Q4 2019 Earnings Call

After the completion of our prepared remarks, we will open the call and take your questions. I would now like to turn the call over to our chief executive officer Joseph Joe.

Thanks.

You Julie and good morning.

On the call today, I will provide highlights from the fourth quarter and full-year 2019.

Discuss our growth initiatives review our Capital allocation priorities and provide our full year 2020 earnings Guidance with detail on each of our deadlines a business.

Yesterday we reported earnings per diluted share for the fourth quarter of $2.67 with net income of $168. And then after tax margin of 3.9% I am pleased with our fourth-quarter and full-year results.

For the full year we met or exceeded our expectations.

Premium Revenue was 16.2 billion dollars and in line with our expectations.

The medical care ratio was 85.8% as our Cost Containment efforts continued to control medical costs while ensuring the highest quality of care for our members.

The G&A ratio was 7.7% as we leveraged are fixed cost base while beginning to invest in growth.

We improved our Medicaid and Medicare and earned exceptionally High margins in our Marketplace business.

The 2019 total company after tax margin of 4.4% was supported by 3.2% and Medicaid.

6.7% in Medicare and 10.3% in Marketplace

All in this performance resulted in net income of $737 and earnings per diluted share of $11.47.

In a year when premium Revenue decreased by 8% due to Legacy contract losses. We were able to deliver 4.4% after tax margins and earnings per share growth of 8% a testament to our early-stage focus on margins.

During the year, we improved an already strong balance sheet and capital structure while the business continued to generate significant excess cash flow.

In the fourth quarter, we harvested in additional three hundred million dollars of dividends from our operating subsidiaries bringing the total for the Year to one point four billion dollars.

As of December 2019 unrestricted cash at the parent company was 1 billion dollars.

In early December 2019 our board authorized a share repurchase program of up to $500.

Through February 7th under a 10 be five one trading plan. We repurchased 1.9 million shares for $257.

I will now comment on the progress we made in the second half of 2019 on our pivot to growth strategy.

During the past few months. We announced to Acquisitions your care and Upstate New York and Next Level Health in Illinois.

Leave Acquisitions of financially underperforming health plans have stable membership and revenue but provide opportunity for margin Improvement operating leverage and membership growth.

As a result of the your care acquisition we will serve approximately 46,000 Medicaid members in Seven Counties in Western New York with annual revenues of approximately $2,000.

The purchase price is approximately $40.

In the next level transaction, we will serve over 50,000 Medicaid and ltss members in Cook County Illinois with annual revenue of approximately two hundred million dollars. The purchase price is approximately fifty million dollars.

We will fund these Acquisitions with available cash in both are expected to close in the first half of the year and hansing our premium Revenue growth rate for 2020.

Mexico we have been working on a special situation, which is a discrete program filling an unmet need.

The Navajo Nation in New Mexico has passed legislation to create the first Native American Managed Care entity and further the legislation stipulates that the Navajo Nation partner with Molina to operate the plan.

Pursuant to that legislation the business arm of the Navajo Nation will contract with us to develop a fully capitated Healthcare offering Under the Umbrella of New Mexico's traditional marriage program.

The new entity will be designed to improve access and quality of health care for the largest Native American reservation as there are approximately 75,000 navajos in New Mexico are eligible for Medicaid.

The program is expected to be operational by 2021.

Turning now to an update on our Medicaid rfps in Kentucky. We submitted a high-quality proposal in 2019 and response to the state's Medicaid office and we're selected as one of the winning bids.

December 2019 the new Administration canceled the awards and rebid the contracts.

We have already submitted the updated proposal that details our capabilities and local community commitments that were originally successful. And therefore we are hopeful that we will be succesfully again.

In Texas the star plus RFP Awards announced in October were disappointing to us.

While we believe we have an excellent track record of service in this program and submitted a high-quality proposal. We also believe the scoring process was severely flawed.

Therefore we are pursuing our administrative rights.

Our team filed a detailed protest which points out a number of fundamental flaws in the scoring process.

We have not been given a timeline for a ruling on the protest.

We believe that the effective date of the new contract would be no earlier than January 1st 2021. So we expect to operate under our existing contract for the full year off 20.

V

And our other growth initiatives are anchored by our Capital allocation priorities.

first organic growth of our core businesses

second inorganic growth through accretive Acquisitions and third programmatically returning excess Capital to shareholders via share repurchases.

Now turning to our 2020 guidance.

20/20 is the First full year in our pivot to growth strategy.

Is a year in which we expect meaningful top-line Revenue growth while continuing to produce attractive margins.

In that context some highlights of our guidance are as follows.

We expect to grow premium revenues by 7.4% organically and 9% Assuming are announced Acquisitions closed by June 30th.

For the total company, we expect to produce strong after tax margins of 3.7% to 3.8%

We expect to continue to improve our performance in the Medicaid business as we benefit from a stable rate and cost Trend environment.

