Q2 2020 Molina Healthcare Inc Earnings Call
Okay and welcome to the Molina Healthcare second quarter 2020 earnings Conference call. All participants will be in listen only mode. So do you need assistance leased Ugly conference specialist by pressing star keep all the time zero.
After today's presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
Now, let's turn the conference over to Julie Trudell, Senior Vice President Investor Relations at Molina Healthcare. Please go ahead.
Good morning, and welcome to Molina Healthcare's second quarter 2020 earnings call.
Joining me today are Molina, President and CEO, Joe Zubretsky at our CFO Tom Tran.
A press release announcing our second quarter earnings with distributed yesterday after the market close and is available on our Investor Relations website.
Shortly after the conclusion of the call a replay of this call will be available for 30 days.
The numbers to access the replay or in the earnings release.
But those who are listening to the rebroadcast of this presentation. We remind you that remarks made herein are as of today Friday July 31st 2020 and have not been updated subsequent to the initial earnings call.
In this call will refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2020 press release.
During our call, we will be making certain forward looking statements, including but not limited to statements regarding the Kobin 19 pandemic an economic environment.
Recent acquisitions, 2020 guidance and our longer term outlook.
Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that can cause actual results to differ materially from our current expectations.
We advise listeners to review the risk factors discussed in our form 10-K annual reports for the 2019 year filed with the FCC.
As well if the risk factors listed in our form 10-Q, and our form 8-K filings with the FTC.
After the completion of our prepared remarks, we will open up the call to take your question.
I'd now like to turn the call over to our Chief Executive Officer, Joe Zubretsky Joe.
Thank you Julie and good morning.
Today, we would like to provide you with updates on a number of topics.
First we will cover the enterprise wide financial results for the second quarter.
Second and related Lee will discuss the impacts of the copas 19 pandemic on various aspects of our business.
Third we will convey our guidance in the context of our second quarter result, and this new but temporary operating environment.
And fourth and lastly, we will provide a premium revenue growth outlook for 2021, which is approximately 20%.
As we now emerge from pivoting to grow to activating our growth phase.
Let me start with specific a second quarter highlights.
Last night, we reported earnings per diluted share for the second quarter, a $4 from 65 cents.
Net income of $276 million.
This result was supported by an M.C.R. of 82.3%.
Hey, Gionee ratio of 7.5% in an after tax margin of 6%.
Our year to date earnings per diluted share is now $7 in 54 cents, representing 66% of our full year guidance.
The Cobas 19 pandemic had an impact on many aspects of our quarterly result.
Some of these impacts increased earnings while others served to decrease earnings.
While many of these impacts are known you had estimable.
Others require significant judgment to estimate.
Today, we will do our best to quantify the cobot impacts on our result, and separate them from the underlying core earnings power of the business.
In doing so two things are clear.
Our operating metrics were substantially in line with our expectations, both as reported in as adjusted for Cobot impacts.
Yeah, both our core earnings and the growth trajectory of our business have not been disrupted by the short term impact of Cowen.
We estimate that taken together.
All cobot impacts on our financial results for the quarter resulted in an increase in net income in a range of $65 million $200 million.
Equating to an increase in earnings per diluted share in a range of $1.10 cents to $1.65 cents.
Now I will provide some highlights related to our second quarter results from an enterprise perspective.
Beginning with revenue our premium revenues of $4.4 billion increased by 8% over the prior year.
Related Lee our membership increased sequentially by 151000 members were 4% primarily in Medicaid.
With respect to medical costs within 82.3% MCR. Our performance was also strong although significantly augmented by cobot impacts.
Although in many cases, we were required to relax our utilization management and payment integrity routines as an accommodation to providers, we continued to effectively manage medical costs, while ensuring all of our members receive high quality care.
This MCR result was impacted by two directionally different factors related to the cobot 19 pandemic.
We experienced lower than expected medical costs due to cope unrelated utilization curtailment, a phenomenon that may or may not recur during the balance of the year.
And a number of our state Medicaid customers enacted retroactive rate refunds.
In the quarter, the lower medical costs, and a retroactive rate refund combined to reduce our reported medical care ratio by an estimated 300 to 400 basis points, which accounts for substantially all of the reduction in the ratio both year over year and sequentially.
All of the corporate impacts on our second quarter result will be described in more detail in a few moments.
Next.
We continue to effectively manage our administrative costs.
Through productivity gains in fixed cost leverage producing a DNA ratio of 7.5%.
This is despite spending on specific cobot related items, which temporarily increased our administrative spending.
Our net investment income usually not earnings item with significant variability was again unusually low at $18 million compared to $34 million a year ago due to the current low interest rate environment.
Our line of business results were very much in line with our expectations with strong metrics in both Medicaid and Medicare well, our marketplace results were slightly lower than expected due to a higher than expected member acuity mix.
Finally in the quarter, we continue to improve our capital structure.
We issued $800 million of high yield bond used to retire short term floating rate debt.
We also upsized, our revolver to $1 billion from its previous level of 500 million.
These are more than mirror transactions. They are the culmination of a two year long and highly successful restructuring and optimization of our capital structure.
We are now position with well priced that nicely laddered maturities solid credit metrics and ample dry powder to execute on M&A opportunities, if and when those opportunities arise.
In summary, we continued to perform well across the many fundamentals of managed care, which has been our hallmark and we are continuing to grow revenue as result of our focus on topline growth.
Now I will provide some commentary about the effects of co bid on our second quarter result.
The cobot impacts on our quarterly results include.
A decrease in medical costs due to cobot related utilization curtailment.
Offset by direct care related to covert patient.
Retroactive rate refunds to a number of our state Medicaid customers.
An increase in our DNA spending on activities related to coated.
And a meaningful increase to our Medicaid membership.
As previously mentioned, we estimate that taken together all cobot impacts on our financial results for the quarter have produced an increase in net income in a range of approximately $65 billion to $100 million.
Equating to an increase in earnings per diluted share in a range of $1.10 to $1.65.
I will now provide more color on the most significant factors contributing to this.
With respect to the cobot impacts on medical costs.
Early in the quarter, we experienced significantly lower utilization and a variety of cost categories.
