hi, I'm on just come back to understand the guidance. So it sounds like based on Kevin response to Kevin's question of the $25 million to $30 million segment profit about $5 million that is related to severance I know you guys talked about other costs in there I just want to make sure that I'm thinking about that right. That's that's 5 million there and call it 20 million plus.

Related to related to health care.

Okay.

Earnings that are that are down and does that sort of the right split.

Yes, I'd say ballpark, Dave that's right I would I wouldn't say that of the two items I, specifically noted, it's around 5 million and severance and around 15 million on.

Hey, real specialty cost of care side.

But you're right I mean, there is there's a handful of other things smaller things that that up in it and as well you know we did have some pressure in the first half the year, which well we were still on the guidance range would have potentially pulled us a little bit below midpoint, so, but but round numbers.

I have in 15, and then the rest.

There either.

Around in terms of where we work versus midpoint or a handful of other smaller things.

Okay.

And then on the severance I guess you guys had announced US initially thinking I'm thinking is extra savings back in December a year ago at the guidance call. Just curious what may have changed.

As you evaluate at the year to include some more severance cost I would've thought that these whatever originally been baked into guidance stemming sort of the plans that you guys have is there something that that got pulled forward or a change that.

Now, causing the severance costs the land in the fourth quarter of this year.

Yeah, I would say David just just having increased specificity now in terms of the plans in timing and also if you can imagine as we as we go into the planning phase. We're also looking at the volumes that that we'd have to deal with in the following year, So whether we're able to achieve the expense reductions.

You know with or without.

Further.

Reductions in.

Workforce or or or requiring additional severance would be based on what growth looks like in the following year as well so I wouldn't look.

Materially different I would just looking at it is fine tuning of kind of our multiyear plan and the timing of it.

Okay got it and then on the behavioral specialty issues.

Can you.

Elaborate elaborate a little bit more on on how widespread the.

The increase utilization as it related to certain pockets of employer groups or into a certain geography or is this very broadly spread across the board and why do you guys think you're all of a sudden saying thats now.

Yes, I mean, that's it that's a great question, David one that honestly, we're spending a lot of time trying to gain further understanding of it is relatively widespread meaning it's not just one account I mean, obviously there are certain large accounts where where it.

Adds up to more but but we are seeing this increased demand for inpatient and be the it's really primarily behavioral health.

We're seeing that you know across a variety of accounts and population. So it does seem like it's more of a.

Sort of broad market phenomenon, rather than either anything specific to things we're doing or.

In particular customer, but in terms of really trying to get down in understand are there any sort of specific causes versus just general.

Demand.

Or or industry trends right now, we're seeing and be more widespread nature.

The only thing I would add to that is that in some accounts given the fact that you see churn in populations.

Bringing on new populations, who may not have been covered in the past, particularly the Medicaid world or on the MCC side again individuals new popular just you're bringing on may not have had access. The fact that were well known and there's a relationship already in place of Magellan being a.

Provider for the behavioral health, we do believe that does have an impact on on the populations that we typically attract or received and so those those are underlying trends were trying to the understand better but they do seem to have an impact.

Okay, and I'm sure from a competitive standpoint negotiation, you probably I want to take too much but can you give us a sense of the I guess the by $15 million cost drag on this how much revenue is as related against that 15 million.

And just trying to get a sense of okay. How how much of a rate increase ballpark do you guys need next year as you go through to two feel good about getting back to kind of a normalized profit on the business.

And is there okay and is there any sort of restrictions in terms of regulators that that may cap you on how much you can increase the rates for next year.

Yes, I would say, Dave it's really much more of a negotiation I mean, these again are primarily health plan customers in the behavioral.

Specialty segment and behavioral health, we're talking about and it looked at it really more sort of the normal course of negotiating so no no regulatory constraints because again. These are commercial customers and you know where a subcontractor really more arm's length negotiations and from a contract standpoint.

You know we often have.

You know sort of defined rate methodology, which take into account both the underlying.

Baseline experience over that period and the actual trends now having said that it isn't negotiation. So while there are no hard constraints.

It is something that that we're working hard to educate customers on and get to the right place on I'd, rather not speak at a customer level about you know what what rates are required and it does it does vary by customer, but we think it is manageable to make up the vast majority of the current.

Shortfall and again those discussions are well underway.

Right, Okay last one I'll, let others.

What for the 2019 guidance now what does that assume for the Virginia margin.

What's embedded in there.

For the full year.

Right now.

It's still still what we talked about earlier and sort of the low ninetys threshold. So it would be really really a continuation of the type of experience. We've seen to date and again, we're feeling pretty good based on where we are right now.

Sorry to be more systemic pre tax margin what is the assumption, but it's pretty close to breakeven when you're when you're running in the low ninetys. If that's the question yep. Okay. Thanks, guys.

Great. Thanks, Dave and it's been wonderful working with you as well and all I can tell you you're getting a great big upgrade with can coming on board. So we're all thrilled to have a bit and I'm sure you'll enjoy working with him as well.

Thanks Barry.

View.

Thank you and again as a reminder to have a question or comment. It is star one Im record. Your name. Our next question or comment comes from Scott Hi down from Stephens. Your line is open.

Hi, Thanks, and first of all Barry.

Pushes on your retirement and.

Congrats to lot count on coming onboard and looking forward to.

When you soon and your thoughts on the future strategy.

So first question just on sort of keeping on the news sort of behavior all.

