Q1 2020 Earnings Call

Team has worked tirelessly over the past two months to ensure that the needs of all of our constituencies are addressed quickly in this rapidly changing and challenging environment.

Good growth in Washington, Michigan held steady good growth in Illinois offset by some losses in Puerto Rico. So our efforts to work with providers office to keep more members in the system and to bring on more members are are pushed to make sure that in the redetermination Andre eligibility process that we hold on to more members is suggesting to work pushing that forward now to the direct question. You asked it's even looking better in April or Medicaid membership is likely to be up over 30,000 members just in the month of April and the interesting point I will make is we believe we're pretty sure that none of that membership arrived as a result of accelerated in the surgeon unemployment. It's too soon to see

Covid-19 impact on the US Healthcare System and the overall economy will continue to develop during the year No Doubt causing some short-term challenges, but also serving to highlight the important role government-sponsored Health Care plays in this type of crisis.

Clearly the macroeconomic environment will significantly impact our results this year and for the foreseeable future.

With that said as a pure-play government managed care of business, we renamed well positioned at a time when reliable access to high quality Health Care is more critical than ever to our members and our state partners.

We would like to provide you with updates today on a number of fronts first. We will cover the financial results for the first quarter.

people that became on a

Employed in March end up in managed Medicaid. So we believe that the 30,000 growth in April is truly due to the suspension of Eligibility determination in the states. And without that term you just not going to lose the members. They stay longer they stick longer and as you know many states actually have suspended redetermination and some of them just perhaps even for a full year. So that really sort of pretends well for the membership growth before the surge due to unemployment actually arrives, which is slightly two in May and June. Does that help? Yes, it does. Okay. Thank you.

Second we will discuss the new but hopefully temporary operating environment created by the covid-19 pandemic.

Third we will convey our guidance in the context of our first quarter results and is new operating environment and forth and lastly will provide some detail about our exciting acquisition of Magellan Complete Care that we announced last evening and other updates to our pivot to growth initiatives.

Let me start with specific first quarter highlights.

We reported earnings per diluted share for the first quarter of $2.92 with net income of $178 million dollars and an after-tax mark up 3.9% which slightly exceeded our expectations for the quarter.

The next question today comes from Kevin fischbach of Bank of America, please. Go ahead.

Great, thanks was just wondering what you think the mlr might be on these new members coming into the Medicaid into the exchange programs. You know, I guess last recession wage to some pent-up demand initially on the on the new Medicaid lives and just thinking about whether you expect that to happen and on the Medicaid side if these patients are members or people who would have been on Coburg you expect any adverse. I'm a lot of their we have we have various years on it. I mean, I think basically and I think is generally you say that it needs somebody needs insurance they buy it and if they don't they won't so there's just sort of an inherent by a adverse selection bias in the whole process. We actually have various scenarios. Um, some of which might say that there's higher cutie coming in to membership and some say that it would be on par with what we have. It's hard to say and where the members coming from. Are they coming from a birth.

Premium Revenue was 4.3 billion dollars in 8.9% increase over the prior year, which is consistent with our pivot to growth.

The medical care ratio was 86.3% We experienced medical costs pressure in the Medicaid line of business early in the quarter resulting from slightly higher than normal seasonal combined with early, but at the time unidentified covid-19 costs.

these increased costs were offset by lower medical costs and all lines of business very late in the quarter as elective and discretionary Healthcare Services began to be postponed and deferred

these offsetting factors combined with negligible prior. Reserve development produced a medical care ratio that's squarely met our expectations

Rich self-insured plan and a big company or they coming from a a small group plan for a small business. So it's really hard to say right now wage. Obviously one of the reasons why we're reluctant to predict what this surgeon membership brings well for the surgeon membership, we have to build the phone operational platforms and hire the people to service that membership and then as you suggest that the Acuity that membership is unknown, but I think the prevailing wisdom is while it might be slightly better and worse than the average that's not going to be a significant factor in taking on these members.

we managed to Aegean a ratio of 7% in line with our expectations even after reflecting incremental expenses associated with the mobilization of our Workforce to work at home and other new operational protocols related to Copa 19

The total company after tax margin was 3.9% in line with our expectations and pricing product line margins of 3.2% in Medicaid office 4% in Medicare and 4.1% in Marketplace.

While a $2.92 earnings per share result modestly, exceeded our expectations. It's achievement is noteworthy in the context of the environment in which it was produced month.

All right, great. And then when I look at your guidance, you know you excluding a number of things from your guide and put it seems to me that pretty much all of them are are things that are mowed to be positive and they are to be negative. Is there anything I should have really I guess that is not included in guidance or has the potential to be a significant negative.

Which brings us to our second topic that dramatically different environment in which we currently operate and some of the changes we have made in response.

To recap a few of these measures.

If I understand your question directly a correctly the two factors that we updated in our guidance are one that's sort of easy to understand and engage and that is our portfolio is going to roll over into the lower-yielding Investments. It's irrefutable and already happening and I think Tom pitched that as a 2007 earnings-per-share respect 27% earnings per share headwind in our guides. We also believe putting the accelerated membership aside that we will incur higher sg&a related to covid-19 operational protocols financial assistance to our employees etcetera, which also we factored into our home the affirmation of our guidance, but we did not update for anything else.