Categories, representing approximately two thirds of our total spend.
With utilization levels, increasing slowly as the quarter progress.
By the ended the quarter utilization in these categories were still approximately 10% lower than we would have normally expected.
The medical cost categories, most impacted where elective surgeries.
Services in ambulatory settings.
Our visits behavioral services and wellness and preventive services.
We also incurred the direct cost of care for Kobin patients with just over 4100, hospitalizations and average inpatient episode cost of $9000 plus the cost of outpatient and other professional services.
The cost per cobot episode varies widely depending on the acuity of the patient.
We estimate that coated lowered our second quarter medical costs by 190 million to $240 million.
As you know as a general matter there are fewer elective procedures performed on the Medicaid program. Then is the case with commercial health insurance.
Since our book of business is heavily weighted to Medicaid the effect on us up elective procedure curtailment is therefore less pronounced.
Fix of our state customers enacted temporary retroactive rate refunds during the quarter with the intent of recouping the portion of our Capitated rates not spent on health care services due to the pandemic.
In the quarter. These refunds amounted to $75 million pretax and related to the states of Ohio, Illinois, California, South Carolina, Mississippi in Washington.
Some items of note.
The refunds in these states took various forms ranging from simple rate adjustment was slightly more complex risks sharing quarter were around a target medical loss ratio.
As well as supplemental payments to provider.
In many of our states. However, it was business as usual as we continue to operate on the pre corporate rate structure.
Our position on rate adequacy has been consistent.
We do not intend nor do we want to keep state Medicaid money that was intended to be spent a medical benefits, but was not due to utilization curtailment caused by code.
In many of our Medicaid States there are already mechanisms in place to protect against a surplus margin as there are minimum ml ours in seven of our states and profit caps and to others.
The F. map increase in potential additional f. map increases should significantly relief any potential rate pressure in our states.
And CMS as authority to approve or disapprove proposed rate actions that are not aligned with the definition of actuarial soundness.
Once the cobot 19 pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will continue.
With respect to our DNA expenses coping related activity increased our second quarter expenses by approximately $25 million.
A variety of new operational protocols technology implementations and benefits for our employees all related to the cobot pandemic were established were implemented during the quarter.
In addition, we have consciously managed our head count at above optimal levels to ensure we maintain adequate service levels, but also to be socially responsible to our dedicated staff.
Medicaid membership increased sequentially by 152000 members in the quarter, a 5% increase.
Much of this was due to the suspension of re determinations as we believe that unemployment related enrollment has not yet materially access to managed Medicaid.
It remains unclear how high the membership people be.
How quickly it will be obtained how quickly it will fall as the economy recovers and where it will ultimately sell.
We have invested in many local growth initiatives with providers.
And branding and awareness campaigns in social media outreach to ensure we obtain our fair share of increased membership.
We believe that post cobot Medicaid membership will stabilize at an increased level as to future natural unemployment rate will likely be higher than previously experienced.
In summary, as we work through this unprecedented period, we remain focused on executing on the underlying fundamentals of our business regardless of the short term covered related impacts on our reported financial results.
Now I turn to our guidance for the full year.
Our full year earnings guidance range remains at $11.20 to $11, a 70 cents per diluted share with a midpoint of $11.45.
Our earnings per share year to date is $7 in 54 cents, which means through six months, we have earned 66% of our revised guidance.
Given the environmental uncertainty that we expect to exist with the ended the year. We are not adjusting the range of our previously provided earnings per share guidance.
We intend to adjust our full year outlook as appropriate when our third quarter results are reported.
The reasons for this cautious approach have already been stated but bear repeating.
The near term outlook for medical costs, the cost of corporate itself and the potential elective procedure rebound are unknown at this time.
There are still potential for additional near term reductions or voluntary company concessions to customers members and providers.
We will fulfill our obligation to make any rebate to a member CMS for our state customers related to the statutory requirements that exist today.
After doing so if we conclude that there is still a remaining financial imbalance, we will correct that imbalance.
Our membership forecast as a wide range of possible outcomes as there are numerous macroeconomic variables in play and really diddley, the acuity of any potential membership increase and the cost of services are also highly variable.
And lastly, we believe that any methodology for extrapolating annual earnings estimates by quarter should be suspended in one's thinking.
I would now like to turn to the progress we have made in executing our growth strategy, which is having an immediate impact in which allows us to forecast premium revenue growth of approximately 20% for 2021.
We have essentially check the box on at least one initiative across all the revenue growth mentions outlined in our growth strategy.
We have retained all of our existing Medicaid contract. We have won a new state contract and we have executed meaningful and accretive acquisitions.
And with the impact of the recession organic growth will be much better than expected.
Some highlights.
Based on announced Reprocurement schedules the revenue associated with our current enforce Medicaid contracts should be intact through 2021.
Plus we have significant uncertainty related to 2022.
The new management team has won or defended all of the re procurements that were under its control.
We assumed the Youre care membership on July 1st.
Which will increase membership by 47000 members in the third quarter and should provide approximately $140 million of revenue for the remainder of 2020.
And $280 million for the full year 2021.
The Magellan complete care regulatory review process is proceeding as planned.
Recall that the federal antitrust approval is complete in the state approval processes are progressing.
We hope to close the transaction by the ended the year and if we do this acquisition will provide the previously announced $2.8 billion of revenue in 2021.
For every month of closing would be delayed beyond the first of the year that annual revenue estimate would decrease proportionately.
Our Kentucky RFP when we'll have a contract start date of January Onest 2021.
Before considering any of the potential benefits of the passport acquisition under a conservative set of membership assignment assumptions the contract should provide at least $850 million of revenue in 2021.
With upside potential into 2022 as membership organically built.
Organic same store membership growth increased product penetration in our nascent Navajo Nation project would also modestly contribute to the 2021 revenue growth rate.
Finally, as previously announced we're exiting the Medicaid business and the Commonwealth of Puerto Rico.
We have reached an agreement to execute an orderly transition of our members to an on island competitor.
The unwinding will be completed by November 1st and the impact that the transaction itself and the contract exit are not financially material.
Under these assumptions, we project 2021 premium revenue of approximately $21.5 billion.