In Medicare, we expect to grow revenues and maintain are attracted margin position despite the industry-specific headwind of the reinstatement of the health insurer fee.

However, we now expect that the client in the marketplace profit pool for 2020 as the extraordinary 2019 margin performance presents a challenging jump off point into 2012 and it is clear to us. Now that our membership growth expectations were too optimistic relative to our pricing strategy.

We have enhanced our earnings profile by a measured deployment of excess capital and finally as a result of all of this with a full year twenty-twenty. We expect gaap earnings per share in the range of $11.20 to $11.70.

Our premium revenue for the full year 2020 is expected to be approximately Seventeen point four billion dollars an increase of 7.4% over 2019.

This growth is within the seven to nine percent guidance range, we gave previously which assumed a steady State and Texas and no acquisitions.

Assuming the your care and Next Level Acquisitions close by June thirtieth premium Revenue would increase approximately 9% year-over-year and eleven percent increase off annualized basis.

40% of our premium growth is attributed to member volume in 60% is attributed to rate increases and mix of business.

We have a strong and balanced business portfolio which produces a solid base line for 20 20 and supports our future growth. Now, I will provide some details underlying our guidance month by line of business.

In our Medicaid business, we expect 2020 premium Revenue to grow approximately 6.4% This reflects the annualized impact of the RFP awards that we implemented past year market share growth and under-penetrated markets and net rate increases.

Are expected twenty $20 and membership is an increase of approximately 3% over 2019 and 6% when including the membership of our two acquisitions.

I mean earnings perspective we expect to produce Medicaid after-tax margins in the range of 3.2% to 3.4% a slight improvement over 2019.

Are working well.

We continue to manage medical cost-effectively as our efforts in payment Integrity Network management and utilization control continue to offset stable low single-digit Med friends, and we continue to improve our retention of at-risk Revenue and improve our member risk scores.

our Medicaid

For business is expected to grow premium revenues by approximately 12% with our decent product growing by 20%

Recall we filed these products and 150 new counties in 2020 including entering to new States, Ohio and South Carolina and gained market share in exact counties.

We continue to progress toward our goal of having full penetration of our decent product in our Medicaid footprint.

Our year-end membership in Medicare. All in is expected to be an eight per-cent increase over 2019.

From an earnings perspective in Medicare, we expect an after-tax margin in the range of 5.6% to 5.7% including the health insurer fee headwind of $12 after tax, which dampens margins by approximately 90 basis points.

In this line of business premium heels have kept pace with medical cost Trend we continue to effectively manage the high Acuity ltss population, and we continue to improve on our member risk scores.

Our Marketplace business we served 274,000 members at year end 2019 and produced exceptionally High margins.

In an effort to be more competitive and our twenty-twenty product said we lowered our prices on average 4%

We began 2020 with approximately 350,000 Marketplace members a 30% increase from year-end 2019 including our expanded footprint off into new States, Mississippi and South Carolina.

We expect Marketplace Revenue growth of 9.2% in 2020 with after-tax margins in the 4.7% to 4.9% range.

Our Marketplace membership and revenue growth Outlook are below our initial expectations as the Investments we made in product design and pricing did not produce the level of membership office we had forecasted.

this

Was particularly true in two markets, Texas and Florida which comprised most of the shortfall to our expectation.

In summary, we had competitive pricing in many but not all of our markets and we saw a fewer members move for the same price differential then we had seen in years.

We do however expect membership attrition to be lower than in past years and thus we expect to end a year with approximately three hundred ten thousand members a 15% increase over a year end 2019.

In conclusion after another solid performance in 2019. We look to 20 20 and Beyond with confidence.

We have a deep management team a strong product portfolio a healthy capital structure and a value-creating approach to Capital deployment.

Our and we will be a pure-play government managed care business. We are going to stay close to the core. We believe that the government managed care business has very attractive characteristics with compelling free cash flow generation.

Now I will turn the call over to Tom Tran for more detail on the financials Tom.

Thank you, Joe and good morning. We report fourth-quarter earnings per diluted share of $2.67. Net income of $160 million dollars and an after-tax margin of 3.9% with premium revenue of 4.1 billion dollars.

Let me provide some additional detail on the quarter. My commentary will be focused on a sequential quarter comparison. The Consolidated MCR fourth quarter of 2019 was 86% compared to 86.3% in the third quarter primarily due to improved results in Medicaid.

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. Reserve development in a quarter was negligible more specifically in the Medicaid business hours are for the quarter improved 80 basis points sequentially to 87.3% producing an after-tax margin of 3.6% We continue to perform well in Medicaid office.

Medicare business continued to perform well in 1/4 the MC off of the quarter of 85.5% was stable compared to 85.6% in the third quarter of 2019 producing an after-tax margin of 5.5% Finally a Marketplace business would continue to perform well and generally in line with seasonal expectations as we report an empty off for the quarter of 73.5% compared to 71.2% in the third quarter of 2019 producing an after-tax margin of 4.5%

Starting influenza cost or higher in the current quarter compared to the same quarter in a prior year, but the overall impact was not significant.