A shelter-in-place directives in all-out shutdowns quickly spread throughout our Geographic footprint. We swiftly move substantially all of our Associates to work at home.

We accomplish this with no disruption to Service as service metrics have remained. Excellent.

This is a remarkable accomplishment in light of the potential for disruption to utilization management Care Management network access and information technology infrastructure.

Substantially all of our company's Workforce 10,000 Associates are currently working from home.

Many providers have seen disruption to their patient in Revenue flows providers are struggling more than ever with utilization management payment Integrity routines and Associated protocols off in a rapidly evolving environment, which their cash flows have suddenly declined.

No, that's what I'm saying. I'm saying you you got into including some negative thing actually the likelihood of getting a lot more members you're excluding deals and these things all seem like actually going to be the numbers seems like there's going to be some affecting them. Just want to know if there's anything else that you're excluding that you think might be the opposite way to counteract. Oh, that's really conservatism. No, I'm basically just saying that the the production of corn he's just got a little better but we did not factor in any of those covid-19 impacts, but yes with those head winds were saying quarter earnings gets a little stronger.

While this requires adaptability on our end we maintain strong performance in network management and utilization control.

To assist providers in this challenging time. We accelerated claim payments by 150 million dollars in late March and early April while also extending the term of all non covid-19 related prior authorizations through September 1st 2020.

We also increased Telehealth visit reimbursement to be at parity with in-person visits and have expedited credentialing to ensure we have ample provider capacity.

It's great. Thanks.

The next question today comes from Gary Taylor of JPMorgan, please go ahead.

We understand that covid-19 creates a variety of challenges for our employees booting family members at home who may need support children who require care.

Hey, good morning. Had two quick questions. First of all, I just want to go back to Joe your comments about Medicaid. Ml. I know there's also some states with off caps, but you know sort of the curbs on how low Emma larke could effectively go and and flow through earnings. So certainly, you know, we understand that those laws exist. I guess the question is on the on a state basis or those all typically just calculate on the state fiscal or calendar year. There's no rolling. Like there are on summer federal minimum mlr requirements. That is my understanding and there's very few adjustments like in the marketplace mlr where taxes and all these factors create a dramatic difference between the regulatory minimum and what you publish in your financials, but yes seven of our fourteen states have some form of em LR floor wage

We quickly implemented broad-based programs to help them during this time, including two special stipends of $500 for a total of $1,000 to each of them more than 9,000 of our employees.

We also implemented pay enhancements for essential employees required to come to the workplace and then additional covid-19 paid leave policy.

We are responding to dozens if not hundreds of special requests by our state customers and other governmental agencies.

for example

We eliminated all member costs for covid-19 testing and related treatments.

We relaxed utilization management protocols in specific instances.

We expanded telemedicine access to all members and we made substantial contributions to the supply of personal protection equipment.

Except Puerto Rico, which is 90 to those also exists in the expansion population and exist in the ABD business, but usually at different rates, so yes, there are very few adjustments from what you publish and the minimum and my understanding is they worked on a one-year package with your base is not a rolling basis.

We also committed support and resources for various non-profit organizations serving those in need across the country support supplies in monetary donations have been made to a variety of trusted organizations that directly serve vulnerable populations.

In summary, we would characterize our first quarter results as more than respectable in the context of unprecedented disruption to the entire spectrum of traditional Managed Care operations record over the span of just a few weeks.

And my second question thanks is you talked about nine hundred fifty members hospitalized with covid-19 credible cost per kg. So I guess two questions one are those are the provider revenue cycle claims submissions being materially delayed and then secondly, I thought of your contracts and Medicaid would pay, you know on a d r g basis. Are you saying you're just not seeing the drg coding yet or is there enough complexity to sort of outlier payments on a liar latest eight cases that the judicate and all that still doesn't you know give you a good sense of the numbers yet. It's it's it's actually not that complicated again thousand came back. So you can't draw any statistical credibility to that we have five days days and we have one month's days. We have people in the ICU on ventilators and people that go in and go out.

In this difficult operating environment. It should be noted that our financial position is strong as we had already done the hard work to develop very solid capital and liquidity positions off.

a few words about these matters

Our share repurchase program is now completed as we purchased the total of 3.4 million shares in the quarter for approximately four hundred fifty million dollars at attractive prices.

We drove down $380 in remaining capacity of our Term Loan facility the bolster our liquidity.

We availed ourselves of this inexpensive debt instrument, which would have otherwise expired in the coming quarter.

And after the completion of the share repurchase program and the term loan facility draw, we are holding approximately 840 million dollars in excess parent company cash.

class range from 10000

Episode two hundred thousand per episode, but we're now capturing all the codes and I think all time was suggesting in his prepared remarks was early in the quarter. We are getting tagged with all kinds of respiratory ailments particularly in Washington and California. This was before covid-19.

I turn now to our third topic of discussion of our near-term Outlook starting with a description of the current dynamics of our industry.

The business model government Managed Care particularly Medicaid has been stress-tested through extreme economic scenarios booting the financial crisis the subsequent boom, and now the effects of the world's worst pandemic in over a hundred years.

The model has proven to work in both robust economies and in deep recessions.

