Q4 2019 Earnings Call
bronchitis, I had a
Week or so ago before I go through our 2019 results. Let me say how pleased we are to have closely WellCare transaction on January 23rd. We were cautiously optimistic. That's a transaction with close early in the first half of 2020 and we're happy that this was the case.
We are now a $100 billion dollar Enterprise providing Health Care Services, the more than $24 million members across all 50 states or one in 15,000 individuals Across the Nation having achieved this we still have a wrong Runway ahead of us with enhanced scale further diversification of products and capabilities and job opportunities for growth across portfolio.
As we have previously disclosed are plenty assumption was to be ready to begin the integration by January one. I am pleased to report that the integration process underway and teams are managing their various Works trees.
For example, we have begun to align 20-21 bids for our Medicare business. In addition. We have activated integration plans in markets where welfare and sensing overlap such as New York, Georgia and Florida. We remain on track to achieve our previously committed and communicated and chretien and Synergy targets.
Most importantly we were happy to walk him to walk their team and colleagues to 17. Let me now turn to a recap of 17 2019 highlights 2019 was another go past year for 17. We delivered strong top and bottom line growth enabled by operational and Commercial successes across our Enterprise wage. We remain focused sticking to our business as usual approach. We were not distracted by the significant headline noise during the year. We continue to execute against our strategic priorities and invest in capabilities that have positions and team for long-term success in 2019. We added 1.1 million members representing growth of more than eight thousand said surpassing the 15 million-member Mar disclose was achieved in the face of Eligibility determinations, which continued to moderate
We continue to grow.
Market-leading position in both Medicaid and the market place. We grew revenues by 24% to 74.6 billion dollars and a choice diluted share by 25% to $4.42 increase 240 basis points to a 87.3 pack normalized margins in the exchange business in order to favor performance in 2018. And the health insurance fee moratorium. The adjusted net income margin increased ten basis points to 2.6% We continue to execute a smooth and seamless integration of Fidelis. The only remaining tasks in this process is to finalize the equivalent of those clean systems platform. We also continue to invest in strengthening our products and capabilities with a focus on areas that will complement our club.
business and they want us to
Continually enhance how we impact patient outcomes while delivering long-term care. If you highlights, we achieve meaningful progress with 16 forward an important initiative that we expect will better position sensing for long-term growth increased margins and profitability in 2019 were executed are more than five hundred million dollars in initiatives and the program has now evolved into a permanent part of sentence and the company's organization in cultures. We continue to my great-niece membership the RX Advanced that technology-based Pharmacy platform which enhances quality and transparency while lowering costs. We continue to focus on proof-of-concept. It will expand as appropriate.
We increase our sake in Ribera salute from 50% to 90% this demonstrates our commitment to continue developing centene's International portfolio wage. We're also proud of the initiatives. We announced in 2019 to enhance the health of the communities. We serve I would like to highlight just a few thousand February reform the social healthbridge trust to help organizations more effectively addressed the social determinants of Health in April along c o p and Youth Challenge to raise awareness among adolescents about opioid issues and prevention of dependence and in September we launched the food for today and food for tomorrow element initiative was feeding America to help those experiencing food insecurity. These initiatives are all in line with our whole Health focus, and yep.
visiting her lipstick approach
How we work with our community? We are focused on addressing the broad range of social determinants of Health. For example, Medicaid of always are particularly deadly to struggle with non-medical barriers to health including nutrition education transportation and proper housing as a leading multinational Managed Care Enterprise. We will continue with the initiatives and partner with organizations to transform the healthy communities across the world.
Moving on to the market and product updates first will discuss recent Medicaid activity during the year. We maintain our industry-leading Medicaid win rate of 83% with success across new contracts as well as renewals and contract expansions Medicaid membership grew approximately 3% to year-over-year to eight point six million recipients, Texas, November 17th accessory. We procured the expanded and expanded in Star Plus contract in Texas law. We will be providing Health Care Services to recipients into new Services, El Paso and Travis while continuing to operate in our seven existing service areas in 17 currently serves a hundred and forty thousand beneficiaries under existing contract.
the new experience
The contract is scheduled to commence September 1st of 2020.
On a separate note the state of Texas has now indicated that the Starship re-procurement announcement will be sometime in February. We remain confident in the value. We bring to the state.
Pennsylvania on January 120 2017 successfully launched the third and final phase of the Pennsylvania long-term care contract at approximately 38,000 benefits.
As a reminder we launched the South West Zone in January of 2018 and the south east Zone in January of 2019. We are the leading long-term provider in the state office currently serving approximately 90,000 recipients. The addition of the third Zone will bring our total annual revenue in Pennsylvania to over two billion dollars since teenage participation in this important program reinforces, our national leadership position and long-term care.
Louisiana
I'm pleased to announce on January 17th, 2020 that Louisiana procurement officer found the States government to be the most for the most recent. May I quote was fatally flawed after months of reviewing are protesting for Sherman officer agreed to State failed to comply with requirements that both in the I'm in the law consequently. The procurement was rescinded and rewards will cancel the state and awardees have appealed the decision to the commissioner of administration and we were encouraged waiting for resolution.
We remain confident that commissioner will opposed to procurement officers decision centene's plan continues to operate under the previously mentioned emergency contract for the state wage. Excuse me, North Carolina as we have noted centene as a provider identity has been awarded three regions in North Carolina North Carolina. Medicaid managed-care Program has been delayed from his previously announced February 12020 start date pending approval in the state budget at this point. No official timeline has been announced we continue to maintain sufficient operations for all requiring implementation activities during this delay. In addition. We are defending our award against ongoing protests and expect that we retain all words once the process is from
Illinois
In February, we cleanse operations on this age Foster Care Program serving approximately 15,000 beneficiaries. We expect additional enrollment of approximately 17,000 laser issue.
health insurance Marketplace
Will you mean pleased with the strength of our Marketplace business which has continued to be very popular and attract in an attractive option for many consumers in 2019 retain market-leading National position at year-end reserved approximately 1.8 million exchange members in 20 States this represented growth of a policy 20% year-over-year wage for twenty twenty. We expanded our footprint in 10 of our existing ambetter States and 306 Newtown a continued focus on providing high-quality. And for what else you said to a very successful open enrollment in January, we had almost two point two million members across twenty States this represents a year-over-year increase of approximately 800,000 beneficiary.