Cost issues.

How would you guys sort of describe the sequencing of how that emerged.

During the third quarter or did that start picking up earlier on the quarter or later inbound just in terms of from the claims experience and reserve development side, what have you seen on sort of a look back basis in terms of claims coming in.

In terms of what what that's implying for maybe how.

When the side these issues, maybe starting to emerge in the first half of the year or not as well.

Yeah, It's got great question.

The way I describe it is we saw.

Pressure.

Emerging in the first half of the year, but it seemed within the sort of normal range of seasonal volatility. So we had assumed that.

The modest increase in demand we saw in the first after the year was more.

You know sort of seasonal in nature and wasn't and we expect things to return to normal in the in the second half the year.

Third quarter.

We saw.

Claims come in high and we also had about 3 million in this particular segment of unfavorable development.

Related to the first half of the year. So we saw the first half actually restate unfavorably and then additional pressure in third quarter and now we've kind of incorporated the new run rate into the full year outlook. So in terms of the progression net that's how and best describe it.

Got it and John do you feel at this point just in terms of keeping their reserve Bang on opt to gain win with these emerging trends maybe talk about on the reserve side on sort of your confidence that that you are building yen.

You know enough conservatism into the reserves.

Yes, if you do see these trends continue.

Are you building in that they are essentially leveling out or are you building. Some additional conservatism that some of these trends may potential potentially continue to accelerate.

Yeah, No I mean, we have refined our methodology based on what we know and based on the emerging trends can you get if you look in second quarter restated you look at third quarter no.

They are relatively level. So so in fact going into fourth quarter. It's not like we're seeing huge uptick now we've got a much better picture of both second quarter in third quarter and feel like Weve appropriately reserved and forecast now for the for the fourth quarter hope it ends up being conservative.

But we think we've got a pretty good beat now on on the full year.

Got it and then just just on the New York side of things just to level set on that.

Hi, dipping in terms of the rate increases and the updated risk scores that pretty much come in pretty much spot spot on with what you had built into the guidance for the year or or was there any sort of bearing us in terms of either a little bit more paperboard nagging umbrella to what you had in the plant.

Yes, pretty it was pretty much what we expected them. If you recall we said.

We expect that E rate changes to be worth sort of 20 to 25 million over the second half of the year that was that was what we originally expected.

And I'd say you know ballpark.

We came in pretty close to that.

In terms of New York overall, the base rates were a little bit lower than expected in the risk adjusters, a little bit higher in terms of the components, but the overall, we came in a pretty close and and obviously.

Some of that was retroactive to the second quarter.

Call you know it was a for one.

Second dates that we did have.

I'm not a period favorability as well as.

Obviously the.

In the third quarter.

Got it and then just one last one for me just relative to the to the updated guidance. So it's still has a pretty wide implied range in the for Q. So maybe you want to sort of walk me highlight.

Part of that's key swing factors in terms of what you're building in a higher end relative to the lower at I assume that maybe some of that relates to how much rate you start getting.

For the behavioral and specialty issues and then maybe also within that dynamic sort of what's embedded sequentially around.

Pharmacy margins.

Well, that's that was a bright spot in the quarter in terms of the pharmacy.

Business, continuing to approve and just sort of interested and.

What you're thinking in terms of margins for the Rx business in Fourq, yet and that's it for me facts.

Okay, Yes in terms of in terms of the.

The pharmacy piece of it.

We did see good margins in the corridor.

I'd say that if you look at the if you look at the.

The last couple of quarters in pharmacy, we run reasonably well would expect.

Continue at that.

General level.

Margins. So I think I think that that should be pretty stable as we complete this year and as well as we go into next year I'm sorry, Scott can you repeat the first part of the question again.

Sure not just in terms of the wide range the why brands still on.

Slide four you guide and.

Turning to swing factors to the high end at the low and that my assumption was maybe that that's sort of reflects how much rate you got on the reflects some of the cost if you're seeing and.

The behavior on specialty, but just intrastate and sort of what what some of those swing factors are that drives a pretty wide range still on the the implied Fourq you guys.

Okay got it sorry for that yes, yes. So so one no it's not it's not the behavioral rate. Those are those are really 2020 negotiations that we're going through now so really won't have an impact on 2019.

I wouldn't read a whole lot into the range kind of being plus or minus 777, and a half million I would just look at it out as you.

There are factors that there's always some level of volatility and obviously cost of care as one on the rate side. You know there's always things were negotiating generally viewed those are more favorable in nature with which states around.

You know.

Risk scores and rates for different facets of the population that have some opportunity we talked about severance charges. Those are things will fine tune as we go through the balance of the year I'd say those are really the key items I'm going again.

Further you get near the more confidence we have and we have narrowed the range. So like I said, it wouldnt attach a whole lot of significance to the width of the range rather than you know we try to make sure we are.

Forecasting in a way that that we've got confidence of being within the range.

Yeah got it and probably I get that wide range is more related tax, yes actually that the segment profit dynamics. So again, probably just the reality is much smaller share count as well. So I appreciate that clarification. Thank you.

Got it.

Thank you and I'm currently showing no further questions or comments at this time I would now like to turn the call back over to Bury Smith for closing comments.

We thank you all today for attending our third quarter earnings conference call take care.

That concludes today's conference call. Thank you for your participation you may disconnect at this time.

Thank you for your participation that concludes today's conference call. You may disconnect at this time.