We are very pleased with a 20% increase in premium revenue as we move from pivoting to growth to fully activating our topline growth strategy.
Another major development and activating our growth strategy was our recently announced transaction to purchase certain passport assets.
The transaction is expected to close before the end of 2020, providing us with a well known brands in Kentucky, a turnkey operation in the opportunity to gain additional membership.
Passport represents potential upside to our 2020 and 2021 revenue guidance.
The purchase price for passport is approximately $20 million plus contingent consideration payable in 2021 based on the level of enrollment retained above a certain threshold.
A few words about the passport transaction and its benefits.
We will acquire the passport brand name.
All its operating infrastructure and we will assume approximately 500 highly trained Kentucky base passport and Evolent employees.
The acquisition allows us to enhance operational readiness in advance of our new contract award in Kentucky and enables continuity of care for passports members.
The acquisition allows us to avoid startup losses inevitably associated with building a greenfield health plan and the early lack of scale.
The acquisition allows us to compete more effectively for additional membership above what we might have ordinarily received from the standard auto assignment process related to our own contract award.
And from a financial perspective, we expect to recover the purchase price from positive cash flow and less than one year as the plan would be immediately profitable and is likely to produce membership well above what we might have achieved organically.
It is also important to note that the membership revenue and earnings related passport could all commence and begin to impact our results on or about September 1st.
If the Commonwealth, Kentucky approved our joint request for an early contract novation.
This would be a very positive outcome, although would impact the year over year revenue growth rate calculation.
As I conclude my remarks.
Take a pause from discussing our operating and financial performance and instead comment on our compassion our humanity.
During this unprecedented time, our company made many significant contributions to charitable and community causes.
We offered financial assistance to distress providers and worked with our state customers to understand where they saw a human tragedies unfold and offered our financial and operational systems.
We will continue to do so and in fact, we are developing plans to deepen our social commitment to build stronger communities one life at a time.
Hi offer another heartfelt. Thank you to our management team and our 10000 associates, who are executing well well dealing with their own stresses and issues related to the pandemic and racial strife.
Even when facing these challenges our associates are inspired and motivated by the opportunity to make positive change by delivering high quality healthcare to the disadvantaged.
Our associates continued to excel and I stand an aberration of their dedication and they're willing to sacrifice in the face of all types of the diversity.
In conclusion, this was a meaningful quarter for the company.
Our results met our expectations. Despite the turbulence caused by the cobot pandemic.
We took major steps forward in our transformation.
We sustained our margins, but did right by our members and customers.
We fully activated our revenue growth strategy and continue to deploy excess capital and strategic acquisitions.
This level of performance provides an insightful glimpse into our very bright future.
With that I will turn the call over to Tom Tran for some additional color on the financials.
Tom.
Thank you Joe and good morning.
First I will comment on our balance sheet cash flow and capital.
Our reserve approach remains consistent with prior quarters, and our reserve position remains strong.
Days in claims payable represented 52 days up medical cost expense.
Pair to 49 days in a first quarter of 2020, and 48 days in a second quarter up 2019.
The sequential increase was driven by lower medical expense in the current quarter due to the impact of cobot.
Reserve development for the first six months up 20, Connie was negligible compared to favorable development, which decreased our MCR by 110 basis points in the comparable period in 2019.
Operating cash flow for the second quarter, a plenty plenty was $613 million, reflecting the strong operating results.
And the timing of government receipts and payments.
We have track $185 million up subsidiary dividends in the quarter, which brought our Pan company cash balance.
$1.2 billion and gave us ample flexibility to fund, our recent acquisitions and organic growth initiatives.
Debt at the end of quarter is mainly 1.6 times, probably 12 months EBITDA.
I Love this ratio it's 50.7%.
However.
Net debt basis, net parent company cash a leverage ratio is only 30.7%.
Taken together these metrics reflect a conservative leverage position.
Our 800 million high yield offering was priced at four and free eight puts them.
Indicating that the debt markets deal our credit quality at a level that should provide the path for ratings upgrade in the near future.
As of June Thirtyth, 2020 ill health plan at total statutory capital and surplus of approximately $2.1 billion.
Which equates to approximately 350% of risk based capital.
Now turning to our 2020 guidance.
Our full year earnings guidance range is 11020 cents. So we'll have involved in 70 cents per diluted share.
We increased our full year 2020 total revenue outlook.
Approximately $18.8 billion from $18.3 billion, mainly due to a higher Medicaid enrollment.
The first half of the year.
As low as revenue from your care membership the resale effective July 120 20.
In taking this cautious approach to providing earnings guidance for the balance of the year.
We have consider a wide range of potential outcomes from the factors that Joe previously described.
Now I offer some additional items of note.
Below you environment and you track on investment income should persist in the second half.
We are likely to incur additional administrative expenses for covance related operating protocols.
We are also going to incur costs.
So should it with the launch of our new Kentucky contract.
And integration costs associated with the Magellan complete care acquisition.
And lastly, as a reminder, consistent what all historical practice.
Previously announced acquisition that have not yet closed are excluded from our guidance.
This concludes our prepared remarks, operator, we're now ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one and your Touchtone phone. If you are using a speakerphone. Please pick up your handset before passing the keys.
Let's try your question. Please press Star then to at this time, we will pause how materially to assemble our roster.
First question today comes from Justin Lake of Wolfe Research. Please go ahead.
Thanks. Good morning first question just on how you're thinking about the for brush Medicaid membership through the year I think you added a you said about 4% membership.
Quarter.
The Medicaid side, how do you.
The year on our dedicated specifically.
Can you delineate how much of that membership.
From the lack that this evolving and how would you treating that going into 2021 in terms of how you think that kind of.
How long that lab, giving me the aftermath.
Yes emergency.
Got it.
Certainty.
Sure just in its Joe.
We grew membership sequentially in Medicaid by 152000 members or 5%.
We believe ER with really good information that most of that was the result of the suspension.
Of Redetermination that the unemployment surge that is likely to come to manage Medicaid has not yet occurred due to a variety of reasons spousal coverage Cobra and backlogs and the various states.
Certainly we expect that membership to beyond the books for a while we know what will hit a peak and we also know that as the economy recovers and we'll begin to a trip.