In addition the key demographics of these members remains relatively consistent with prior years. The average age declined by one year 242 off a retention rate increase 2% to 82% and our infatuation rate increased by 3% to 96% We expect to have a strong year of operations in our industry-leading Marketplace business.
on the Medicare
You and we served approximately 405000 Medicare beneficiaries increase of approximately 3% year-over-year. We do not check our growth expectations Medicare and overall performance has not kept pace with the rest of our products. We haven't focused on addressing the underlying drivers cuz it's under performance. I I work as high-performing Medicare portfolio. We serve as an important Catalyst to accelerate growth and performance in this business as I mentioned last month and an investor confidence. We plan to operate Medicare business under the world care brand name Brooke. He had uncomfortable that we will be able to reset the trajectory Public School a couple of quick comments.
medical cost
They remain stable and in line with our expectations in the low-single digits on the radar for 2019 are composite of Medicaid rate increase was 2% off. We're expecting a composite Medicaid rate increase of approximately 1 and a half percent for 24. Now. Let me provide commentary on Health Care legislation in regulatory environment. We believe that there is little desire in Washington to revisit Comprehensive Health Care report, however, Congress and the administration continue to explore ways to improve the health care delivery system. We are pleased with the end-of-year legislation which included a provision fully eliminating the health insurance beginning in 2020 what this tax, not only increase the cost for seniors and those who purchase commercial coverage but requires states to pay hundreds of millions of dollars wage.
tax the place significance trade
a new Medicaid Program
in addition the marketplace Provisions aimed at stabilizing the individual Market further indicate bipartisan support for exchanges last week the administration announced a block grant proposal. They're giving States more flexibility with their expansion population. We are currently reviewing is to go to and look forward to working with the administration to help promote Medicaid fiscal Integrity while making sure the program remains available to those who need it since he welcomes the federal government's efforts to promote Saint in a station across all programs to make coverage more affordable and sustainable. It represents another opportunity to be an Innovative partner with the month and since he was a total approach is well positioned to do so
In conclusion 2019 was another very successful year.
We delivered solid Financial requirements it made significant progress against our strategic priorities. We look forward to 20 20 Beyond with confidence as we continue to build on this positive momentum with a focus on driving significant growth across the portfolio with an Enterprise on our gigantic in an emphasis off again.
Continue to focus on operational excellence emerging expansion and investing in the strength scale and quality of Enterprise and portfolio to reach out to you to deliver value over the long term. Thank you for your interest in Jeff will now provide you with further details on fourth quarter and full-year 2019 Financial. Yes. Thank you, Michael and good morning this morning. We reported strong fourth-quarter and full-year 2019 results 4th quarter revenues were eighteen point nine billion an increase of 14% over the fourth quarter of 2018 and adjusted diluted earnings per share were $0.73 this quarter compared to $0.69 last year. Now, let me provide additional details for the fourth quarter revenues grew by approximately 2.3 billion over the fourth quarter of 2018 primarily as a result of growth in the health insurance Marketplace business expansion and new programs and many of our state's into a job.
the nineteen particularly, Arkansas
Illinois Iowa New Mexico and Pennsylvania in our recent acquisitions in Spain. This growth was partially offset by the health insurer fee moratorium in 2019 moving on to Thursday. Our our health benefits ratio is 88.4% in the fourth quarter this year compared to 86.8% in last year's fourth quarter and 88.2% in the third quarter of 2019. The year-over-year increase was attributable to the health insurance Marketplace business where margins have normalized as expected from favorable performance in 2018. The increase was due to the health insurer fee moratorium. Sequentially the 20 basis point increase in hbr from the third quarter of 2019 is primarily due to the normal seasonality and the health insurance Marketplace business in a moderate increase in flu-related costs. The hbr for the fourth quarter was higher than our expectations driven by higher than projected medical costs in our Marketplace business and slightly higher than projected.
plus the marketplace business continues to
Form well and finished the year with pre-tax margins. Well within our targeted 5 to 10% range Marketplace membership remain strong as we ended the year with approximately one point eight million members for 20. We expect our Peak enrollment to be approximately 2.2 million members representing growth of over 10% from last year's Peak enrollment. This is in line with the range that we provided at our December investor day off now on to sg&a are adjusted selling General and administrative expense ratio is 9.5% in the fourth quarter this year compared to 9.9% last year and 8.8% in the third quarter of 2019. The year-over-year decrease reflects the leveraging of expenses over higher revenues and lower variable compensation costs in 2019, the sequential increase primarily due to an increase in selling costs in the fourth quarter of 2019 and the impact of approximately 440 million of that wrist state-directed payments in California recorded in premium Revenue. Yep.
3rd quarter of 2019
Additionally, we spent five cents per diluted share on business expansion costs during the fourth quarter during the fourth quarter. We recorded Thirty million dollars or $0.05 per diluted shares of debt extinguishment costs related to the Redemption of our one point four billion 5.6 to 5 % senior notes due February 15th, 2021. This includes the call premium package the right off of unamortized debt issuance costs and they lost on the termination of the $600 interest rate swap associated with the notes.
Investment income was a hundred and twenty six million dollars during the fourth quarter compared to $67 last year and $98 last quarter the year-over-year increase reflects increase investment balances over 2018, including the proceeds of our seven billion dollars senior note issuance related to the plan financing for the cash consideration of the WellCare acquisition improved performance associated with our deferred compensation portfolio and the impact of higher investment balances sequentially investment income increased in the fourth quarter due to the higher investment balances associate at the World Bank financing and improve performance associated with our deferred compensation Investment Portfolio, which fluctuates with its underlying investment Investments.
the earnings from our
Compensation portfolio or substantially offset by increases in deferred compensation expense recorded in sg&a.
