Q3 2020 Molina Healthcare Inc Earnings Call
Hello, and welcome to the Molina healthcare third quarter Twentytwenty earnings Conference call.
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Oh knowledge teleconference over Julie Trudell, Senior Vice President Investor Relations I'm only to health care. Please go ahead.
Good morning, and welcome to Molina healthcare third quarter 2020 earnings call.
Joining me today are malino, President and CEO, Joseph Brzeski, and our CFO Tom Tran.
A press release announcing our third quarter earnings was distributed yesterday after the market closed and is available on our Investor Relations website.
Shortly after the conclusion of this call a replay will be available for 30 days.
Members to access the replay or in the earnings release.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are positive.
Okay Thursday October 29, 2020 and have not been updated subsequent to the initial earnings call.
In this call we will refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2020 earnings release.
During our call, we will be making certain forward looking statements, including but not limited to statements regarding the company's 19 pandemic. The current 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 our actual results to differ materially from our current expectations.
We advise listeners to review the risk factors discussed in our form 10-K annual report for the 2019 year filed with the FTC as.
As well as risk factors listed in our form 10-Q, and form 8-K filings with the FTC.
After the completion of our prepared remarks, we will open up the call and take your questions.
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 an update on a number of topics.
First we will cover the enterprise wide financial results for the third quarter.
Second we will discuss the impact of the COVID-19 pandemic on various aspects of our business.
Third we will convey our 2020 guidance in the context of our third quarter results.
And fourth we will provide an update related to the continued execution of our growth strategy.
Let me start with the third quarter highlights.
Last night, we reported GAAP earnings per diluted share for the third quarter a $3.10.
With net income of $185 million.
This result was supported by an MCR of 85.9%.
Gionee ratio of 7.3% and that after tax margin of 3.7%.
Our year to date GAAP earnings per diluted share is now $10.65.
On an adjusted basis, which excludes nonrecurring non operating items our earnings per diluted share were $3.36 for the third quarter.
The excluded items related primarily to costs associated with our exit from Puerto Rico.
And start up costs associated with various growth initiatives.
In summary, we are pleased with our third quarter performance, both with respect to the continued delivery of solid earnings and the focused execution of our growth strategy.
All of this was achieved while dealing with the effects of a global pandemic.
Unlike the second quarter in which the combined cold weather related impacts served to temporarily increase our earnings.
In this third quarter, the combination of all cold weather related impacts netted to a negligible to slightly positive impact on earnings.
Therefore, our reported results and ex Kobin results are essentially the same.
We will once again quantify the various cobot impacts on our results.
To provide some clarity on how the affected our operating metrics.
But it is clear to us that our operating metrics were substantially in line with our expectations, both as reported and as adjusted for coping impacts.
Now I will provide some highlights related to our third quarter results from an enterprise perspective.
Beginning with revenue our premium revenue of $4.8 billion increased by 17% over the prior year.
And by nearly 400 million and 9% sequentially.
Related Lee our membership increased sequentially by 478000 members were 13%.
Primarily in Medicaid.
Bear in mind. These increases include the membership and revenue of passport.
Which we assumed on September 1st when the Commonwealth of Kentucky, Notated passports Medicaid contract to Molina.
With respect to medical margin with an 85.9% MCR. Our performance was also strong and only modestly impacted by code.
We experienced a modest amount of utilization curtailment, which was partially offset by the cost of coordinated care the.
The net of which favorably impacted the medical cost line.
This was substantially offset by cobot related rate be fund on the premium revenue line.
In the quarter. These items combined had a negligible impact on the total company medical margin and earnings but served to decrease the medical care ratio by approximately 60 basis points.
This strong medical margin performance anchored by Medicaid reflects a sound noncore bid rate environment.
Continued excellent management of medical costs, and a moderately lower acuity population.
All of the cobot related impacts on our third quarter metrics will be described in more detail in a few moments.
Yeah, we continue to effectively manage our administrative costs through productivity gains and fixed cost leverage.
Producing a gionee ratio of 7.3%.
Despite spending on specific Cobra related items.
Including the cost of servicing the additional membership volume.
Net investment income usually not an earnings item with significant variability was again unusually low at $14 million compared to $40 million a year ago due to the current low interest rate environment.
Our line of business results were mostly in line with our expectations with strong metrics in both Medicaid and Medicare However, our marketplace results fell short of our expectations.
In Medicaid and Medicare control over medical costs utilization and unit cost.
10 used to provide the balanced for sustained consistent performance all while ensuring our members receive high quality care.
Cobra related impacts were slightly favorable into Medicaid and Medicare businesses.
Excluding the Cobra related impact our performance and resulting margin in these line.
Well exceeded our pre cobot expectation.
In our marketplace business, the cobot related impacts in the quarter were net unfavorable.
We also operationally underperformed in our brands product with respect to both utilization control and the achievement of risk scores that accurately reflect the acuity level about population.
We remain confident in our ability to tightrail the medical margin performance of this metallic tier as we have done in our Medicare and our flagship Medicaid business.
In summary, we continue to perform well across the many domains of managed care and our operating fundamentals remain very strong.
Now I will provide some commentary about the item by item effects of coated on our third quarter.
While these items are of no individually considered together they nachtwey negligible to slightly positive impact on enterprise earnings and earnings per share in the quarter.
The cobot impacts on our quarterly results include a modest net decrease in medical costs.
Due primarily to Cobra related utilization curtailment.