We do not yet we have various forecasts of how much membership we're likely to have at the end of year as a result of all this but I think the we're comfortable in saying that our Medicaid membership will be higher than previously.
Forecasted as a result.
David but we have not put a point estimate on that still way too many variables to put a point estimate on how many members were likely to get I will say this through the first three weeks of July the Medicaid membership continued to grow by about 30000 members organically.
In the first three weeks of July.
That's helpful. Thanks for that many just last question Bobby Exchange performance you noted.
A little bit higher costs due to do a higher acuity can you flesh that out a little bit for it and then.
Should we assume that you were able to catch that early enough for 2021 bids and any color you can give us in terms of how you're thinking about you know where you did.
For margin in 2021 and that exchange.
Thanks.
Sure in our marketplace business, our silver bronze mix Didnt.
Change all that much but we did have a churn in the brands membership we took on so we had many new members in our brands product.
The MSR ran higher on those members than we had expected it's either higher medical if you're attracting the right risk or it's either mismanagement of your medical cost line, but if you're managing medical cost effectively which we think we are and the risk for us is having been commensurate. So we'll catch up we will get.
The risk scores in line with the acuity the membership, but thats the reason for the.
For the small shortfall in our marketplace business for the quarter.
With respect to the business.
Yes, we projected a medical cost baseline.
Uncoated impacted use 2019 is the medical cost baseline and then trended forward.
Without any cobot impacts so we believe that the rates we filed for 2021, our solid fully contemplated all the costs.
Related to a medical services for our members and the scores that we will attain.
Great. Thanks.
The next question comes from Kevin Fischbeck of Bank of America. Please go ahead.
Great. Thanks.
I wanted to ask about the the rate environment, how should we think about 75 million dollar number you characterize it as retroactive does that mean that theres not expected to be a go forward impact or Theyre also go for impact.
She is in your guidance.
Well the the retroactive refunds that recorded in the quarter really are a reflection of exactly how the rate apparatus should work, obviously rates never contemplated this rather dramatic curtailment and utilization.
So.
Whether states enact refunds themselves or whether the minimum minimal ours and seven of our states get triggered the money is rightfully going back to the states because it wasn't spent on benefits for their beneficiaries.
So we recorded the retroactive component either back to in some cases back to March in some cases back to the beginning of the year.
And certainly we contemplated the forward looking aspects of those rate decreases refunds as we provided are very cautious outlook to the balance of the year. So the 75 million was truly the retroactive component that takes us through June thirtyth, but we certainly contemplated.
The continuation of those refunds that have already been enacted and obviously the potential for more actions to be enacted by our state customers.
Okay. That's helpful. And then I guess it was a little bit can get it sounded like you were saying that MCC is.
In your revenue.
Guidance for 2021, but then Tom mentioned that you don't include deals into their clothes I just wanted to make sure.
He said.
How the treatment of MCC and that 2021, that's a fair point I think I'm going to use that as the opportunity to make sure. We clarify the outlook, we're giving for premium revenue in 2021 first thing I would say is our revised.
Forecast for 2020 is $17.8 billion, a premium revenue, which is a 10% increase over 2019.
Thats, a pretty strong pivot.
Now as we really activate the growth strategy projecting a 20% growth rate off of 2020 is certainly something we're pleased with and yes. It does contemplate.
The Magellan complete care acquisition closing on January Onest for every month it would be delayed you can proportionately reduce that but we expected to close at the earliest by the end of year, but no later than the entered the first quarter.
We also included the organic.
A component of our Kentucky contract meeting and amount of revenue in Kentucky that we estimate we would get through the normal auto assignment process. We did not include any potential benefits of additional membership that we'll get through.
Through the ownership of the passport brand and the potential novation of that contract early in the fall.
Also it's important to note that we've decided to exit Puerto Rico.
Which leaves $400 million of revenue in 2019 will not be into 2020 rate and of course, a modest very modest and cautious forecast of organic growth. So that's sort of how we compile are rather conservative outlook for 2021, and we really.
We wanted to just begin framing the story as we really activate our growth strategy, we want to give a forward look at leading indicator and outlook of where our revenue line is headed.
That's that's helped clarify the last point.
My last question here.
You say for next year modest organic growth I mean, what are you assuming it's hard.
Unemployment next year versus this year.
Yes, we have various forecast on where as I said in the previous question that was asked of where the Medicaid membership will go and.
As I said, we're just we're taking a week by week. We membership grew again in the month of July.
We expected to grow again in August and perhaps through September as that unemployment search come through but it's just so really hard to two projects are the way I would think about it is and what I'm holding my team accountable to we should do no worse than our market share in those markets.
Hopefully, we'll gain market share in this process, but if you take our market share that would be a good proxy for Medicaid enrollment grows by certain percent, we should we should at least get our market share.
Okay, great. Thank you.
Okay.
The next question comes from Matthew Borsch of BMO capital markets. Please go ahead.
Yes, Hi, I.
I was hoping maybe you could just elaborate a little big Burger on your outlook for Medicaid in the rate actions I.
I understand you know, you're saying that when we get past Kogut 19.
That you expect will continue to had rate set according to actuarial soundness, but.
Can hang out also recognize referring to a number six were already existing risk sharing mechanisms have kicked in.
Where you have Dom.
Exceeded.
Okay.
Well under.
Medical budget targets, but what do you have king if anything to send off at this point how're you doing that in terms of.
States under fiscal pressures.
Well you guys clearly are doing too well with this rate here.
Yes.
Proposals to cut so for.
Sure well not be the conversations with our various day customers have been very balanced in very rational.
And they do understand the principal back that as the force of federal law of actuarial soundness, which in the CMS approval process, they take very seriously as well.
Clearly the actions that have been taken our related coated.
That's that is occupied the conversation we clearly understand that there are other budget pressures in the states that are causing them to look at Medicaid with a very very sharp pencil.
But you can't recoup money in Medicaid rates to balance your budget that violates the concept of actuarial soundness the rates have to reflect the services that we intend to allow members to have and.
I think the rate environment will persist through all this as I said, we'll go back to a point, we're on a prospective basis.
We agreed to and.
Statistically credible medical cost baseline a reasonable trend off that baseline.