Interest expense was $113 for the fourth quarter 2019 compared to ninety eight million dollars last year and $99 last quarter both the year-over-year and sequential increase reflects a net increase in borrowings related to the issuance of an additional seven billion in senior notes in December 9th, 2019 used primarily to finance the cash consideration of the WellCare transaction page or effective tax rate for the fourth quarter was 22.3% compared to 32.5% in the fourth quarter of 2018. The decrease is driven by the impact of the health insurer feed more of them. Sequentially. The fourth quarter tax rate was in line with our expectations and lower than the third-quarter tax rate driven by the vesting of our employee stock awards, which occurs every December
Now on to the balance sheet cash and Investments totaled twenty one point four billion dollars at quarter-end including 7.2 billion held by unregulated subsidiaries our risk-based capital projects for Nai C filers continues to be an excess of three hundred and fifty percent of the authorized control level dead at quarter-end was 13.7 billion which includes $93 of borrowings on a Revolt facility our debt-to-capital ratio at the end of the year end was 34.3% excluding are non-recourse debt and the senior notes issued to fund the WellCare transaction. This compares to 37.4% if the fourth quarter last year and 35.6% at the third quarter of 2019 our medical claims liability totaled 7.5 billion dollars a quarter in life and represents 45 days and claims payable compared to forty eight days in the third quarter of 2019. The decrease in d c p is driven by a reduction in state directed payment.
That are a component of our Medical.
Claims liability as we have highlighted in the past. We expect the DCP to be in the mid 40 range on a run-rate basis, but state-directed payments at the end of some quarters have increased our DCP to a higher level in the fourth quarter. We did not have any material state-directed payments included in our medical claims liability, which drove the decrease in DCP historically these payments were administered as passed through and not a component of medical cost but it states have moved these payments into premiums with a small amount of risk. They have been included in premium Revenue in medical cost cash flow used in operations was 850 1 million dollars in the fourth quarter and cash flow provided by operations was 1.5 billion for the full year 2019 or 1.1 * net earnings operating cash flow for the fourth quarter of 2019 was negatively affected by the timing of payments from a few of our state customers as well as the absence of material state-directed payments that I previously mentioned.
Now let me provide an update on the WellCare acquisition. We are pleased to close the WellCare acquisition on January 23rd and have the gun the integration process each. WellCare share was converted into 3.38 shares of common stock valued at $66.76 plus $120 per share in cash for a total value of 19.6 billion dollars including 1.95 billion of assumed debt based on the closing price of centene stock on the acquisition date. We expect our debt-to-capital ratio to be approximately 39% at close range including any share repurchases or repayment of debt associated with the proceeds from divestitures given the closing date the results for January will be prorated for our ownership. Of well care of the divestiture of our Illinois business.
now shifting to
As stated in our press release this morning, we will be providing Consolidated guidance including the WellCare acquisition on Tuesday, March 3rd with a conference call the morning of March 4th at 8:30 a.m. Eastern time as I just highlighted. We need to close the month of January and prorate the activity for the month performance and account for the device at your transactions absent the WellCare acquisition and related to vestiges dissenting Standalone guidance. We provided at our investor day in December. Let's still intact. We remain comfortable with the previously communicated accretion targets of no less than break even in the First full year post office position and mid-to-upper single digit accretion in the second full year. Additionally we continue to expect here to net synergies of $500 and run rate net synergies is 700 million dollars wage will provide an update to all these metrics on the March fourth call.
Well, we will provide our formal guidance in March. I would like to highlight a few headwinds and Tailwinds that will affect the guidance for 20 21st. The head winds in the S4. WellCare assume the North Carolina contract would begin on February first moving the start date to October first in line with our model reduces revenue and earnings for 20 22nd due to the closing date centene will not incorporate 22 days of well cares January results into the combined twenty-twenty guidance. Additionally the amounts in the S4 did not account for any divestitures the total divested business represents approximately 3.6 billion and annualized twenty-twenty total revenue and six hundred and fifty thousand members.
Now turning to tell ones.
Willcare had a successful open enrollment period for both its Medicare Advantage plans and Part D plans Medicare annual enrollment was in line with expectations and the PDP business currently has approximately Fifty Point four million members given the timing of closed we continue to review well cares 2019 results including any one-time items in the effect on the 2024 cast as strong as earlier. We will provide a full update on the March call in summary 2019 was a successful year for the company as we continue to execute on our growth strategy. We grew both Total revenues in adjusted earnings by approximately 24% over 2018 total revenues grew by 14.5 billion and adjusted diluted earnings per share by eighty eight cents. We reduced our leverage by 3 a.m. Basis points in 2019 in preparation for the WellCare acquisition and continue to expand that income margins.
Looking forward we expect to leverage the combined capabilities to provide meaningful growth and efficiencies across all of our product lines. We are focused on executing the integration plan and achieving our stated strategy and accretion targets that concludes my remarks and operator. You may now open the line for questions. Thank you. We will now begin the question-and-answer session wage other than one on your touch base phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily took simple our roster.
our first question
Comes from Kevin fish back with Bank of America, please. Go ahead. All right, great. Thanks. That will care, Terry was helpful. But I guess I just wanted to see if there was anything else that you would highlight as far as the delay in the guidance because I think you guys provided the guidance for Health Net before the transaction closed. So just wonder if there's anything else that kind of lowers your visibility or any other item that you really want to get color on before you provide it maybe the you know, the proposed that may rates or anything like that. You want to get color on? Yeah, just a couple of things Kevin. I think it's just purely the timing of the closing, you know, the well care or the Health Net transaction closed around the end of March and their annual 10K audited financials were already out. And so literally I think it's just the timing of clothes and I think you all should have the fact that their you know, their audits not complete as well as the last step in the regulatory approval process in this transaction was the department of justice peace. So again, we were operating as mm
In companies until the time of closure.
And it's a it's a considerably larger complex number of states and in businesses involved in and we want to you know, you know, Kevin would like to do it methodically and careful. So taking an extra 30 days or so seem to make sense. Okay, and then just my last question the mlr on the exchange is coming at higher than you expected quarter can provide them or color as to why that was the case and and why we shouldn't be worried that that's going to impact your 2020 Outlook. It costs are higher. Why doesn't flow through into how you price for Fort Worth doing came in a few priced. Yeah. I might just started that then just pick it up. We want to remind you of what we have said historically one it is it is falling within our guided Rangers to 10% to we had commented how we are keeping the members longer and so that can have an impact on the MRI and the fourth quarter, but because we keep doing wrong wage.
total margin impact is
Been affected by it. You may want to go a little iffy on that shift. Yeah, I would say a couple a couple of things Kevin. I would say we did see some higher non impatient costs in the fourth quarter than we anticipated but also a little less than half of the fourth quarter costs in the exchange business that were higher than our expectations was associated with the reconciliation of outstanding claims items that were settled and resulted in more favorable reimbursement going forward and the majority of these were in states where we have ml our rebates. So and then the other thing is we have mentioned we did mention December investor day that we did expect it exchanged margins to continue to moderate slightly in 2020. So I guess what I would say is you you combine all that together. We're still comfortable with where our 2012 expectations are for the exchange business. It's a very strong business and as I come at all the demographics continues to on the growth and face of what people expect additional competition wage.