In strong economic environments with low unemployment. There are relatively fewer Medicaid in subsidized Marketplace members capitation rates tend to be on the strong side of Actuarial soundness 6s States budgets are well-funded.

During challenging economic environments with high unemployment. There are relatively more Medicaid in subsidized Marketplace members capitation rates tend to be on the lighter side of Actuarial soundness of States budgets become tighter.

And claim submissions just because of the elective procedure to Falls, but there is not been a huge disruption in either the level of payments in the level of submissions that we've been a date that could change your oil the next couple of months.

So while government Managed Care particularly Medicaid is certainly impacted by this environment the business and financial model flexes to accommodate these unusual in sometime extreme circumstances.

Thank you.

Next question comes from Matthew Bush BMO Capital markets. Go ahead. Yes, sir. Thank you. I was hoping you might comment on how you're thinking about the oil changes in enrollment trajectory, you know over time. I realized that the probably a number of scenarios you're looking at for how this recession plays out. But you know for lack of a better metric and do you think comparing with sort of duration and GAP that are 2008/2009, you know hits the broad side of the barn all of you have seen all of the different pundits and think-tanks project what this might look like with unemployment scenarios ranging from 10:20 even up to 30% with Medicaid rolls expanding anywhere from ten million to 30 million members a very wide-ranging.

In an extreme environment, like the one we are in today government intervention is often required to provide rescue packages backstop the healthcare system and a disadvantage preparation.

The current crisis is no exception as Congress and the White House have stepped forward with a number of measures.

The families first coronavirus response act includes additional assistance for State Medicaid programs in the form of an increase to the match. Each state has received a 6.2% increase which will extend throughout the covid-19 public health emergency declared by the Secretary of Health and Human Services.

You have also been a number of legislative Aid packages enacted including the two trillion dollar stimulus package and the additional $484 billion dollar supplemental covid-19 spending package referred to as phase 3.5 These funds and various forms have been made available to Providers small businesses individuals and a number of other constituents. You should ease the pressure on the Health Care system during this crisis, which indirectly should help the viability of Medicaid programs.

I think as we said in our prepared remarks that are lots of factors to consider here number one, you know, Cobra used to be a rather significant factor and how many members would come in but now with subsidized Marketplace, you know, you could argue that there'll be more members attracted to the subsidized Marketplace which might be the hundred and two percentage of Premium that Cobra charges. So there's all types of phenomenon, you know in a even on the unemployment rate. We have to look at sub sectors of the economy sucking at the lower-wage service economy. And I believe that's not going to come back quickly, you know that sandwich shop that dry cleaner shop that coffee shop the small businesses are going to struggle to get back into business and we think that the lower wages service economy will remain have higher unemployment rates for a longer period of time than perhaps the higher wage sectors wage.

In short we have a stress test in business model and significant government intervention designed to accelerate the economic recovery.

But even in the presence of these very positive factors, which support a favorable outlook for the longer-term trajectory of the business the near-term quarter-to-quarter Outlook remains difficult to log.

This brings us to a discussion of our guidance for the remainder of 2020.

Two overarching factors must be considered in providing guidance in this environment.

Economy. So if you take our market share if you if

First we faced a remarkably wide range of possible medical cost scenarios that could emerge over the next nine months.

If you do a projection of unemployment in all of our states ranging from ten, you know to 20% look at our market shares in Washington and fifty percent in Most states that ranges from five to 25% of 9% on average. You can actually crap the scenario where the membership Peaks at a pretty significant number as unemployment softens some of that goes back but I think there's a permanent Delta here on that lower end service economy that's going to struggle to get back into business quickly. You know that that brings up a very closely related question, which is Thursday. We're shooting the dark here, but would you predict we might see some structural changes in how health care coverages handled at the small group and particularly the lower end of the small group, maybe lower-wage end of the spectrum given it's been volatile for wage.

We have model many utilization scenarios for the balance of the Year. All of which are plausible. But Each of which produces dramatically different results.

Second we must consider the likelihood of a significant increase in membership as a direct result of widespread unemployment.

With Rising unemployment levels into suspension of Medicaid Eligibility determination in many states. We are now likely to experience a significant increase and Medicaid in Marketplace enrollment, but by how much we do not yet know.

These covid-19 effects on medical costs and membership are widely expected to have a net positive effect on near-term earnings.

However, we are not yet prepared to draw this conclusion based on the many variables and uncertainties that remain as Managed Care moves through the full course of the pandemic.

But now it's even more volatile. You know, it's a good question and I tell you during the all the swirl in the activity around this. I hadn't given that much thought but the way we look at it is dead. Now do have a product Suite that works all the way up to 400% of federal poverty level when you think about it. So when we have Medicaid expansion in a variety of states of 238,000, we have the highly subsidized Marketplace up into the 250 range, you know, we have products that the population can buy all the way up to that level. And so, you know, I would seem that we have the products we both commercial and government sponsors that we need to satisfy the population. I hadn't given your specific question a lot of thoughts during all this money, but I will do something get back to you on that. Thank you.

We are however prepared to state that we view our original 2020 plan and our previously announced Guidance with enhanced confidence.

Accordingly we are reaffirming our full-year earnings per diluted share guidance range of $11.20 to $11.70.

Let me briefly walk through the thought process that supports our guidance.