And.
That is serve managed Medicaid well over many many years.
Understood and.
I realised.
Timing is in different places for different states, but when would you expect to get it too.
Most intense period jobs discussions.
Over the new rate proposals.
Well as you know our rates.
Contract years span from January one two July to September. So we're always in some type of discussion with our customers about rates.
And as we emerged to discovery period, we have to adjust for the effects of cobot are the effective covert going to last into the 2021 baseline.
Right now.
They could.
But we just don't know so I wouldn't want to divulge any particular conversation were having the state but.
The discussion about how long cold left and what that medical cost baseline needs to reflect its just an ongoing state by state discussion.
Okay. Thanks.
The next question comes from Stephen Tanal SPP Leerink. Please go ahead.
Good morning, guys. Thanks to the question and all the color today.
One thing I wanted to follow up on was just Joe the 21, and a half billion outlook, the greater than and as it relates to Kentucky.
Just wanted to get a sense of of the first I guess, maybe confirmed the math I think the will stay to prove that.
You guys can keep passport strategy 15000 members I'd, probably add another billion dollars of premium revenue on top of this outlook based on how you guys have assumed there right now so first one I understand if I have that right and maybe if there's anything else you can tell us about more Kentucky said, so far with respect to whether that allow you to keep those numbers in place.
Your math is.
Precisely correct.
We assumed through an auto assignment process that we likely get a 140000 members.
Which is why we put an estimate of 850 million into our forecast.
We just didnt want to be presumptive, we're buying the passport operating assets and the brand name. The membership has to be assigned to us through the state approval process up you're absolutely right.
If we obtained all 350000 members that would represent a little over $1 billion of upside to the 21 and half billion dollars estimate that we've given you.
We will say this.
Well, we're still in the approval process. So I don't want to go into any particular conversations we've had.
Continuity of care is really really important to our customer stability of the network continuity the care plans, particularly for the high acuity population is really really important to our customer. So we believe.
What one of the.
Potential for this transaction is the key either all or many of the 350000 members that are now in the passport plant that was certainly the intention that we had in mind when we bought the passport assets. So.
Continuity of care really really important to the customer instability of network and if we were up keep many of those members those objectives will happen Matt.
Great. That's really helpful. And then I guess just as a follow up on this point it sounds like Magellan complete care at least inside this initial target is good for about 2.8 billion. Obviously it can move around a little depending on the close but we can use that in back into I think that level of organic growth you spoke to in France.
This conservative I think it's about 5%.
Correct me, if I'm wrong, but how do you think about that 5% them in what is the potential.
For upside there and how conservative do you think that as maybe talk about where it comes from Medicaid Medicare et cetera.
But we continue to believe that will grow our marketplace products are de snip product.
Is doing really really well.
We.
Clearly have plans to grow market share as I outlined at our Investor day over a year ago, putting in the operational protocols to make sure that we have less leakage on return the redetermination than we've had in the past and that through additional branding and awareness campaigns at the local level, we attract more membership.
Through the voluntary process and improving our risk scores and our quality scores I should say to move up higher in the auto assignment algorithms. So we have plans to grow organically I would call small bolt on acquisitions as good as organic particularly at the prices were paying so.
So I'd say at the cautious and conservative estimate.
And.
That's the way to think about it.
So maybe if I could just slip in one more I was just curious to know how much minimum medical loss ratio rebate accruals may have dampened the sort of downside or the year on year decline in MCR in same question on premium rates on bids.
I guess prior year development from the roll forward table on a gross basis looks like it was negative in the quarter. So wondering if minimum at all ours were factor there as well so maybe any color there would be helpful. Thanks.
No after we recorded the.
The premium refunds the.
Minimum mental ours did not have.
Any impact in the quarter no material impact on our financial results now going forward again depends where we're koby takes the medical cost line it depends where the retroactive rate refunds kick in but we again through whatever mechanism. There is we actually prefer and intend to make sure that.
We don't keep state money.
That was paid to us for servicing members that wasn't due to the pandemic. So whether it's through the retroactive rate refund whether through the minimum mental our mechanism or whether it's just voluntary working with our stay customer to to make directed payments to providers to add value added benefits for members were just to give money back we think thats the risk.
Possible way to behave in a global pandemic with our Medicaid customers.
Helpful. Thank you.
The next question is from gave plenty of Jefferies. Please go ahead.
Hi, Good morning, Thanks for taking my question I'm, Joe a little bit of a follow up to the last answer that you just gave trying to get a sense you named I believe six states that enacted retros seven have ml ours to more have profit caps I guess I'm wondering how much of those.
Overlap.
Or or kind of compliment to that question would be how many states are naked on this issue how many states do not have a mechanism or have not enacted a mechanism yet to recoup money in this environment.
I would say that.
The state of the states that haven't yet.
Our Washington into Washington have directed payments, but no Washington in Texas No.
Florida in Michigan have not.
A new York hasn't so those are the states, Wisconsin has.
Those are the states that haven't yet and I don't have list in front of where the end of ours are but the larger at 85 ready six.
And those quickly trip.
Probably in a marginal way.
But.
Those are the states that have been enacted anything yet and as I said.
We'll wait and see when something's enacted.
How their adapted what retro period, they apply to et cetera, I'm sure but.
That's that's the.
That's the outlook got I appreciate that and just just thinking I guess wondering how.
States fiscal years and their budget balancing activity come into play in in their thinking in your negotiations if.
If they don't have or don't enacting mechanism to recoup that money.
In the 2020 fiscal year does that increase the likelihood that they try to take that out in.
In rates.
In 2021 understanding your comments about actuarial soundness not sure. How those would know is out of is that explicitly a year by year thing or could could that take into account kind of a two year forecast and the way, they're looking at that actuarial soundness level.
Well certainly we have we follow very very closely.
All of the budget and legislative activity.
With our state customers, obviously, it gives you a sense of how.
Repeat their budgets are with with tax revenues or not so we certainly follow it many of our states have already passed budgets many of them past budgets a year ago that are two years in duration.
Where we haven't had any conversations about rates.
But many are in process.
Certain of them are in process. So we certainly keep our eye on it but as I said before.