Petra we continue to do what?
No, and it's and he's one-time thing. He sex talks about can have an impact but that's that really has a benefit going forward. So it's just to make sure you're saying that some of these settlements in we're going to also prospectively impact costs upward, but there are markets where you have rebates if if you had a settlement like that in Q4 and you're paying rebates page with that no, no no. No, what I'm saying is is that we had costs that we incurred in the fourth quarter that will provide better reimbursement going forward out better and those wage and yes and the more favorable reimbursement going forward and those costs that we incurred in the fourth quarter happened to be in states where we have them all our rebates. So there is some mitigating effect and it reduces those mlrs three year Rolling calculations. So it reduces the effect of the ml are going forward.
Great. Thanks.
Thanks. Good morning. One of my first one just on the difference between sort of you know, first year, um, you know, at least Break Even versus missing the first three weeks. Should we assume that that's actually a favorable thing in in terms of you know, I think about PDP benefit design or should we think of it as you know, 2020 no material difference than first year post closing off. Well, I mean, that's that's why it's one of the reasons why we're waiting Josh is you know, you have to actually closed the month of January and and as you're well aware, there could be variability on the medical cost side and I think on the on the revenue side, you kind of know your members and you know the premium but the cost side is what you don't know and so, you know one one of the reasons, you know, we're waiting until the beginning of March to give the combined guidance is just to get the actual number of January and do the proration math.
Okay, and then how are you guys thinking about the PBM opportunity on the Legacy? WellCare book? I don't think there was a formal announcement. I know they were talking about um, you know, making some changes there or at least, you know going through the process there now. It's part of sentient overall and I assume you guys will be instrumental in that decision making process. How are you thinking about that? I let you have more specifics. But we we said earlier that we will be based in Tampa and Jews going to drive that process for us and we see some real benefits in the total pushing power without having to consolidation, but he can give most yeah Josh. I think they were in process on a on an AR-15 concluded that process right now is what I would say is we're in flight on the Synergy analysis obviously looking at their contracts and our contracts and all the dead.
Our next question comes from Josh with nephron research, please. Go ahead.
I would say harmonizing those to achieve the value that that we're trying for in the synergies.
Um, so I guess that's where we are. We've begun the process and we're in process on that now more to come in March.
Okay. Thanks.
Our next question comes from Ricky goldwasser with Morgan Stanley, please go ahead. Yeah. Hi. Good morning. It's wonderful up on your own. No answer on the question. You mentioned that Welker concluded the RFP process. Can you just clarify did they make a decision in it? Or did they just concluded their own view of the RFP process? No. No, they they've made a decision in that. I think they extended their contract with a clarification and then just as we think about the the mlr obviously talks about the the moving Parts in the fourth quarter that impact your your initial thought so should we think about kind of like the flu is it is it twenty impact I think was kind of like the difference between the high end of your initial range versus where you came in and then when we think about the
Impact in the first quarter, and I know that you don't Guide to the quarter. How should we think about if
Lou continuing to weigh on mlr. Yeah, I guess a couple of things. I I I just bifurcate the the marketplace versus the flu again, this is versus our expectations. I would say the marketplace was two-thirds of the variance with the flu being a third. So I think that gets you close to twenty to Thirty basis points on the quarter. So I think your your clothes off as far as the flu for q1. We'll have to wait and see you know, one month is not a quarter and so we'll have to see how flu costs pan out for the entire quarter as you're well aware. We did talk about the perfect of leap year and the additional day on the first quarter's performance, and I think we discussed that at nauseam at our December investor day.
Our next question comes from Charles re with Cohen, please go ahead. I'm sorry. I thought maybe one more follow up on the question. If if it's an extension for three years with CVS. Is there any change of control Provisions that would allow you as you do the analysis to consolidate the PBM operations sooner or would you have to wait for the three years to be over to really kind of roll roll something on all together? I think there's certain flexibility in the built into the contract. So obviously they knew they were in the middle of a transaction. And so I think there's some flexibility in that. But again, we're we're we're doing the full analysis long as we speak in more to come in March. It's really the pricing with the amount of purchasing power. We have will be very important.
understood
Thank you. And then just you know going back to individual a little bit, you know, I think you said that you know for the year, you're sort of well within the target range of 5 to 10% But when we talk about normal marginalization over the near medium-term, where do you think we are in the process, you know, you know, do you think we're going to where do you think we kind of stabilized out over the next year or two? Thank you. Yeah, I'll I'll kind of go back to our what we said at our December investor day a couple of things to just highlight. Remember we've always talked about 2018 was a very good year for the marketplace business office. And what we saw in nineteen is a margin a pretax. Margin. That was very consistent with 2017 16:15. So we have seen very consistent margins since the Inception of the exchange business for us. The outlier is really 2018 which had an exceptional year and so as we close 2019, I would say margins were exactly yep.
They're roughly in line with that.
Trance meaning consistent with 17 and 16. So we're still comfortable that in the 5 to 10% range and I think we mentioned at our investor day that we saw them moderating slightly off, but but it's not substantial. We don't see a material moderation moderation in margin from 19 to 20.
Say, thank you.
Our next question comes from Sir James with Piper Sandler, please. Go ahead.
Thank you. So 2020 is probably expected to be a more competitive year for exchanges and I'm wondering if you can tell us if you've noticed any difference on the impact that it's having on market share ramp in New Markets compared to expansions in past years. You know, I think I heard the same thing last year and we grew 10% in the market that strength 1% and I think we have strong networks. We saw a we saw the the continuity of our members increased by 2000. We still have the effectuation increased. So at every level and I said all last year that we know how to be competitive. It makes us better and I think there's the products is strong and our consumers recognize it like the Network's we have and we we expect to be more than competitive wage.