With respect to medical costs at this point, we cannot predict with any degree of precision how the covid-19 situation will impact medical costs in 2020 for a variety of reasons.

First the level of future direct covid-19 related costs is not yet estimable as the incidence rate of diagnosis in hospital admission and the page it cost per episode. Remain. Unclear

You're welcome.

Next question comes from Joshua rascon of nephron research, please. Go ahead.

We observed a steep decline in elective medical procedures very late in the first quarter through the month of April, but we do not know how long this phenomenon will persist and begin to normalize.

Tarascan your line is life. Perhaps your line is muted.

The prevailing expectation is that discretionary realization could be very low for the second quarter and perhaps Beyond but then rebound quickly in the second half as covid-19 debate life and health system capacity freeze up.

Sorry about that. Sorry, it was a mute question around the exchange is and I know it's early but you know sort of April application processes and things that are coming in. I'm just trying to get a sense of you know, as individual move from the commercial markets into whether it's Medicaid or Marketplace sort of where do you think the magnitude of impact is going to be? And and again, is there any data that you're seeing on Marketplace applications to date wage? That would be helpful.

And any potential short-term and non-recurring benefit from lower utilization is partially limited by rebates. We could be obligated to pay under applicable minimum wage regulations.

We are seeing I'd say this early stage given that April data. I was speaking about we haven't seen Marketplace growth yet, but we had seen a slowing in the natural attrition rate as we said at the beginning of the year when we gave our Marketplace forecast. We had reduced our attrition rate Outlook, two one one and a half percent a month, which was just suggest, you know, 3 to 4 and 1/2 thousand members that is slowing We Believe membership will start rolling again here very soon. The point I was making before I think is the important one is that Cobra charges 102% of the full premium and we believe based on all the models. We've looked at that age too highly or even reasonably sized subsidy in the marketplace products silver product. Let's say beats a hundred and 2% of commercial.

With respect to our administrative costs are operating efficiencies are secure in our operating leverage discipline is intact. There will continue to be GNA pressure. However, related to National Standard Operating protocols and the cost structure required to serve as any significant additional membership.

Investment income will certainly be lower than our original forecast as money market and other maturing fixed-income Investments roll over into much lower yielding instruments recall to bring that our portfolio is short-dated. So the impact is rather immediate.

Before the onset of covid-19. We fully expected to achieve our membership guidance.

With the unfolding unemployment levels and suspension of Medicaid Eligibility redetermination. We are now likely to exceed that guidance, but by how much we do not yet know.

all the time and so

We're likely to see more uptake in the marketplace than maybe in past recessions when the marketplace actually didn't exist. So now that it does exist. I think it's going to be the net beneficiary black folks who come out of commercial plans and find that highly subsidized Marketplace product beats staying on COBRA and just to follow up on that point. Is it fair to assume that? You know, I know you talked about some of the adverse selection bias in in processes like this where people buy insurance if they need it, but in this situation isn't isn't it fair to assume that, you know Cobra those remaining on COBRA wage to be ones that are more focused on continuity of care and have chronic needs and things like that or you are you assuming that the marketplace membership may actually have a positive bias wage generally speaking. If you're in the middle of some kind of expensive treatment protocol or are chronic a member on expensive drugs. You just don't move

We have developed various models and scenarios based on macro and micro economic factors which produce widely different results.

The eventual outcome will be influenced by several key factors including unemployment levels particularly in the lower wage Services economy availability of spousal coverage in Cobra uptake

Impact of these factors is likely to be greater in the economically sensitive Medicaid expansion sector.

Relatedly pre-coated. We fully expected to achieve our premium revenue forecast for the year of Seventeen point four billion dollars.

Our previous membership forecast was achievable in our rates were generally known.

Now it seems likely we could exceed our Revenue forecasts depending on the timing and extent of the additional membership. We just discussed.

your care acquisition will be an additional source of growth when closed

Because you're happy with what you have. But as you know, Cobra has a limited life and those members have to go somewhere eventually right now. We're not assuming anything other than a rebuilding the infrastructure to make sure we can handle the influx of members adjacent. It runs. Our Marketplace business is very mindful of how do we capture early risk scores and risk profiles phone number so we know when we get them how to treat them how to get them into care plans et cetera. So very early stages. I don't have any more thought on it than what I just gave you and and just one quick. I'm on the revenue guidance. Is there an assumption of pass through revenues that are going to be coming through or is that in the bucket of covid-19 packs that were not anticipating?

I also note again that any potential upside to annual earnings is limited by rebates we would be obligated to pay under applicable minimum Mor regulations

in addition to our compliance with such regulations even if our come in lower than our own internal targets

with a mindfulness of our Civic responsibilities in order to redress any unexpected imbalances

We could choose to reinvest some of that margin differential and provider-based quality of care initiatives and additional benefits for our members were in the communities where they live.

While the current near-term economic environment is unpredictable government managed care business has consistently shown very attractive growth characteristics with compelling free cash flow generation.