The G&A ratio for the fourth quarter of 2019 increased by forty basis points to 8% compared to 7.6% in a third quarter of 2019 due mainly to spending on sales and marketing during the open enrollment for Medicare and Marketplace.

Turning to our balance sheet cash flow and cash position for the quarter. I'll Reserve approach is consistent with prior quarters and our Reserve positions remains strong days and claim payable represents 50 days of medical costs expense compared to fifty days in a third quarter of 2019 and fifty three days in the fourth quarter of 2018.

as of these

Summer $31 2019 I'll help plans at total statutory capital and surplus of approximately 1.9 billion dollars which equates to approximately 350% of risk-based capital.

In December, the board of directors authorized a share repurchase program of up to $500 million dollars and during the quarter. We repurchased approximately 400,000 share for $54 million dollars.

Subsequently recorder through February 7th. We repurchased an additional 1.5 million shares bringing the total number of share repurchases took one point nine million four $257 million dollars.

Operating cash flow for 2019 was $427 million and Improvement compared to 2018 primarily due to the exact timing a premium receipt and government payments.

we need

Show full year 2020 earnings per share guidance on a gaap. Basis is in a range of $11.20 to $11.70. We have not include the York are Next Level Acquisitions as these transactions have not yet close. Our guidance assumes a steady speed stay in Texas for the full year twenty-twenty as we believe the existing contract will run through this year.

A premium revenue for the full year 2020 is expected to be approximately Seventeen point four billion dollars which reflects a 7.4% increase over 2019. If the York are at Next Level acquisition or two closed by June thirtieth premium. Revenue wage would increase approximately 9% year-over-year and the earnings impact for 2020 from the two acquisition would be negligible.

We expect the medical care ratio to be in a range of 86.2% to 86.4% The increase over 2019 is primarily due to a higher Marketplace MCR in 2020.

We expect our G&A ratio to improve to approximately 7.2% This reflects Revenue growth fixed cost leverage off productivity improvements offset somewhat by reinvestment in growth initiatives.

Our effective tax rate is expected to be approximately 31% in increased from 24% in 2019 driven by the impact of the health insurer fee. We expect after tax margins in a range of 3.7% to 3.8% primarily off due to lower Marketplace margins that show previously mentioned.

Wow.

We do not give quarterly guidance. I do want to point out that the first quarter earnings per diluted share will be less than 25% about full-year Outlook off due to the impact of the leap year and a timing about Capital actions lastly. I would like to announce that we will be holding an invested dead May 28th, 2020 in New York City that concludes our prepared remarks operator. We are now ready to take questions.

Thank you. We will now begin the question-and-answer session to ask you a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to the first question today comes from Peter cost of Wells Fargo.

Good morning. Thanks for taking my question really just one of the Explorer the The Exchange business a little bit in terms of do you believe that margins will deteriorate further going forward or are we at the end of it here with this year coming up and and then talk about the pricing situation with competitors how much further do you expect price competition to impact business is growth.

Sure.

We hit our price point on our silver product. Meaning we are number one or number two and about 50% of our geographies. We have our price point and bronze either the number one price position or zero-premium and about 75% of our geography. So we didn't hit our price point in all geographies an age where we did hit the price point fewer members moved for the price differential then we had seen in years prior so we didn't get the volume that way to get for the 4% average price decreases. We put into the market. So, you know twenty twenty the the the earnings reset. We earn 150 million dollars, which was exceptionally high in 2019. That will be approximately 75 million dollars in 2020, but I would say that 2019 felt more like a wage.

$25 a year

And 2020 should have been more like a hundred million a year. So the the while the spread looks wide, I think the jump-off point in 2019 was particularly challenging. I think we need to go through the bank cycle for 20 21 to see where the margins land. We still have very high hopes for this business. It leverages our Medicaid footprint or Medicaid Network nearly 90% of our members or full size. So we're servicing the Working Poor serving the Working Poor. So it fits strategically but let's go through the 2021 pricing cycle and see how we can grow The Profit pool over time.

Okay. Thank you.

Next question comes from Matthew Bush of BMO capital.

Yes, maybe just a little bit more on the ACA Marketplace membership and and I'm curious in Florida and Texas wage. Is it a dynamic of price competition being more intense than you had expected? And you also alluded to members not moving at the same price point as you saw the move in Prior years, is that reflected maturity in the market or or other other factors, you might attribute that to man and Thursday last point. It's the question of elasticity of demand and I think where we miss forecasted was the result of members moving as prices were moving up as price increases. We're going into the market members would move for ten bucks and twenty bucks and I think as prices have now moderated and even declined I think you seeing less movement.

for the same price differential as the more

As you suggested seasons and matures as your members become more chronic, and they stay with you longer. These high Acuity members are not going to move their Health Plan off if they're using a lot of services, so I think the maturity and the seasoning of the market has something to do with it on your first point. Yes in Texas in certain places in Florida. I did not hit the price point that we tried to do to a competitive force, and as we repriced into 2021, we're going to look at those markets and try to capture the market share that we think we can attain. Thank you.