Got it, and maybe you could talk a little bit about the boots that Ascension and some of the jv's could give to Medicare growth. So should we think about that as a potentially providing an opportunity to grow above Market rates for Medicare? Yeah, I think you know, we're still working through and now now that we're able to walk work with WellCare. And as I said, we're going to be consolidating that will also be headquartered in Tampa you might Poland and so we're working through that they're working with us on the joint ventures. Those are things unfolding very nicely they'll take time and I think the time to talk about the impact they'll have will probably be when we give guidance for 20 21 and the team has had the full look at it, but we really see our trajectory changing with the input of the marketing and other capabilities that workers demonstrating.
Thank you.
Question comes from Steve tinnell with Goldman Sachs, please. Go ahead. Good morning guys, I guess on the RX advance and WellCare sort of curious do well care have full visibility the costs and benefits of RX Advance before renewable CVS. And well, you know, we were I want to be very clear. We were very careful prior to the epistle from Department of Justice. The operator is two very separate companies. And as we had no insight into their contracts and we were calculated have any doubts because the the rules of that are very clear and it's the old story in only have to be honest. You should be out and so we they they had no insight into it.
Got it. Okay, that's helpful and maybe just one other on centene filtered want to understand how you guys are sort of thinking about in the context of earnings. Do you expect at any point to sort of commit to a certain net number or contribution? And is that not twenty or Twenty-One? Like just any color on that? Yeah. Let me let me see I think as we said in the beginning we are really self-funding a lot of development in our systems and systems capability and then the name of the game going forward is that and that's where our scale and size is a hundred billion dollar company wage is so important we have it gives us the resources to continue to focus on the system's that's going to deliver the kind of performance margin Improvement Etc in Twenty-One twenty-two and going forward and and as we start to let some of that fall in the bottom, right I such shameful be in a position to disclose that wage.
our next
in a succinct way, but it's
I can't remember who that you have to that cost a little bit like your fingernails you have to continually trim them and we we we see them as Incorporated in the company and it's a continuous process of reducing costs while improving the capabilities of the company and he couldn't be more pleased with the five hundred million dollars that we were able to achieve this past year and we see it continuing to grow an additional funding this year which would just continue the next generation of systems work. Yeah. And in fact are going to be just a little more power that we have we're we're really bifurcating but dry food. I guess would be the word our systems. We have that that we have a group that's going to be maintaining the systems that work day in and day out. We have a group that's going to be working on the transition cuz there's a log
Frances through these systems and I make I make no secret and they don't either that you know.
Okay knew they were going to be sold at some point. And so there's a lot of little systems that's going to take some time to transition. And that's why we've said it's a two or three-year process to do it right and get it. Right and we're focusing on that and the third group or the Advanced Technology Group, and these are the think tank people. The people that have brought us things like interpreter and others. They give us real time. He met with positions. They're they're going to take us to the Next Generation. So that's being funded by this by this these savings helpful. Thank you.
Our next question comes from Justin like with wolf research, please. Go ahead. Thanks. Good morning. First. I just wanted to follow-up one last question on the PBM. You know, there was some talk by WellCare group getting better economics potentially pulled forward into twenty twenty-two twenty-three dollars an oil change. The contract doesn't begin or doesn't end to the end of the year the original contract. So I'm curious if that's something we should consider that maybe twenty twenty could be could have better PBM cost rather than 20 21 and then can you tell us strategy is to move Medicaid over to RX advance from welfare groups for Ali and then leave the Medicare PBM during for CBS during the contract. Yeah just took so as I mentioned before I mean we're going through the process right now comparing the the PBM contracts and and all the capabilities that both companies have and you know rationalizing that for the Synergy opportunities.
And so I'm I'm not going to comment today. You know, I kicked that question to March when we provide full combined guidance because then we'll have the opportunity to to have the benefit of
Billy on both those contracts. Yeah, just if I may just if you if we think about when you combine these two companies, we have multiple work streams or developed During the period of time of waiting for justice approval and that's why there's systems is combining to you know, when you when you take the Florida and Georgia the large companies both sides combining them and then the things that were doing they and while we have divested of plans, we have obligations there to ensure that a smooth transition of that membership. You put all that together. It's it's very complex. So we're we're just trying to take a use the next 30 days to take a bath careful view of it and get it right. We're not trying to duck anything except saying it just takes time when it's as complex as this way and it's I keep telling people it's not how fast it's how long you do.
Totally makes sense. I appreciate that and then just my follow-up is on the exchange medical costs in the fall quarter. So if we if we think about the the you know, they were above the high and the arranged by a 20 basis-point sign ml are so 80 basis points for the quarter. Can you give us some delineation in terms of how much of that was the exchange Miss wage? You're sixty out of the eighty basis points. Just trying to get were exchanged margins. Where in the quarter. Yeah. I'll I'll kind of package everything that I've said together in one maybe this will clarify everything so long. You're right on the lips. So mlr for the quarter was higher than our expectations by 80 basis points. I said two thirds of that was Marketplace one-third I would say is flew Em are just rough right that's and then of the marketplace piece, I set a little bit less than half was associated with these reconciliation of the outstanding claim.
where we
Effectively had medical costs in the fourth quarter that will provide a benefit going forward. Right and some of that was in states where we had em, all our rebates. And so there's there's an offsetting effect there, but it's not a one-to-one because the mlr calculation is a three-year rolling calculation. I want to restate it. Just if I made my temple non-financial, okay, when you look at what we did there we had some states were balanced building things with issues cuz we didn't have a contract with the hospital. We now have contracts with them. So we got those things settings. We got a life with him. So we had the expense to to settle those claims with those groups, but now going forward and then and these are largely States going 4th 2020. We're going to be in a stronger position cuz they're now part of the network and those kind of issues won't be there. So it's you know, it's it was really a one-time get it right off.
and it could happen again just
To be very candid but you know, I always be those things as that's where the long-term comes in. We're in this and we continue to do very well in a long time. If it cost us a couple of Pepsi over there in the quarterback. I'm looking at 2020 and I'm really pleased and what we see happening particularly. I see the membership the effectuation rates. They they've demographics. It's just a really great business for us.