I'm not sure. I understand you referring to a Medicaid and and I'm not sure what you're referring to exactly Josh. Yeah Medicaid payments where you know, you're going to see increases to the provider fee schedules to get past Thursday in terms of Medicaid if possible. I will answer the question more broadly. Most of our state customers are very concerned with the viability of various aspects of the medical communities and their states and whether it's going to be enhancements to the fee schedule request as you've seen to pay claims faster in some cases even Advanced payments too small providers, they are very focused on the health of the provider system, but we have not seen yet from what I've been exposed to any major changes to fee schedule, but there are many conversations.

We are in the right business at the right time you're of our members support our state partners and move with confidence and conviction into the future.

However, we also believe that making accurate and perhaps bold statements about our longer-term future makes little sense at this time.

Accordingly we have decided to postpone our May 28th investor day. We perhaps later in the year. We're now we are strictly heads down doing the hard work we need to be doing.

I turned out to the fourth and final area of commentary this morning an update on the many activities relating to our pivot to growth strategy.

Even with the extraordinary level of activity related to covid-19, which is now our highest priority. We have not lost sight of our near-term focus on top-line growth.

I'm going about how to keep the providers funded during this entire process.

Opportunities to enhance and expand our portfolio in a substantial and synergistic way occur infrequently.

Thank you.

Last night we announced just such an achievement as we signed a definitive agreement to acquire Magellan Complete Care or from Magellan health.

The next question comes from Sarah James of Piper Saint Louis, please. Go ahead.

Thank you. I wanted to Circle back to your comments that in a strong economy. Medicaid rates are set at the high end of Actuarial soundness. And in fact recession will be set at the low side. Can you give us more detail? What is that mean from margins when you think about the peak to trough move?

This transaction caps nearly a year-long effort long predating the covid-19 crisis delivers compelling benefits that will endure for years to come.

A single bolt on acquisition we had businesses in three new States and three overlap states to our portfolio at a purchase price equal to approximately 30% of the targets Revenue off.

I think the first thing I would say Sarah is we put a lot of faith in the concept of Actuarial soundness there abs and flows off constant tension when benefits are carved in when benefits are carved out when new populations are attempted to be capitated. There's a constant ebb and flow and the only point when you're making money if from a business model perspective, you would expect that in very strong economies when tax revenues are flowing that rates would be on the strong side of Actuarial soundness and the opposite could be true when tax revenues are down in in terms of recession, but the concept of Actuarial soundness wage has has proven in this industry. It's proven in the years that I've been here as Testament to the margins that we're achieving there are abs and flows and all I'm suggesting is dead.

Sure, do we expanded Molina Healthcare? Which surpassed the $20 Mark in annual revenue?

Let me briefly describe the businesses. We purchased their strategic fit with our portfolio and the resulting Financial metrics.

as of December 31st 2019 MCC served approximately 155000 members across 6 days Virginia, Arizona, Massachusetts, New York, Florida and Wisconsin

Full-year 2019 Revenue was greater than two point seven billion dollars and we projected to grow to three billion dollars within two years.

Magellan Complete Care comprises the following businesses full-service Medicaid in Virginia a new state

full service Medicaid in Arizona also a new state

In a recession we could expect rates to be on the softer side of the Actuarial soundness concept, but we still have not changed our outlook for our Target margin about a lot of a lot needs to be seen here in terms of what trend figures are going to be a baked into the 2021 rates. Are we going to use normalized Trends off the 2019? So when trend is in selecting the way it is, I think the bigger issue is when trend is inflicting up and down the way it is. How are the Actuarial teams in our state customers in the Actuarial teams of the managers going to reconcile its various views of medical cost Trend when we go to look at 2021 rates, but all that being said, I have a lot of faith and confidence in the Actuarial soundness, because it's actually worked well for managed Medicaid.

eligible in Massachusetts branded senior Whole Health again a new state

manage long-term care in New York metro area granted senior Whole Health a new geography and two small businesses one in Florida in one in, Wisconsin.

The addition of the properties allows us to apply our previously demonstrated operating Excellence to bring these businesses to our Target margins.

Harvest the full benefit of fixed cost leverage by adding more Revenue with little additional fixed costs and launched Medicare and Marketplace in new Medicaid geographies.

Returning to the financial metrics the $820 transaction net of certain tax benefits is expected to close in the first quarter of 2021.

The purchase is funded entirely with cash on hand.

That's very helpful and and comforting given how strong relationship is with the the state actuaries as medical Trend does change. Is it just one more follow-up there you mentioned that one of the possibilities could be items being carved in and carved out. Can you provide us any color on your discussions with States on how they're viewing the shape of their program given where their their budgets may be sure, the one aspect of managed care and medical cost in a secure that comes to mind and your specific question is related to Pharmacy. As you know, that is commonly discussed as either be carved in or carved out as you probably saw in the New York State budgetary process that was just finalized. They have suggested that at some point in the future New York State wage.

We project it will deliver returns. Well, in excess of our cost of capital is our demonstrated operating capabilities, which is in a unique position to improve the margins of these businesses.

As we move margins to our targets boy our enterprise-wide platforms and have the benefit of fixed cost leverage. We expect the acquisition to be accretive by approximately $0.50 to $0.75 cash earnings per diluted share in the first year of ownership.

And it created by at least $1.75 in cash earnings per diluted share in the second year of ownership.

These new additions to our portfolio demonstrate how carefully targeted m&a can accelerate our pivot to growth.

With the addition of we will serve more than three point six million members in government-sponsored health care programs in eighteen States.