You can't use Medicaid rates to recoup tax revenues they have to reflect the services that you intend to pay for members and as I said on the last earnings call. There's no question that as the economy moves up and down and state budgets are either very strong or on the weaker side than rates would.
Beyond the stronger side of actuarial soundness, when the economy is really robust and might be on the weaker side of actuarial soundness when the economy is flat.
Then again theres, the offsetting impact of more membership.
There are fewer members so you know.
It modulators and it's all manageable, but as I said actuarial soundness has to reflect the cost of health care services for your members and you can't recoup budget deficits with Medicaid money.
Right understood last question here, you you've alluded to even voluntary give backs and that's something that you would contemplate.
Are those actions I guess I'm wondering how formalized or some of those actions in your plans and and have you taken those into account in the in the reconfirm guidance that you're making today I'm. Just wondering if you do decide to make voluntary payments how might we.
Account for those are learn of those.
It certainly was contemplated in the very cautious outlook, we gave for the second half I would state it this way.
A state might decide that they will take the action to recoup the money that wasn't Peyton benefits through these rate refunds, if they don't do that and we trigger a minimum MMR than we have to pay it back by regulation, if neither of those two things exist or happen and we still think that we.
Yes, it appropriately or inadvertently unexpectedly benefited by this curtailment of utilization, we would work with our stay customer.
And work on a program of either additional value added benefits for members.
Direct the payments to stressed or distressed providers or just given money, but we don't think it's helpful. For the managed care industry to sort of have a surplus margin related to curtail utilization in a pandemic and we'll report that as we report our third and fourth quarters will report to the extent, we triggered minimum Emma.
Ours, we had retroactive rate refunds, where we voluntarily granted money back to our customer.
Very clear thank you.
The next question comes from Charles Rhyee at Cowen. Please go ahead.
Yes. Thanks, Thanks for taking the questions. Joe obviously, it seems like a lot of this one when you guys gave your outlook last quarter, you gave yourself a lot of room for US a lot of some certainty and then we're seeing.
Some of that a little the play out obviously at the same time weve been able to maintain your earnings outlook for for the full year here.
You know, but within within that were you surprised at although with some of the how some of these are a adjustments team or is this sort of what you are already in discussions with states you, though at the time that you're kind of reported last quarter soil sort of within the range of what you're expecting.
Then sort of just follow up on the last question here.
This several other states here that you're saying that you really don't have mechanisms in place.
Are those discussions are their discussions ongoing with them. Currently so it's a question of whether they make a decision to do something or not or is this are these situations where.
Sort of no no discussions have started.
Charles I mean, we knew we were headed into a very uncertain and unclear environment I mean, it's a pandemic and its healthcare.
And we saw the utilization suppression.
We knew that.
Whatever the numbers are we knew that we are benefiting were leased RPL temporarily is benefiting materially by suppressed utilization. So yes, we expected our state customers to contact the industry to figure out a way to recoup some of those funds.
Which is entirely.
Almost the embodiment of actuarial soundness.
The rates were super adequate for the Coca declared emergency period.
Therefore, the money should be given back. So this environment was entirely contemplated now at the beginning of the quarter, but I know that health care costs will be down between 190 $240 million no, but when utilization was down 20% to 40% and health care categories represent two thirds of our spend.
You knew that there would be from March distortions related to covert. So yes, we anticipated this environment as the quarter progressed, we certainly monitored it and this is this result reproduce and I'll say the reason we gave those numbers. If we really did want to highlight I'll make this comment that when you too.
Take all the distortions significant distortions related to coded out of our numbers.
It's a very very strong quarter with good metrics I mean, if you take out the one tend to 165 estimate of what coated increased earnings per share by we produce at a minimum $3 per share for the quarter, maybe as high as 355 for the quarter and that 82% MCR that we printed for the quarter.
I had 400 basis points of cobot benefit so banks were on our 86% result.
That we've been consistently and routinely producing so we tried to be clear, we tried to separate and isolate those coated distortions as clear as we could and yes. We knew we are going to an unfair environment, which is one of the reasons why we again gave cautious guidance for the back half of the year tell us where the can demicks going and we'll give you a clearer.
Picture, but the range of outcomes for the second half of the year is so varied and so wide holding our guidance and give you some qualitative factors rather than quantitative factors. We thought was the most responsible approach.
Yes.
Are you having discussions with the states like Texas, Washington, Florida are those all those when you kind of mentioned them or they ones that they're just kind of outstanding but nothing's really started.
Texas in Washington, and have us all have actually expressed their interest in increasing our Medicaid spending.
During this period of time, we had some.
Early on I.
I think was even in the first quarter.
Our Washington as you know was one of the first they get hit with the pandemic and a lot of the behavioral providers in Washington, who were on.
Fee for service, we're really really getting crushed.
And so the state asked us as the industry to make some directed payments to providers would be glad we did.
So we're having discussions Thats just an example, we're having discussions with smaller states by Washington in Texas, yet have expressed.
More interest in infusing more money into Medicaid than extracting it from Medicaid.
That's helpful and one last just clarify how you said a additional s. map could offset for their rate headwinds are are you assuming anything above the 6% asked map in the guidance out there for this year or when you think about next year no.
As you know theres all kinds of jousting, that's going on between.
The.
In Congress related to this but no we did not whether its 12, whether it ends up being 12% or 40%.
We did not.
Include.
Any of that outlook as potential upside to what might happen in rates. If it happens it'd be great. I think states will be relieved and I think it'll take a lot of pressure, but no. We didnt not assume we did not assume that would happen.
Great. Thanks, a lot.
Okay.
Your next question comes from Josh Raskin Nephron.
Research. Please go ahead.
Hi, Thanks. Good morning, appreciate taking the question I apologize for.
Going back to this voluntary actions are this correcting imbalances, but I just wanted understand this in the context of Molina overall right. So if you're trying to sort of keep things flat, let's call. It on the medical cost side right. So a lot of it gets trip.
From a regulatory perspective, but you're going to kind of sounds like gives back any upside on the medical cost side as results of cobot, but the work in the enterprise has other headwinds right higher DNA cost and investment income coming in lower et cetera. So I'm just trying to understand there's a confirmation of guidance sounds like none of that upside is on the metal.