Got it. Thanks.
Our next question comes from a J Rice with Credit Suisse, please go ahead. Hi everybody just on first the comment about Medicaid rates as you came in if I've got my notes right into 2019 looking for a 1/2 Cent increase and I guess today you're saying that you ended up with about a 2% increase and I'm just wage is that mostly due to some troops around the research verifications, or is it something else and we're there any re verifications of note in the fourth quarter and you are in 1 and 1/2 for 2020 are there potential re-verification that can help you in the early part of twenty twenty. Well, I think we said the river it's a moderating and yes, we we've had great success because of the real-time systems. We've had and getting the states to recognize the the membership mix and the Acuity mix within a month.
well never satisfied with the
And how fast they make those adjustments but part of it is well, they say we have real-time systems. They have to wait and see what some others are doing that don't have that real-time capability and that can slow down the whole process. So unbalanced. We're we're comfortable that the the stage in the large states were working with are going to get it right with us and it's just a matter of timing. So which corner it falls in June? That's that's a little more hard that's a little harder to to forecasts, but it's all coming together right there to Japanese anywhere know I think you know, Michael's exactly right? It's just a timing perspective, you know, we're not there are some states that were, you know, still searching for rate adjustments heading into twenty-twenty. So again, it's the timing issue and and we're still looking for, you know, additional rate adjustments in certain States for this effect.
Okay, good. Maybe my other follow-up question would be once you complete the WellCare deal. Your you said your ProForm. I think that the total cap will be at 39% off your where that's within your target range, I believe so do you need some time to digest well care or are you back on the acquisition hunt if something comes along it's attractive to you. Let me let me call me one that's 39. We still have to determine your week the proceeds from the sale and we're looking at both stock buyback and I'm in retirement of debt so that will help but I guess I have to respond to this and say
We're not going.
To look at anything serious and large until we're really comfortable that the the trade this transaction and integration has taken place to the level that's appropriate. But those people that need us know that we have an insatiable appetite and so I would say as soon as they also know where balance sheet managers that'll beat up very carefully at that. So I would say as long as she continues to send this gets integrated and we see opportunities will be back out there, but I have to emphasize what we set out invest your day and and I say it every chance we're very driven by organic growth and I remind people we had almost seven billion dollars or organic growth last year. So we're going to continue to focus on that and that's our primary focus and then we then as we see new capabilities and things we can add will go in the m&a book. Does that help you? Yeah, that's helpful. Thanks a lot.
Our next question comes from Steve valiquette with Barclays, please go ahead.
Hi, good morning. This is Andrew calling for Steve. Just wanted to follow up on the it sounds like you're attributing most of the pressure to The Exchange business if we look back at full year 2019, how did and it's Medicaid mlr perform relative to your expectations?
Medicaid in in aggregate, I think Medicaid was within the range it wasn't it wasn't, you know, we would have called it out if it was dead material one way or the other on the full year when you look at your over your results.
And then one clarification related to divestiture is you noted that the S4 did not include divested business that comment was referring purely to revenue correct your deal deal Synergy is have always reflected energy, correct?
It's specifically on the revenue line. Okay, great. Thanks.
Our next question comes from Scott Fidel with Stevens, please. Go ahead. Hi first question just on the the new block grant proposal appreciate that. You're still digesting that and Michael. I know you gave some initial comments, you know just interested just that this sort of initial sort of stance here. How are you thinking about this in terms of this being um more of a net sort of positive around the Innovation opportunity that you mentioned or you know more of a net potential negative around, you know, the funding caps and potential risk to rates or or I think that there's there's simply going to be some different moving pieces had one no one's to this and I want to be very General on this cuz it's so early in it. But as we said this this this involves expansion not to not to current business. This is Keith and focus on the expansion of their Hill Caps or block grants work really dead.
States that are not growing and it states that are could have an impact so Thursday.
Various impacts but as we look at it, we think I'm going to say that I tilt towards the net positive on it because it's giving the states some opportunities for Innovative. And as you know, we were very decentralized and our local plans have strong relationships with those States and I think there'll be in a position to be able to offer to help.
The states with that and use them our systems capabilities and tests and model things but it is limited to the expansion aspect of the business. So that's that that's keys. And so I think going forward go. I'm going to chill to the positive side, but we're going to continue to work with it and he'll make it better.
Okay, and then for my follow-up question know a bunch of different Dynamics discussed in the exchanges Jeff just interested in sort of where the thinking is right now on the register payable ending the year, you know really two things in particular just want to ask about one. One of one of your peers had cited the the weekly report that came out at the end of the year and month that had led them to make some adjustments to their risk adjuster assumptions. And then also just interested just in terms of those higher for Q cost that you had in the exchange business does any of that sort of flow through to the estimated Acuity profile of your population relative to the market or or were those just sort of other factors that that don't play into the risk adjuster or somethin's wage?
Yeah, couple of things I guess our our risk adjustment was in line with our expectations and you know when the ten
Comes out you'll see the total number, you know, we've got roughly a billion dollars of payable to to the government on the books. So it wasn't really a risk adjuster phenomenon for us. It was really just hire non impatient costs. And as you're aware, you know, we have to get those, you know, we're estimating a significant portion of our medical costs. And so we'll have to wait for those claims to come in and look at the diagnosis codes and and submit those for risk adjustment. And so there may be an effect there, but it's too early to tell
Okay. Thank you.