The next question comes from like new shell of evercore is I used to follow up on the exchanges is this the membership does appear less sensitive to price changes. Is that going to change approach pricing next year in terms of optimizing margin versus favor and enrollment growth and also just how are you thinking about the long-term Targets on on margin and revenue growth that you provided at the investor day off the the balance that you referred to is is what you need to titrate in this business you're looking for how many members you can grow for the price point you put into the marketplace a.m. And the the the favorable news and all of this is that while fewer members move that also means that more members are retained. So we're projecting while laughing we have one and half to two percent membership attrition per month. We're projecting this year that to be more like 1% As I said as members stay with you longer there probably more chronic and Ed.

users of healthcare services and less likely to

So I would I would say that yes as the market Seasons fewer members will move that that's good for member retention.

How about the the the long-term guidance on what exchanges are you thinking about that? I think we have to go through the 2021 pricing cycle. You know, we'll look at look at all of the facts in this business will look at our networks will look at our our broker relationships and our commission structures and then of course product design and price point and we still think we can grow The Profit pools. I'll be off a lower base. We're not re forecasting the long-term margin picture for the business. Although suffice it to say it probably will take longer to get there than they had originally forecasted.

Right. Thank you.

What's the next question comes from Steve tinnell of Goldman Sachs?

Morning, guys, just a couple of quick ones in the guidance. And then one of the marketplace to just want to understand it is prior. Development are prior development now included in the guidance. And and if so, is that a similar level to nineteen? I think it was about ninety eight years prior year development is not included in our 2020 guidance. Perfect. Thank you. And then the Texas Star Plus Bulbs. Can you give us a sense of what amount of sort of Revenue and net earnings would be lost if the appeal the award doesn't go as planned kind of on an annualized basis just so we have a sense of what that Delta would look like.

if

Right now as the department has published if they went through with the awards the contract new contract would be effective on September first twenty twenty-five. Therefore it before months of Revenue lost and the Medicaid contract that's approximately 350 million dollars and we estimate anywhere from twenty to twenty-five cents of earnings per share dragged in this year. Now. I wouldn't necessarily multiply that by three to get the the full-year impact because you just can't take the cost out fast enough in 1/4. You're not going to take the cost out fast enough. So we need some time to readjust our cost structure and and are fixed class-based put to estimate the full annual effect. But for this year twenty to twenty-five cents is dragged and latter half of the year or the left half of the year and three hundred fifty million dollars of Revenue loss in the Medicaid contract.

Super helpful, then then just on the marketplace wondering if you come in on the mor that's in Better Than the guide.

I'm sorry. Can you repeat the question the marketplace mlr 420 that's embedded in the guide.

Yes, approximately 74% up from 68% in 2019. Super helpful. Thank you.

You're welcome. The next question comes from Justin Lake of wolf research.

Thanks. Good morning. I was hoping you could walk through your capital and balance sheet projections for the end of the year. Assuming the deals close you expect to see a repo that's in the guide and just trying to get an idea on the end of the year Capital flexibility.

Sure, Justin and just to recap during 2019. We were retiring the very expensive convertible notes that were in our capital structure that were getting more as the as the stock price moved up that were getting more and more expensive. So over a period of eighteen months. We freed up one point seven billion dollars and the notes right now are substantial gone now is you know, those notes have a dilutive effect on your Share account. And so retiring those notes actually is a catalyst going into next year on the share count Dynamics as well be our share repurchase program having already repurchased 1.9 million shares from all that being said, we still have a billion dollars of cash at year-end in the parent company name means it's free and excess cash flow. We also have nine hundred million dollars of undrawn debt capacity for a total of 1.9 billion dollars of dry powder to fund our Acquisitions wage.

repurchase shares

And to grow the business the way we intend to the only thing I would ask here is Joe said is that we expect to continue to attract dividend from opposites Theory as I can handle generate profits in 2020. So that additional you know, dividend structure will also give us additional, you know flexibility there to do other things.

That's helpful. Can you tell us what you expect to spend on these these Acquisitions? I mean we can figure out the share repurchase number pretty easily the two that we have under contract wage will be 9.50 million for 140 million, but yet so total of $90 for the two Acquisitions and then we and then we still have 250 million dollars left in our careers. Sure. We purchase authorization, but we could top that up at some point in the future and then just a couple of quick questions first. Can you give us an investment income assumption for $20 and then Second Joe just a follow-up on the commentary on taxes. I just want to make sure you were saying that it's would be $0.25 dilutive to this year, but would actually be we shouldn't * key to get the $0.75 because you'd be able to cut some cost would be lower than that on a full year basis. Once you get the answer the second question first. Yes. That's correct. 25,000

A drag if we were to lose.