Well cost side, but you've got other costs I'm, just trying to understand sort of how you think about progressing through the year should we just think of if there is any potential upside again, it gets absorbed and the guidance as to guidance or is there some variability and as a crazy to think additional costs on the DNA side or lower investment income could actually be a headwind.
Well just you certainly captured the essence of the difficulty of providing at point estimate forecast in this environment.
And I.
Want to make sure it's clear what we meant.
If a refund is enacted the state is therefore recouping, what they consider to be the excess capitation rate.
Through a enacted temporary rate refund if it triggers a minimum MLL R than there is already in existing regulatory mechanism at all we're saying is if we still felt there was a financial imbalance, we feel that imbalance should be corrected I am not defining what an imbalance means whether it's 100 basis points or 200, 300, it's going to be state by state Siggi.
Relation by situation I'm not going to go into exactly what we mean by that.
But I do think as a philosophy our company and I think managed care generally is taking the approach that we do not intend to benefit by these depression or their curtailment of utilization due to global pandemic.
Yes, I mean, we contemplated the headwind with Tom spoke to it we contemplated the investment income headwind going into the back half year, we contemplated that we'd be spending extra DNA. As we gave you are crushed approaches. So I'd say no I wouldn't say their headwinds there already contemplated in our comfort level and reestablishing the guidance. We previously gave.
Okay, and you know I don't think anyone is to argue with.
Strategic value of working with your partners in a period, where you benefit. So I think that's that's an obvious one just one quick follow up on the developments or sort of lack thereof, and sort of how that compares to last year were there any typically you guys and seem conservative reporting of the last couple of years reserving I'm, sorry, that's less favorable development.
Sorted lack that Rob this year, where they are some countervailing forces was there something else in there I heard Tom say same methodology et cetera.
Hey, Tom would you like to take just a question about Feldman. Please.
Yes, Hi, Joe.
Right, Josh I'll reserve methodology, we made the same.
So we said that for the six month.
The the.
Development is negligible.
PPD basis, it slightly favorable but it's not.
Material the slogan along called it out.
Okay, but any yeah. Historically you had been seeing more was the I guess is it just getting better at the estimation process or you know curious why you wouldn't see the same level of development methodology same.
Yeah, I would say that.
I would say that would in any any he do relate reserve is always judgment factor there's range.
And you know you can always argue you come pretty close to it.
In prior years, we had a lot more development, we tend to be a lot more cautious we still a very conservative in our reserve methodology. So I wouldn't say there is anything inherently different it's just the outcome is a little bit closer to our estimate.
Perfect.
The next question comes from George Hill of Deutsche Bank. Please go ahead.
Good morning, guys and thanks for taking my question you guys have clearly positioned the balance sheet and the kind of the debt covenants to be active in M&A market and you guys are performing well I guess, what I'm interested in hearing about as the other side of the discussions defect. The current environment is giving kind of smaller plans more breathing room and more room to run and set themselves up for.
Growth reflects is accelerating M&A discussions.
Hi, George It's Joe I think.
Covidien has not.
In our opinion changed the attitude of how people think about.
Managed care or managed Medicaid, it's a tough business. It's hard you have to have the infrastructure you have to have the scale you have to have deep skills and knowledge a lot of esoteric knowledge.
It's not it shouldn't be a hobby.
And it shouldn't be an adjunct you need to be highly skilled and this so no. It hasn't caused us to think any differently.
About it although I would say that a small Medicaid plan somewhere might be enjoying some additional profitability.
Certainly hasn't changed in discussions we've had with many plans across the country. It certainly hasn't emboldened them to think differently about the long term nature of this business.
I mean, if it made it takes a pandemic to put you on the right course to profitability then.
Your your you're making the wrong Hall, so no we still have.
A really really bullish outlook on small discrete bolt on in tuck in acquisitions.
That's helpful. Thank you.
The next question comes from Scott Fidel Stephen Please go ahead.
Hi, Thanks, good morning.
So first question just interested.
No that obviously, there's a lot of moving pieces here, but.
When thinking about the three segments and the bad guidance that you had previously given for after tax margins across the segments or maybe even directionally can you help us think about.
In the current guidance, how each of those jobs those bids the slides may have evolved weather.
No actually have a little bit lower and Medicaid so little bit higher or just interested in your thoughts around three segments in terms of after tax margins in the 20 Twond.
Sure well certainly as Scott. This thing this wouldn't be as the quarter with all of the distortions caused by curve that this would be the quarter to reset our your long term expectations on margin Attainability in any line of business is way too many distorted impacts and you think you have those to store distorted impacts captured appropriately I think we do.
But no I think we still think that Medicaid.
As.
A three 4% contributor our we've been routinely producing a mid to high single digits in Medicaid Medicare.
And I would say, one where we still have a desire and a hope and a strategy to drive growth in the marketplace business at mid to high single digit margins.
As as a growth engine for the business is still in our long term strategy, but this wouldn't be reported to sort of reset your expectations.
I would just answered the question that way.
Yeah, well understood and then just bought out if all question just on on MCC and how you had laid out on when you announced the deal the thoughts on accretion and just interested.
If you look at MCC and magellan's reporting for them they've had a big first half they've already exceeded our their full year segment profit guidance just in the first half, but obviously there was a lot of benefit in the second quarter from carbon just like other health plans. So just just interested at whether you think sad initial first year target of the 50 to 75 cents of cash.
Yes accretion and your view is that still the right way to think about it or do you think that just given general trajectory that magellan's Haddon against you see recently that you kind of capturing a bit more of that multiyear accretion in the first year.
Well, we're always pretty cautious forecasters, so I would say that there was a fair bit of caution built in to the 50.
75 cents to begin with on the cash EPS basis, and yes, I mean, I, obviously cant comment anything I know through the integration process, but I certainly can respond to your comment on what was reported publicly and yes. The first half look like the businesses, we're doing very very well and you hit the question how much of its corporate related how much of this sustained.
But certainly we're pleased with what we saw in the public report.
And it certainly gives you as much or even more confidence that the accretion numbers, we put out there are attainable.
Okay. Thank you.