Our next question comes from Lance Wilkes with Bernstein, please go ahead Yeah question on how are you going to manage the company going forward and I was interested in both, What's the org structure? You've got in place right now as far as Michael to you the direct reports and then as you think a management process, what's the process you've got in place now for lunch or the Legacy 17 Legacy well care and integration and and you know how those differ. Yeah, I think let me a management perspective. We we laid out and our June investor day the organization chart that we were working with as initially and Jews going to report to me become part of my senior management team because of the increased focus on Pharmacy Thursday morning time can in fact, he should be related today in his new role of markets and products and will be helping to do that to bring that in place, but that's all been.
laid out and the we we
What I call a partnership and people have clear responsibility that you get the accountability that responsibility and the authority to manage their businesses. And when you had asked a long we are and is this the Enterprise now International in scope you have to do that. So it's it's very it's the accountability is just is very very clear. So I'm going forward That's the basis of which we're doing it in terms of the integration as you raise it. There's there's different work streams is the systems and I've comment on that that's going to take time and there's a group working on the transition of systems cuz welfare was in the middle of transitioning some of their systems we're eating in another so that that all has to be brought into play the Jeff. I think just playing to be on a general issue by July one so that that would all be in place and that's some place that will be moving to our form of
We reserve calculations as that occurs and we're doing some of that now we use date receipts. So all those things is different work streams for it. It's coming together. We think we know who will be managing What markets and they've been told that and that's moving through and it's because of the need for systems that we're going to it's going to take a little bit of time. You you take Florida. They had a large business. We have a large business and so we're going to operate there and two systems for a short period of time til we can convert to our system. So this is all laid out and it's it's very detailed and it's something that the the board looks at every quarter. We've probably spent Thirty forty minutes. We doing. Well we are and how it's going at our board meeting yesterday. So it's it's something we're very comfortable and I remind people at something we've done
Historically, I mean, but that was was a large company.
Last year and it's fully integrated except we moving the claims our platform which we we said all along would take some time house next was integrated. So I mean this and in fact that we have strong manager on both companies now, I just want to add one more thing that that the reasons lay out to everybody. So they note that we we had cultural surveys on a culture in our culture and we can say this is yours. This is ours and ours is the one will prevail we're not trying to blend things and we have found historically that makes a difference. We also said right up front that all things being equal in terms of a Foreman's the sensing person gets a job. If there's two people for the same job that does not mean that the wealthy person will not be repurposed into a very senior position that gives them challenging new opportunities, but it also gives them comfort that the next time we do a deal that they have that same protection off.
These are things that we have historically done that work really well for us and help to ensure a smooth transition and we expect that again. Does that help you?
Yeah, yeah, it does and and just as a follow-up as you spoke about maybe not doing large-scale m a right now until this is digested but obviously having an ongoing appetite for m&a in in general. Could you talk a little bit about the the priorities and and talked to whether they are regions or particular capabilities in light of having the combination of companies. Well, I think you know it's going to once again it's it's we talk about capabilities some of that maybe systems and you know, and there there's some small Acquisitions need make because of our size. We don't have to disclose it and I have jokingly told people that we we did one day on the person was filled with enough to disclose him cuz he said now my family's not going to be chased me for some of this money. So I mean there's there's some benefits but we we do that type of thing too is the capabilities. We have some other opportunities come up nationally and internationally will do it.
But when I say scale in size when you are now a hundred billion dollar plus Enterprise with five billion dollars.
To leave at the bottom and the balance sheet that we have and they improve credit rating that we have and you know what we're able to sell our bonds and what are bonds are trading at it says what's relative and what can be done has changed a little bit from several years ago. But we were once again just focus on what's the Strategic value and it has to make Financial sense then strategic value and then we'll look at the capabilities of brings and I can't go beyond that because then I'd be starting to tell you who were looking at.
Oh, yeah. Thanks a lot. Our next question comes from Peter with Wells Fargo Securities, please go ahead.
Thanks for squeezing me in here. Just want to belabor the point on the ml our guidance for the Hicks business one more time just to make sure I fully understand what you're saying. You you talked about in the range of 5 to 10% but you you've trimmed that back that guidance, you know into that range a couple of times now, so it seems like you're probably in the mid two thousand or half of that range you talked about for next year still some some non-material moderation of that. So does that really imply that next year you're going to be in the lower half of that range that you've talked about for sure presumably the the Tailwind that you pick up from the the risk adjusters being a little better as of the page doesn't help you that much and then finally, you know, does this have anything to do with the the Iowa Medicaid Claim payments that you were delayed?
you know, they
Iowa we all know has some issues we will cover going soon as they got our attention is being fixed. And and we we made all the programs we made and that's that's kind of historical. It was not it's not mature. We're going to get the funding. It's not it's not a question that on the
Medical office which I want to remind you that it will vary from quarter-to-quarter based on our pockets maximum out-of-pocket a lot of different things off. So what we're saying is that in any given quarter, you'll see some variation now, we also know the the last call tends to be higher because the Mac Auto Park would have been bad and sometimes people try to get some surgeries and other things done and Jeff commented to the impatient little bit higher but I expect some of that unbalanced Thursday 5 to 10% is a solid range. We're very comfortable with it. And in the first quarter it's going to be the higher price range and the last quarter it could be in the lower part of life but unbalanced and we tend to we love to be conservative. We love to under-promise and over-deliver where we can and so we're saying, you know, it's realistic to say that as the
disclose so
Maybe a little moderation, but it's still solid in the in it's solidly in the 5 to 10% range.
But if I start to say we're then I'm giving you more than we have historically ever. It serves no purpose.
squeak business
Thank you. Thank you. All right. Next question, please. Go ahead and just a quick question about the group Commercial Business. I know it hasn't been front-and-center for a while and I'm curious what your thoughts are on the state of that. Did you come into twenty-twenty the intensity of competition there? So we we we have some of it in California. We've said well maintained it it's it's good business for us and I would say that all that's under a strategic review. Okay, but but I but honestly man, I'm back burning a little bit. So I want to get I want to get WellCare fully integrated and get things before we start distracting people in some other opportunities. All right. All right. Thank you.
our next question comes from Michael, New Rochelle with
Evercore is I please go ahead. Thanks. Maybe just going back to the divestitures. Thanks for the revenue number. But can you also make any comments about relative profitability in size the proceeds and if you actually decided I'm going to redeploy on BuyBacks or Debt Pay down or vessel to be determined as you put the facility the guidance together. Yeah, we we're we're going to right now that that analysis and that's going to be a function of stock price as much do anything. And so stay tuned that something will resolve probably Jeff what next 30 days or so. Yeah. Yeah, absolutely. And then the other thing on the size of proceeds billion dollars pre-tax, so a billion dollars pre-tax is the proceeds and that by the way that also includes, you know statutory Capital as well. Yeah.
Got it. I think it was a fair transaction for everybody.
Give me one more just a sorry if I missed it, but you have any update to a Marketplace enrollment expectations for 2020 now that you know open enrollment is over. Yeah, we said two point two million two point two million members speak with got it. Thanks.