The contracts on September 1st, but we're still looking at how quickly we would reduce our cost structure. And so we I don't have a full year number, but I'm expecting it would be less than three times the 2020 effect.

Tom investment or on a question of investment income we lumped together investment in other income and if you look at 2019 is 132 million month 3rd quarter happened to be higher than normal as we went through some restructuring of our portfolio. Typically you would see roughly about 30 million a quarter. I would say that for twenty G20. You should see that number to be lower because yields have dropped significantly over this past year due to the fact that you know set finite decrease a couple of times. So Thursday, I don't have the number right in front of me. So let me let me just follow up with you right right after the call I give you an exact number.

Thanks again.

The next question comes from Scott Fidel of Stevens.

Hi, good morning question. Just want to ask something maybe a little more thematically and Joe interested in just your thoughts on just looking at the Medicaid RFP process more broadly and what transpired in 2019, you know, it was a pretty messy year in terms of how the RFP is played out in a number of states when we think about North Carolina, Kentucky, Texas Louisiana just interested if you think you know holistically there's any broader takeaways around what we've seen playing at play out in the Medicaid RFP process. I mean one can certainly look at each of these, you know from a bit of a idiosyncratic sort of one-off Dynamics in each state, but clearly when you aggregate it together, you know, it was just just a difficult month or difficult year for rfps in general than we've traditionally seen.

I think that's a fair point.

And the the this the specific sites, you mentioned certainly have a lot of intrigue around them in terms of how they all unfolded. We don't view it any differently than we always have them. We think Don incumbents have reasonable chance of displacing an incumbent which means you need to protect your Turf and go after the new ones hard. We still think the ground game works. You have to be in a state a year or two before an RFP is dropped in order to build the provider relationships the Regulatory and political relationships and really get to know the landscape and we're doing that in a while. I think this year as you mentioned might have some videos syncratic noise to it. We still believe that the pipeline of you know, a Nevada, Missouri, Iowa, Indiana, Tennessee Georgia a little further out, you know, we'll evaluate all of those through the screens. We put them through the friendliness of the regulatory environment reasonable rate structure wage.

the strength of the incumbency and

Do we need to develop a network and we'll take our shots and go after the ones we send even win. So I long-term. I don't think my view of the growth aspects of new stuff has changed even though as you suggest 2019 was a bit noisy. Okay, and then just one quick guidance question just your thoughts on the good range for operating cash flow in 2020.

Well operating cash flow really fluctuate a lot. So that depends on you know, timing of government payment. So we you know now that we've good Zone we we expect our bring cash look at the positive going forward, but every every quarter you going to see fluctuation, and that's just the nature of the business were in

Okay. Thanks.

The next question comes from Josh roskin of nephron research.

Hi sang. So quick ones on guidance as well. Just as we think about adjusted EPS any difference in amortization expectations for next year. And then the Share account reductions or that 5% boost you're seeing is that share BuyBacks? I think it feels like it almost assumes a reauthorization of the BuyBacks as well.

Went to the second question first then handed over to Tom in 2019. We were retiring they're very expensive convertible notes, which as you know, you'll end up in your diluted Share account. So about a third of our share count reduction is just a spillover effect of all the convert retirement activity in 2019 hitting full run-rate in 2020. And the remaining portion is access to the actual reduction in Share account as a result of the share repurchase program. It does not anticipate any Top-Up to the exact 500 million dollar authorization. Yeah on the intangible amortization. If you look at the table we disclosed in the early release is approximately, you know, Seventeen million dollar pre tax for 2019. That number is going to drop a little bit in in in 2020. So I expect to be roughly about 7 a.m.

to 18%

A per-share for the full year versus this year, but roughly about $0.20.

Okay, perfect. And then you guys talked last quarter around you know, some of your selected some of the specific Medicaid markets cost pressures and some high-cost claims and you know, obviously no sign of that no mention in the press release May, you know any look back as to what the potential drivers were what you guys were seeing, you know, or you know was any of that still lingering in the quarter.

It really wasn't and the second and third quarter. We did note some cost pressure here. And there the one that we were most aware of and concerned with was in Ohio do two or three things the behavioral Carvin over a year ago the inclusion of IMD facilities in the behavioral benefit and then of course due to redetermination the Acuity mix shift often said that rate advocacy is a very important part of this business and we and the other participants in Ohio work with the state got a rate increase in mid 2019 and then got a very significant rate increase for 120 going forward. So that was the one we were most concerned with and we think that is largely been solved with birth rate. Advocacy efforts and a nice rate increase on 120.

Thanks.

The next question comes from Charles Owen.