Could carve out Pharmacy.

We will achieve enhanced Geographic diversity Raider portfolio depth a meaningful addition of durable top-line Revenue.

Um, obviously not terribly material for us with the two hundred million dollar business there but carving in and carving out is actually in my view more of a question of how much range how much capitated rates do they put in or take out rather. We'd rather see a bundled into the full capitation and have more Revenue but if it's carved out if it's if they're if they carve out on an unsubsidized basis, you lose your 2% margin on what's carved out and and that's it. So you just you you hope through the negotiating negotiating process that the proper amount of birth rate is either card dinner carved out. That's the issue in my opinion.

We will also be able to maintain continuity of care for em, CiCi's members and stability for its state partners.

These qualitative considerations have an added importance in the current environment and demonstrate our unwavering commitment to capably assist our government partners and bringing high-quality Health Care to age rules and families during this time of great need and into the future.

Let me provide you with some additional highlights as a relates to our pivot to growth strategy.

Thank you.

First we terminated our agreement to purchase Next Level Health due to the sellers stated unwillingness to close pursuant to the terms of the acquisition agreement.

The next question comes from George Hill of Deutsche Bank, please go ahead. Yeah, good morning guys, and thanks for taking the questions A. Lot's been covered. I guess Joe had a follow-up and Deals this you think about the m&a environment. Do you expect kind of the current environment that we're going into now to to kind of make em, a more difficult or rest difficult trying to figure out if people targeting Medicaid enrollments kind of defend smaller businesses and smaller plans making them harder to acquire or could people see this as an opportunity to exit and have a quick solid for Tom.

Second in New Mexico all legislative and political hurdles have been passed in connection with development of the first-ever Indian Managed Care entity.

We have been named as the exclusive manager of the Managed Care entity for the Navajo Nation We Stand poised and ready to serve the 75000 navajos eligible for Medicaid.

Third as previously announced Texas canceled all of the new contracts associated with the Star Plus re-procurement Awards canceled the star chip RFP.

You know interesting question. I think most of the investment banking Community would tell you that in the past couple of weeks or months that many of em in Flight processes, you know have stalled this one's been going on for some time. And so it was able to get done with great cooperation from the guys from the gentleman and the teams worked well together. It's hard to say, I think this business is a tough business and we look at some of the smaller players the non for-profits the single state players. It's hard to get the operating leverage the scale the clinical sources you need to actually do a good job. It's just a tough business. But when this is all you do and you have three and a half million members and twenty billion dollars of Revenue, we certainly have the invoice the skills and resources can be well here so, you know buying underperforming properties at 30% of Revenue getting them either. Margins up to six six and a half percent off.

The state has commented that it is not likely to re-secure this contract in the near-term and thus we expect that our Revenue base on this contract is secure at least through age twenty-one.

We await the decision by the state of Kentucky on its Medicaid RFP, which we expect to be issued before the end of the second quarter.

While Tennessee is the only state to specifically announced that it is postponing. It's our fee due to covid-19 We Believe there will be a general tendency by other states to also delay. Until the covid-19 crisis has abated.

And finally in our continued efforts to shape our business portfolio to optimize value. We have decided to sell our Puerto Rico Medicaid business.

Is a great use of our resources and our skills particularly when they're funded with cash that's generated from core operations and we don't have to go to the equity markets or even the debt markets to function. So here in the foreseeable future. Obviously, we're going to be a working on the regulatory process with Magellan that will be integrating it but we're still going to look for in a single area bolt on talking opportunities like the your care acquisition which was fabulous for us. We're going to continue to look for them cuz we actually have the cash flow to action on them if they're dead.

Doing so we will work closely with the regulatory authorities and the provider Community to ensure that our members in Puerto. Rico are not disrupted and have reliable continuity of care.

Now some concluding remarks.

I hope it is clear to all that during this time. Our members and customers are going to make requests of us to do the extraordinary.

Our philosophy is to provide the help first and ask questions later.

We trust that we will be adequately rewarded for their work. We do in the services we provide although in this environment. We expect some non-traditional protocols to be invoked.

No, that's helpful. And I guess Tom I quick follow-up for you is an accounting one, which is I know it's early but if we start to think about the the contracts where you guys have ml are minimums, I imagine at some point you'll have to reserve revenue or have contra-revenue accounts for what could be premium rebates or premium holidays. Have you guys started to do that yet? And is it too early to think about or discuss what the magnitude of that could look like?

This philosophy is not in congruence with shareholder friendliness at all.

It is the epitome of a prudent environmental social and governance philosophy and the pillar of long-term business sustainability.

We will fulfill our moral Civic and patriotic Duty and we will emerge from this and even stronger company.

Yeah.

Question there. And we do that consistently every quarter as you know in our Marketplace, we have to provide reserve for in potential rebate based on certain forecasting of the eventual, you know medical care of care ratio, and we do the same thing for our Medicare line of business and we will be doing the same thing for 90 K. Should that happen to be the situation?

Not only are we proving to be flexible and adaptable in this changing environment, but we will make sure our performance during this Challenge answers are growing reputation among our existing customers and potential new customers alike as a go-to resource in government-sponsored Managed Care.