Our next question comes from Ralph Jacoby with City, please go ahead. Thanks for morning first. Just a quick clarification. Did you say that the hire Em are non inpatient? I think that's what you said and I thought my question. If I yeah, not not inpatient was not inpatient. So if you could just flush out when you say non inpatient is that just selected outpatient is a drug just just help us in terms of what areas popped to that magnitude to drive the mlr I think we just so normal PCP visits. So, you know, it wasn't in necessarily in the specialist category. So I just hired doctor visits is what I would say. Okay. All right fair enough and then just a quick follow-up here, you know any initial comments around some of the proposed changes for Hicks and twenty twenty one month and I guess specifically around pulling tax credits for those who pay zero premiums of people and don't update their income. I guess just trying to understand logistically do most update each year. So, yep.
Not an issue or how easy it would be for you all to sort of Aid and making sure they sort of gets done. And if you could just what percentage of your Hicks & Rollies pays your premiums thanks wage. Hi. This is it's Kevin counihan. So, you know the payment notice just came.
Friday as you know, we're still digesting a lot of those issues that you speak to we've got broad diversity of folks within the FPL range. I think is you know that we tend to have the majority under 250. So again not trying to be evasive but we still are just working through the payment notice.
Okay fair enough. Thank you.
Our next question comes from David Lindley with Jeffrey's please go ahead. Thanks. Thanks for squeezing me in so I wanted to ask a question on Revenue may seem trivial but God but you were outside of your your Revenue range by about four hundred million dollars doesn't seem like exchange retention is is enough to account for all of that. I just want to make sure there weren't any one time if it's flowing through the revenue line know. I I think I think we there, you know, we mention in the I guess in our December investor day that we thought of the the Ford who is either recall or December investor day that our fourth quarter Revenue would be lower than our third because of the size of the past three payments and I think we did get a few past three payments in the corner of that kind of helped Revenue, you know, we don't have great visibility on these from States and so they just show up. So I think are we expected a bigger drop dead?
And then second question just to get to go back to your head went and tell when commentary I want to make sure I understand that that that is relative to S4. But that your guidance both on to the earlier question about Five Sisters, but also in terms of timing of clothes that that it would seem that those two items relative to what you would have baked into your neutral in year one and mid-to-high single-digit accretion here to that particularly the year one element of that that those two things probably came out better than you expected. Is that a fair conclusion time.
Which two items came out better than expected timing of clothes and the and the magnitude of divestitures. Yeah. Yeah, but the the fax being a close, I mean when we gave our our numbers, you know, we are you know, the accretion target is a full year, right? So it doesn't really matter when it starts. It's a full year and my point my point on the guidance is that you know, we're going to prorate January and that's going to have an effect right? I mean if you just take the the WellCare Top Line number, you know that they were expected to hit for 2019 and and you take $22 out of that. You know, that's that's a sizable number. Okay fair enough.
Our next question comes from Gary Taylor with JPMorgan, please go ahead.
Hey, good morning, Jerry. Hey, I wanted to I had a clarification on that last Point as well. So maybe I'll try to put it a little clearer cuz I've had a few questions. So Jeff when you had laid out some of the the head winds around WellCare, those are relative to ultimately the twenty-twenty consolidate a guy and she's going to give those are not headwinds to the year one at least neutral and guidance. Yes. Yes. Yeah that that is correct. Yeah. Yeah. You're correct on that. Okay. I just had a couple questions my last one. I wanted to go back to the exchange question just one more time and make sure understood um about you had mentioned that some of the increased costs were in states where you were already up against the minimum of ours. It had some accruals so so effectively dead.
Additional cost you would have occurred in those States.
I guess made of would not have impacted earnings because you'd already your your margin is essentially already capped or your mother's already capped and then consequently, I'm moving in the next year any Improvement wouldn't flow through to earnings. Cuz again, you're you're in the lower at least is already essentially cap. If you're if you're into the minimum wage is my understanding that correctly or is there a different point you were trying to convey on on that part? The biggest piece of that that you're missing is that the mlr calculation is a three-year rolling calculation, right? So to the so to the extent we had costs in the fourth quarter and you're in a minimum mlr right and it depends on the magnitude of the entire year and they'll our rebates and so when you go forward if I had lower mlr rebate and 2019 that is a lower amount that I have to deal with in the future dead.
right, so it's
It's not a one-to-one. I mean you could if everything was equal per year you could say it's a 1/3 benefit. So if we had costs in the fourth quarter, we'd get a third of that back down but the math isn't that simple because every year is a different animal our number the math is complex, but I think the point you were trying to convey though. At least was that the thought that in incurring some of these settlements and reaching in network agreements with some of these bcp's ultimately was going to provide some better performance. And yeah, well, I would there's two things number one. It's better reimbursement, you know more favorable reimbursement for us going forward as a contracted provider, right? So that helps and then yes, it reduces the aggregate level of ml are payable that you have and so there by provides a benefit going forward. Okay. Thank you very much. Yes.
Our next question comes from George Hill with Deutsche Bank.
Please go ahead. Hey, good morning guys, and thanks for squeezing Miami and a lot of my questions have been answered. I guess I'd ask one kind of philosophically on the the the Medicaid demonstration projects around the block grants. Do you guys in the pharmacy business feel like you're better off with the statutory rebate on the drug side or do you feel these guys feel like the business would be better served taking a formulary approach and being able to negotiate your own discounts and rebates. Thanks. Well, I mean I always I've always liked the idea we more masters of our destiny and but I think when you have the systems we have in the capability that are we going we have the flexibility to work either way. So we you know, yet will make our decisions as I've always said based on the facts of what they are at the time and these are still issues under discussion and there's opportunity to influence some aspects of it. We believe and that's what we'll do and it's we we just take a very open-ended approach to it off.
And I'm comfortable will end up in a strong position at the end of the day.
I appreciate the color. We we thank you for your thoughts comments and thoughts today and the chance to clarify some of these things and we're looking forward to the March 4th is I'm going that's what they Jeff where we're going to be able to give you the pool guidance and not set the Baseline on what this combined company will be doing going forward, and we we believe will be very significant. So thank you and we'll be back to you again in March.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Thursday