Yeah, thanks for taking the question. Just two quick questions one going back on the on the market place, you know, if you're seeing fewer members move because of pricing. Is there anything beyond pricing that you can do the really differentiate the products to to to drive growth?

Yeah, there are some benefit design, you know dental vision and what we call and celery benefit features many of which we implemented in for this cycle. And then of course, they're your broker relationships and is your commission structure competitive and will broker loyalty help move membership. So we're looking at all of those factors that are 2021 pricing.

Okay, great, and then and just going back to Kentucky. You mentioned that you kind of resubmitted the bid were there any kind of major changes when you looked at the revised be there and you can you talk maybe give us a little thoughts on you know, sort of what changes you you revise for your bid as you resubmit it. Thanks.

The only changes to the RFP were to alcohol and administrative matters, really the questions on the capabilities did not change at all. But what we did and I would imagine all of our competitors did is you went back and looked at where you could have scored better and tried to shore up your RFP response which we did and as I said, I'm sure the competitors did as well.

Okay, great. Thank you.

The next question comes from Stephenville of Barclays.

Great. Thanks. Good morning, and a guy so a couple of questions around the marketplace, you know, I guess first for the 2020 memberships that you mentioned that Texas and Florida particular were stock roads. If your expectations. Is there any chance that maybe just the unfavorable headlines for Molina around your initial outcome and the Texas Star Plus Award may have hurt your Marketplace membership growth in Texas. Do you have any thoughts of me? I'm may have been soft and I have a follow-up after that.

No.

I'm in Texas in the two businesses are quite separate and distinct from each other under different regulatory regimes et cetera. So no, we do not think that the birth of the marketplace and Medicaid business at anything to do with each other. It was competitive pricing. You know, you do the best you can it's a blind bid you try to predict where you competitive or going. And as I said, I think the good news is we did hit in fifty percent of our silver geographies and in seventy 5% of our bronze geographies. So we hit the price point in many boxes will try to do better next year and hopefully the attrition rate will stick and we'll have sticky membership and profitable going forward.

Okay, then just quickly again for Marketplace. I mean you mentioned, you know last month of January that eighty percent of the three hundred fifty thousand members are renewals or retained which you know, you mentioned gave you suck visibility on the mor we're just kind of explore this a little further this whole discussion around, you know, less new members for 20 leading to lower margins. I mean, is it possible that just a large percent of your Marketplace book because it's a you know, retain members of maybe hitting up on em, all our floors and 20/20 than what you expected in that is what is mechanically make in the net margins come in a little lower than expected or is that not really what you're seeing effects?

we

The in 2019 we are at the minimum Mor in one state New Mexico. We have been for two years now. And as you know, the 2017 it's a three-year rolling calculation. The 2017 was a particularly poor year and as we just announced the 2019 was an exceptionally good year. So that will put pressure on the page ml are in a couple of additional States, but it's really not material to the overall story on the margin. It's really the product the sorry the volume projects the equation that is the larger part of the story. Not the minimum mlr. Okay, perfect. Thanks.

the next question comes from Gary Taylor of JPMorgan

Hi, good morning. Most of my questions answered. I just wanted to go back to Medicaid margins for next year a little bit. I think up ten basis points is a your guidance and you you'd mentioned some rate increases in Ohio. So I've noted those I guess my question is what have you contemplated for 20 28 terms of just the redetermination environment in general getting better were staying the same and with this Trump public charge a rule now being allowed to take effect, you know, at least while it's being litigated. What are your thoughts on whether that has you know, any impact in terms of of enrollment in margins?

I mean Gary in.

Last part of your question to public charge redetermination the impact on twenty-twenty. We certainly took all that into consideration and we saw membership stabilize in the last half-year the your of this the quarter-over-quarter sequential membership and Medicaid is pretty much held steady and so many of the significant redetermination efforts that we're going on a a Michigan and particularly Ohio have moderated certainly the public charge that we're aware of it three of our state's California, Texas and Illinois in particular have high concentrations of the populations that are subject to it. But you know, uh Department of Homeland Security only estimates that a hundred forty thousand, you know, people need to really affected by it. But the chilling effect is something we're aware of and we certainly considered in our Guidance with respect to rate and profit Improvement. It was not just Ohio wage.

we did well on rapes and many of our geographies as I said the rate environment is

Table, it's very rational. It's actually really sound um and and just about all of our geographies rate. Not only kept paste with low single-digit medical cost Trend. Um, it exceeded it in some choices so that helps margins in 2020. And also we continued to pound away at our profit Improvement initiatives payment Integrity utilization control that are wage Wars all contribute to the profitability of the both the Medicare and the Medicaid book of business. So we're pretty confident we can maintain this margin position in twenty-twenty and perhaps Beyond off. Thanks one other question if I could just on a Prayer development, I I your your Gap earnings guidance roughly flat year-over-year is hurtling, you know, almost a dollar of of excess develop month that you're assuming does not recur and I know I think that ninety-eight cents is higher than it's been it's been historically the last few years, but could you just remind us on maybe 1 month?