Your next question comes from Ricky Goldwasser <unk> Morgan Stanley. Please go ahead.
Yeah, Hi, good morning.
Question on Magellan and passport.
Magellan is into guidance passport is not what's the rationale for that.
The rationale is we did not feel it appropriate we want to be deferential to our regulator customer in the state of Kentucky, We're buying the passport brand in the assets, but the membership actually needs to be assigned to us if we get more than 140000 weve projected we get about 145.
I was in an auto assignment process, which I think is a reasonable estimate where we do not want to be presumptions that we would get all where most of the 315000 I, we're trying to be differential to the regulatory approval process and the Magellan acquisition, which still needs regulatory approval once its approved and we take.
Over the legal entities, we will have the membership Fox Bakken barrel that was the reason.
Okay.
And then I'm just trying to Bolton acquisition understand your your bullish on the opportunity there just going back to want a fairly are common.
So our Bolton acquisition that thing you refer to it sort of part of organic growth. So should we assume that they are included in the guidance.
Well.
It's an interesting question.
I believe in a quantify organic where if you want to quit a term that anything done with generated cash flow is as good as organic particularly the prices were paying.
When you can when you can recover the purchase price of an acquisition in the first year of positive cash flow.
At a purchase price of what is likely to be somewhere around 4% a premium that's as good as organic even though it's technically an inorganic play in the case a passport so to me if you're buying bolt on tuck in acquisitions, particularly met membership migrations, where you're paying per member or for the members retained.
Even though you're you're outlining a modest amount of capital it's as good as organic.
Got it and then and then lastly, well we think about it and then you on Medicaid members that are Onboarding, how do you see kind of like that margin profile compared to existing population.
Since many of them are coming.
Either through or staying on through the Redetermination process.
The way I would describe it is those members are.
As an average acuity of our existing population not materially more acute not materially less acute.
Now when the unemployment surge happens I think you might get a slightly different story since.
People that need healthcare generally secret.
So you could have a slight acuity shift there, which is one of the reasons why when we gave our cost guidance that a we don't know how many members were getting and B. We don't know their level of Qt or the cost to service them. So it's clearly just another.
Factor of uncertainty for the back half of the year.
Thank you.
Your next question comes from Sarah James of Piper Stand There. Please go ahead.
Thank you.
Walk us through how pricing actions would have impacted the hicks margins ex 'cause it and what long term margins are what your goals I for that product and then the comment I just wanted to clarify your comment on risk scores being off from what you expect it how much of that is really related to industry trends.
Challenges because I've covered in getting your numbers evaluated in scored versus the population that Molina holds having a difference in the health of the population.
Sure I'm going to answer your last question first and ask you to repeat the first one I'm not sure understood. It but we clearly think this is a case, where the new brands membership we took on.
We did not either have or get quickly enough the risk scores that we needed to service that population.
And there could be just a lag by when you get all your coating done when you get all your interventions done I will catch up we have a very good operation when it comes to risk, scoring so is the churn in that Brian Upfronts population.
That caused us to have risk scores that lag it'll catch up and it's not a long term concern I think I need you to repeat the first party question. It was about medic, there's about marketplace rates, but I didnt Oh it.
Yes, I just wanted to understand what the marketplace margins in some of the change there was the pricing actions and some was related to cover that so just trying to understand you know excavated how do you think margins would have ended up given your pricing actions and how do you think about.
Your margin goals for that product long term.
We haven't changed our margin outlook for the product and we still have a strategy of growing the profit pool and as I've said, many times on a year by year basis.
Me and my management team will make the call on whether we ease up on margin to grow membership or whether we pull back.
Ease up on membership to grow margin and we'll make that decision geography by geography with a thorough analysis of the competitive landscape with respect to the performance of the business.
The co bid pandemic.
Utilization.
Curtailment did not have as significant impact.
On marketplace as it did our other businesses.
Initially utilization was down.
In late March in early April, but it bounced back very very quickly through May and June.
So did not have.
Steven impact on marketplace as it did on Medicare and Medicaid.
Thank you.
The next question is a follow up from Stephen piano SBB Their Inc. Please go ahead.
Hey, guys. Thanks for taking this and I'm sorry to come back on I guess I just impart wanted to clarify point I made that I think is now wrong I hadn't factored in Puerto Rico, when I looked inorganic growth and so I just wanted to walk through the math of the bridge to 21 revenue.
So if you have seventeeneight of premium revenue 20, and 21 and a half billion in 21, obviously theres a 3.7 billion increase Magellan complete care. Good for 2.8, Youre stair steps up 100 million, then you've divested Puerto Rico, which is 400 million. So I'd call those non organic and so M&A seems to be contributing about two and Uh huh.
Yes.
Which implies about 1.2, net organic which I think is organic growth of about 6.6%, which still looks a little bit conservative, but just wanted to say that is that math right and is that kind of how you guys are thinking about or is there anything else you want to steer us there.
All right you have the right model and you're thinking that is the model we've used and again, it's an outlook, it's not a pinpoint estimate we believe not leave.
We couched it as conservative we wanted to give you at our investors a very clear indication of where the trajectory of our topline is going we will refine assessment as we go forward.
When we go through the third and fourth quarters, who knows where our Medicaid membership will be we could have an another hundred 50000 members by the end of next quarter. We just don't know so we'll refine the organic aspects of this but the inorganic aspects are pretty clear and you're right you have to factor in the 400 million dollar, Puerto Rico exit as an offset to some.
Modestly calibrated organic growth.
Yes, I missed that and I guess, just lastly, one when what might we learn about Kentucky, and whether they're going to let you keep passports enrollment.
Well, there's I don't.
Don't want to comment on the regulatory process, but we're working through the regulatory process on the contract novation and on the actual process of getting approval to.
By the passport infrastructure.
Open enrollment starts.
I think it's mid October so we're hoping to have this whole thing concluded either by the end of the summer or early in September, but I can't predict when that will actually happen, but we're working hard on it.
In the earlier can get done.
The more stable that membership will be those members loved the passport brand they like being in that plan. The state understands that so I think we're all aligned in our intention to want to keep those members in the passport brand in the passport care planted in the passport network.
Great. Thank you again appreciate it.
This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.