Before I turn the call over to Tom, I want to recognize our management team and the entire Molina community.

Okay, but I guess no way to kind of quantify what the what the incremental could look like from normal versus kind of what we're stepping into the next couple of quarters. No, no as we set it up with, you know, the volatility of this impact on from covid-19 on the impact on medical costs, you know, it's unknown. That's why we, you know, hesitate to provide more more color of that. So we'll have to let this thing play out over the next couple of quarters, and it's typically done based on either a calendar year or contract year depending on how the state prescribed that okay understood. Thank you.

During this unprecedented time. Our team ten thousand strong has worked tirelessly to ensure that the needs of all of our constituencies continue to be addressed quickly and effectively.

The true highlight of the quarter was the performance of our entire Workforce and their rapid operational and clinical response across every dimension of the health care ecosystem truly inspirational. They never lost sight of the members of the state Partners who are counting on us to deliver whatever the challenge.

Sure.

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

My next question comes from David Lindley of Jeffries, please. Go ahead. Hi. Good morning. Thanks for taking my questions. You always have a great great ability to cut right to the chase. My name is around operating Medicaid Managed Care Organization in a covert in Iron meant thinking about a couple of transactions you now have in fact that include New York operations epicenter of kovich. So just just interested in kind of understanding how you might see the future change in in one's ability, you know, the risks and opportunities in in managing a plant in a Covetous affected environment given that you seem willing to step right into the epicenter with both of these Acquisitions your care package and MCC having significant operations in New York.

Thank you Joe this morning. I am going to provide some details on our first quarter results provide additional insight into covid-19 impacts our medical costs and then I will provide more color on our 2020 guidance. So let me start with a quarter premium revenue for the first quarter of 2020 increased eight point.

Trouble thanks for the question. You know, it's it's look at the challenge we moved, you know, six thousand people from working in office to working at home. There are as I said hundreds of require getting from Regulators every day to do certain things, you know that requires you to have to reconfigure your provider contracts. I mean the the the operating protocols the amount of operational change that we're going through right now and dealing with all this is significant, but you know in New York are our business is in Upstate, New York, which is not the epicenter of of covet off but certainly is being impacted the business in New York is a good business. We manage to billion dollars of benefits Nationwide. I think we're the largest of the Second Baptist manager of the SS benefits so fits nicely with the portfolio. It's it's really it's not a medical business per se. It's a business where we cater wage.

To the activities of daily living too pretty complex.

Members under the Medicaid Program but you know, it's it's a good business. It's it's got seven over seven million dollars of Revenue. It's reasonably profitable. We think we can answer the Page by managing the hours more effectively but covid-19 was certainly a consideration as we actioned it. But either it'll covid-19 will either have abated by the time we own it or be so well understood and well-managed that it'll be the new normal so was a consideration but it did not deter us from wanting that property and including it in the purchase great. Thank you on on Exchange you you commented that you haven't really seen a material change in trajectory on membership there. Maybe that changes does that influence does what is likely to happen this year influence the way that you will address?

To your growth strategy in that business for twenty twenty one after the twenty-twenty kind of positioning didn't pan out as you thought. It would be a very good point. I will expect you to quit. I would reiterate that. Our strategy hasn't changed. We had committed to Growing the pool of profits of the exchange business office and had articulated that we will make the local Geographic call as to where to push price for gaining membership and we're dead or where to push price to gain members push price down to gain membership and we're he's up on it to gain margin and make local decisions based on competitive forces and obviously as you suggested it and admire, we got the elasticity of demand equation long last year the bigger issue for it. So the strategy hasn't changed we're going to take the total profits and attempt to grow to over time at reasonable margins wage.

The the wrench that's been thrown into the works obviously is coated right now as we sit here today, we're developing the pricing models for twenty Twenty-One. They're off of a 2019 Baseline wage is pure covid-19 for the question will really be what type of rates go into the market for twenty. Twenty-One given the code in it that we're in right now. So our beliefs is that long discussions with Regulators allowances will be made for maybe some later rate filings, maybe rate filings that include coded and others that don't allow us to see more so that we can take a reasonable if you would medical cost try and get it into the rate so that we're not guessing and the industry's not guessing. We don't want to push so much rate into the market that we have excess margins. I certainly don't want to undercut it to where margins are too low. We want to get it right. So we're working with The Regulators right now on the pricing regimen for 2021.

Got it. One last thing if I could what level of

Cash, do you want to have with what did he do? You want to have to run the business? And are you willing to add more leverage in this environment thing?

Our leverage position is very strong and I would encourage encourage people not to look at our debt-to-total cap, which averages forty to 45% of things of 46% at the end of the court because that generally just sounds hi to people our debt-to-ebitda a coverage is 121 Glenridge is 1 to 1 are fixed interest cost coverage is is like three weeks of earnings. We've covered our fixed charges on an interest. So we're actually under levered from a cash flow perspective having said that in this life, you always want to be more liquid than you otherwise would but with eight hundred forty million dollars of cash five hundred million dollars of dividends expected this year nine hundred million dollars a month. I have facilities. We believe we still have enough cash in enough liquidity question that if another bolt on acquisition opportunity came up this month next month or next.

Quarter we'd be able to action it. But in this environment you want to be a little more liquid than normal. We usually Target a hundred million dollars of parent company cash as a floor and would probably think slightly higher than that in this environment.