Contributors to that that $0.98 or roughly a dollar just so we can you know, think about that a little bit heading into twenty-twenty.

You're welcome.

Most of the favorable development that we had report throughout 2019 were related to Medicaid business.

Thank you. Thank you. Next question comes from Kevin fish of Bank of America great. Thanks. So I go back to these changes for a few minutes the it sounds like you're saying that the Delta versus your expectations on the exchange is really about membership rather than Mom. And so are you saying that the margin is more or less in line with kind of what you expected when you were pricing the business last year.

No, Kevin, you know we expected the margin to be more closer to the long-term guidance range that we gave you. So we're certainly coming in lower. But as we said many times you can't have a conversation about margin or membership without the companion statement. Our goal is to grow the profit pool and growing it off of the 75 months or days will be pretty important to our earnings growth story going forward. So every single year we go into the prices cycle will try to sort through the competitive forces with our broker relationships. And our goal is to grow the profit pool heal over time. Now, whether we can get it back to the you know, 8% after tax margin range we had originally forecast. It'll take some time to get there. But as we go into the 2021 pricing cycle will know more.

And is it is it the minimum?

Are you saying I think he said minimum alarm was not a big issue. So if it's if it's not minimum alarm being a big issue in 2020. Cause the margins drop what is is just growth in lower-margin markets and wage than you expected.

Yeah, Kevin. Mlr does play a factor in a lower margin in 2020, but it's not really the major factor. If you will at your mentioned before you come off the two thousand a-year drop off your three year Rolling calculation. So twenty-twenty we expect to have higher higher minimum loss hire outside the rebate and more stable and just New Mexico, but all of those factors played into the the the the margin compression for the year number one off of the higher Revenue base. The operating Leverage is significant. Let's not forget that long, you know, your your variable cost in sales expenses certainly there, but you're leveraging a fixed cost base. So the fact that we didn't hit Revenue are really really hurt us in the operating leverage in this line. I'm okay, I guess the fact that you already made minimum are more space. Is that give you the pricing Tailwind into next year or are you now rethinking how beneficial that might be dead?

that people really weren't switching for the

Incremental price differential when we go into the twenty-twenty with pricing cycle will will have to forecast again. Here we go with, you know, three months into the year forecasting if we're going to be up against in a in a state and take that into consideration of the pricing and as you know, it's a three-year rolling average so you can't get it all back in one year it takes time. But again as Tom said it's not a significant part of the story we might bump into it in a couple of more States than New Mexico, but it's it's just not significant part of the story for this year. I think it's the last question. So just basically just status down the costs are coming in basically as expected you contain expecting to come in and expect there's no cost issue. We're really talking about a pricing and Millar and membership growth issue. Not a not a cost issue anywhere in here.

Yeah, I think that's that's exactly it. It's the balance of those three factors that you try to anticipate and price for and this year we

Miss work acid it and we didn't hit it. All right. Great. Thanks.

The next question comes from David Lindley of Geoffrey's. Hi. Good morning. I'm covered but I have I have a couple on the Acquisitions you mentioned that I am a relatively low-margin which gives you an opportunity. I think Tom and his prepared remarks said if they close by accident, they would be neutral to earnings this year. Guess. I'm wondering how much of your birth Playbook does that assume are. They just naturally financially neutral and your operational execution would make that better or does that assume some operational execution home and and how quickly you know, you were able to execute the Playbook pretty well in the organic business or pretty quickly how quickly do you think you can execute that in these Acquisitions. We believe we can get these to run rate of Target margins after one year of operating them. Whatever that year is one, you know, twelve months of operating them in bear in mind. It's not just getting the $550 off.

dollars of Revenue to art art

A margin, I hate to keep talking about operating leverage, but it's real. Uh, these two properties in particular one in Upstate New York is basically just folded into our existing infrastructure and same with Ohio. We have a very large Illinois Health Plan. We need no more management. We folded in and we get the operating leverage office. So it actually produces north of your target margin of the operating leverage you get and we plan to get to a run rate after 12 months of ownership cut. Okay, and and then I write that approximate Delta from birth requiring them to your target margins is a good two hundred basis points or more.

Yeah, these these two properties in particular are basically break-even. Okay break even and then just for Simplicity to the sharekhan question and the reduction in share count and 20/20. Can you give us after the retirement of the convert after the buyback that you did in the fourth quarter? Like what was the ending Share account for the year as opposed to the average for the fourth quarter?

Yeah, the the ending shared housing, too.

The lower than what you we we provided to you on a guidance table. So because you know as you by Cher it's going to flow throughout the number of quarters. And the the number is probably you know, roughly about a little bit less than sixty 1 million share for the end of 2028. Okay, great and last question on the on the comment about attrition Joe. I think you had you had talked about fewer movers my I'm interpreting that choice movement during like an open enrollment period and and during shopping. Do I also understand that you're Translating that to you think your retention within the year is going to be fire and is the thought process in those two different kind of periods the same.

Good point our retention during open enrollment was north of 80% So we ended the year two thousand four thousand members 80% of those are now members inside our 350,000 beginning of the year membership. We also saw this last year and you can see it in the metro cost. Yeah, you can see higher use of Pharmacy, uh, chronic conditions using expensive drugs. So the members are clearly more chronic you see as the risk Wars you said the retention rate and the Open Enrollment retention rate. And therefore we are projecting that will only lose about 1% a month where in the past we've lost one and half to two percent of them.

Okay, and and then is that is that higher chronic mix than consistent with what you expected in pricing and kind of our expectations, you know, I presume you bake that into your guidance, but just to make sure absolutely and and again higher cutie members as long as you get paid for them and get the right risk scores higher 2-D members are are fine and can produce Target profitability. So yes, we took that into consideration as we price the book, but we have to get the risk scores and we're getting better and better at 5 every day. Thank you. Thanks for the answers.

The next question comes from Sarah James of Piper Sandler.

Thank you for guidance in Medicaid and Medicare margins. They're both well above average and your long-term guidance that you gave it off Friday. The net margin is a company is still well below the midpoint of long-term guide. So I'm wondering if the 3.8 to 4.2% is still not what we should be thinking about for long-term net margin guidance for Molina as a whole and how sustainable are the heightened Medicare and Medicaid margins that you're experiencing 20.

Well it certainly in Medicaid with a projection for 2020 of 3.2 to 3.4% After tax. We believe that the Medicaid margins are sustainable and again all based on a reasonable rational and actuarially sound rate environment. So, you know, that's the context for being able to sustain those margins ability to to manage medical costs on the Medicare side, you know bear in mind. Our book is different and it's not traditional Medicare Advantage. It's decent and MMP. These are high Acuity members in a heavily burdened with ltss benefits and we're very good at managing those. So yeah, it's a two billion two point five billion dollar book of business with startling characteristics than many of the larger Medicare players. So I don't think they the comparison to traditional M A is the right comparison, but we believe these margins are sustainable in this area. And yes, you're right, it's wrong.

the the margin rebalance

In 2020 on market place that has caused us to operate at the lower end of our long-term guidance range. And as we go through our 2021 pricing cycle for Marketplace would make the determination as to whether that long-term guidance still stands or not.

And maybe if I can pair the margins to your own book cuz you're right about the the product mix they're so they're they're running a good bit off the you know, five percent five and half percent long-term guide and then you mentioned there also absorbing 90 basis points from the hip. So as we think about that book month going forward when the hip falls off. Can you add that 90 basis points back in and how do you think about the long-term margin profile of your Mac Book clearly wage goes away for next year or it's it's the complete reversal. So you're right in that point as you grow the business more aggressively newer members that come on are going to attract a higher ml are typically we see new age is coming in in the mid-90s and the book as it Seasons produces mid-80s. So if we start growing this book more aggressively that will put pressure on the birth.

Which will in turn put pressure on the margins?

But that's all contemplated in pricing and in forecasting, but that would be the dynamic that I would expect as we grow this book in the future.

Thank you.

I did this, this is Tom. Just a question from Justin Lake on investment income before. I just want to provide you with a data 20/20. We expect investment in other Revenue to be about $35 million, June 10th, 2019.

Thanks, The next question comes from George Hill of Deutsche Bank.

Good morning, and I think most of my questions have been answered. I'll just check one more on about the marketplace environment. If you guys kind of went to Market with 4% price decreases in or unable to kind of get the term that you were looking for. I guess turn wasn't what you were expected. I guess. Do you know what churning aggregate look like kind of across the market inclusive of your book? And I guess what does I'm trying to figure out like what do the issue is kind of tell you about the economic sensitivity of that market and like what type of price decrease do you think is necessary to drive turn in that book and and grow market share and I recognize that there's a lot of moving pieces with that but yes, there are a lot of moving pieces and one thing I would say is that first of all, we did retain an open enrollment 80% of our members. So we have at least our own data points off hard to say, you know what the competitors saw but we believe this is sort of a dynamic as prices have now stabilized or even moderated and decreased dead.

You know the 510.

And $20 price differential keep bearing in mind. These are nearly fully subsidized members. So the marketplace ten million members wide, we're serving a niche where surveys highly subsidized member 86% of our members have some subsidy about half of those have a full subsidy and the Dynamics I think in that market might be different than the marketplace at large a member is high Acuity and they're using Services. They're less likely to move. That's a dynamic. We've always dealt with but I think it prices as prices have moderated members are not leaving for the same price differential they have left for in Prior years. Okay, that's helpful. Thank you.

This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect your lines.