Great. Thank you.

The next question comes from Ricky goldwasser of Morgan Stanley, please. Go ahead.

Hi, this is Alexa actually in for Ricky. Thanks for taking my question. First question. I just have to one is just following up on George's question about so you talked about how majanja to be year-long effort to close. So could you give some colleges in the typical time line to get your deals ready to to announce? And and how many kind of companies that you're looking at at any given time?

Well, you know without getting into the process cuz that's we don't really want to do that. But the point what we wanted to make was that this month along predated covid-19 process started and that was the only point we really making but willing buyer willing seller it's it's hard. There's a lot of properties out there many of them aren't actionable but getting something that strategically fits from which product in geography perspective and then one that's actionable is hard work. We have an expert and in a group led by Mark. I'm in a great way to people who are scanning the universe for actionable opportunities that fit with the portfolio and that are actionable and you know last year we found your care we found next level but we obviously terminated our wages next level for very good reasons, and then this opportunity came into the market and we worked at really really hard with great cooperation from the folks from the gentleman there were others in the pipeline. I can't mention wage.

They are and where they are.

But there are still properties out there that are actionable and we still have the liquidity and the resources to action them. If in fact they come to Market and can be actions.

That's helpful. Thanks. And then just on the the first elective care side, you know, we've heard ranges over the last week about you know, 15 to 40% of total medical costs are associated with elective care. Is there anything that you can give us an on how your elective cost compared to your book? Sure, you know, it's hard to draw any conclusions from two weeks in March, but we certainly can draw conclusions from the full month of April, you know on the outpatient and Professional Services side outpatient Ambulatory Surgery is depending on the geography and line-of-business pre-authorization requests and notifications down Thirty to fifty percent diagnostic testing and imaging another sort of elective category, you know forty to 45%. Referral to Specialists DNA all down significantly over comparable. We're even seeing it on the inpatient side particularly with elective surgeries and wage.

Behavioral Services, so in the medical cost categories that tend to be elective in discretionary. We're seeing a pre-authorization request and notifications down significantly over comparable periods. The other point I would make here is how long does this persist? There? Are there were various mandates of the suspension of elective procedures. They can't be done under either State Authority or or governmental Authority that will end soon at some point but there will be a a contagion of fear of of patients fear of going into facilities of where the risk of being infected. So how fast they rebound how fast it be effective when they come back is another factor and why predicting what medical costs look like here over the next three to six months is difficult. I remind everyone when we're talking about the rebound birth.

Is there is a capacity limitation on how fast things can read out there only so many beds there only so many doctors and there's only so many hours in a day and when you have three four or five or even six months of pent-up demand it cannot raise through the pipe that quickly there's a capacity limitation on how fast it rebounds which adds another variable into forecasting how quickly this could rebound so I hope that helps but that's sort of a view of what margin April look like from an elective elective and discretionary off procedure.

The next question comes from Charles, please. Go ahead.

Yeah, thanks for taking questions not you know, just make maybe two last questions for me or you talked about potential delays of decisions month, but you still said you expected Kentucky sometimes a second quarter. So are you still expecting Kentucky to make a decision in the second quarter or do you think that is up for delay we wage then toll that actually we were told month of May but we won't have to just open it up as a second quarter cuz we just weren't sure but we we've actually originally they actually posted that they need to do it in April and then do the covid-19. They actually then pushed it and whether it's actually published in writing or they made an announcement. I can't recall but they did say may but we sort of opened me up and said, you know sometime in the second quarter, so we haven't heard about a suspension and until we hear. Otherwise, we still expect the second quarter announcement.

Right, and then and Joe at the beginning you can also mention about some of the things you were doing for your members including opening access for the for Telehealth. And you know, I saw the we saw the announcement obviously several weeks back about you know, using teladoc. Can you just help us understand a little bit how Telehealth is priced for a Medicaid population when you extend it to your members is that should be about the same way as for commercial population that the members are paying some some dollar visit the or is that something that you guys include in sort of the the overall cost that you're charging station?

First thing I would say to that is in our company. Our Telehealth solution is more fully implemented in our Marketplace product and it is in our Medicaid product. It is it is beginning to be rolled out in our Medicaid product. And obviously this accelerated of the roll out cuz it was the right thing to do in members couldn't get in-person visits as we said in our prepared remarks. We created a parody mechanism between in-person visits an old is it but

I I I wouldn't want to say how it's priced but it's it's more it's more penetrating is we're searching for in our Marketplace book than our our Medicaid book and we have a contract we pay for it and it's it's loaded in the benefit is really all I can say, I understand that. I mean, I guess is there a cost-sharing then do members pay some amount to access it like they would in a commercial population in a in a more typical commercial population or or is it done differently? I guess well, generally the Medicaid the members are not paying anything out of pocket for any service. So in Medicaid the answer is no and I I believe we're check doesn't get back to you. But in Marketplace, it's probably like any other claim payment if somebody's inside their deductible, you know that it gets treated that way if there's a copay whatever the benefit plan is. I think it gets off.

Like another claim pursuant to the benefits structure of the contract.

There are no further questions. This does conclude our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.

Okay. Thanks. That's really helpful. Thank you.