Rate refunds to a number of our state Medicaid customers in response to the cobot related utilization curtailment, which we experienced in both the second and third quarters.
Increase in our DNA spending on activities related to covert and a meaningful increase to our Medicaid membership.
We experienced several significant cold weather related impacts on medical costs in the quarter.
First at the beginning of the quarter utilization was still moderately curtailed, but rebounded to more normal levels during the quarter.
Second we attracted approximately 300000, new Medicaid members to Molina since the end of March and the acuity about population is clearly lower than the book of business average.
And third direct cost to care for Cobi patients totaled $35 million in the quarter as.
As a resurgence of cobot infections in episode has occurred in places, including Texas and California.
And disproportionately impacted the marketplace business.
In the quarter. The net effect of these three factors reduced normalized medical costs and increased pre tax earnings by a range of $95 million to $105 million.
As you recall in the second quarter six of our state customers enacted temporary rate refunds with the stated intent of recouping a portion of our capitated rate not spent on medical costs due to the pandemic.
In some of those states the refund period extended into the third quarter.
In addition, during the quarter, one additional state, Michigan enacted a refund to mechanism.
In the third quarter, the total impact from cobot related rate refunds served to reduce premium revenue and earnings by $88 million on a pretax basis.
With respect to rate adequacy, we do not intend nor do we want to keep state Medicaid money that was intended to be spent on medical benefits, but was not due to utilization curtailment caused by cold.
In many of our Medicaid States there are already mechanisms in place to protect against a surplus margin.
As there are minimum M.L. ours in seven of our states and profit caps and two others.
And once the COVID-19 pandemic abates, we believe that the traditional process.
Establishing prospected Actuarially sound rates based on a credible medical cost baseline in cost trend off that baseline will be so.
Kobin related activity increase our third quarter administrative expense by approximately $7 million.
We continue to develop a variety of new operational protocols.
Analogy implementations and benefits for our employees all related to the cobot pandemic and the related increased volume.
Medicaid membership increased sequentially by 473000 in the quarter, a 15% increase.
325000 of this increase was directly related to the passport membership in Kentucky, which we assumed on September 1st.
The addition of the York care membership in New York was almost entirely offset by the expected membership decline from the early stages of our Puerto Rico exit.
The remaining 148000 member increase was primarily due to the suspension of re determinations as we believe that unemployment related enrollment has not yet materially accessed the managed Medicaid.
It remains unclear how high the Cobra related membership people be.
How quickly it will fall as the economy recovers and where it will ultimately so.
However, it does appear that since unemployment nationally is now just under 8% initial industry estimates of unemployment related Medicaid membership increases were overstated.
Related Lee the declaration of the extension of the public health emergency period, and the related maintenance of effort extension into next year will likely have a favorable impact.
In summary, as we work through this unprecedented period of the cold the pandemic, we remain focused on executing on the underlying fundamentals of our business you continue to produce solid results regardless of the short term cobot related impacts on our reported financial metrics and results.
Now I turn to our guidance for the full year.
On September 1st we closed on the passport acquisition and the Commonwealth of Kentucky, No baited passports Medicaid contract to Molina.
For 2024 month of revenue from this transaction will add approximately $700 million of revenue with negligible earnings.
This increase combined with higher Medicaid enrollment through the third quarter.
Ports the increase in our 2020 total revenue guidance to $19.6 billion from the previous estimate of $18.8 billion.
This total revenue guidance for 2020 includes $18.6 billion in premium revenue.
Our core performance each quarter has been strong and stable producing at or about $3 of earnings per share.
Although this core business performance is expected to remain strong through the fourth quarter, we are choosing to maintain our existing guidance.
We take this cautious approach because of the continued uncertainty related to cold its impact on medical costs and the possibility for additional kobin related rate refunds.
We further note that the proceeds from the previously announced a favorable settlement with respect to the federal risk corridor, our litigation will be reported in our fourth quarter.
Also in the fourth quarter, we intend to make a sizable contribution to our recently launched Molina cares charitable Foundation.
These two items will likely offset each other.
When we report our fourth quarter, we will certainly focused on providing a clear view of the earnings power of the business as a baseline for gauging the quality of our 2021 earnings guidance.
Shifting the discussion now to our growth initiatives.
We made another major stride in the quarter related to the activation of our growth strategy.
In September we signed a definitive agreement to purchase affinity health plan of New York for approximately $380 million.
The profile of affinity is perfectly aligned with our philosophy of staying close to our core business.
It is a managed Medicaid business in New York City as well as surrounding counties and is a nice complement to the senior home health business that we are acquiring with the Magellan complete care acquisition.
Affinity serves approximately 284000 Medicaid members.
Its membership based stable and the company has very good share in the markets. It serves.
Affinities operating infrastructure sound. It has solid provider relationships high performing team of enrollment coordinators and a platform, which has the ability to successfully defend and expand its market position.
Affinity as not perform to the levels of profitability that Molina has achieved.
It therefore provides yet another opportunity for us to bring our operating discipline business processes and technologies to improve margins and harvest fixed cost leverage with our other New York based businesses.
The transaction is expected to close as early as the second quarter. So the acquisition could provide up to $600 million of revenue for 2021.
At a purchase price of less than 30% of reported revenue.
We are projecting excellent returns in excess of our cost of capital.
The transaction is expected to be immediately accretive by 15 to 20 cents adjusted earnings per share in the first 12 months of our ownership.
After that initial integration period, we expect to achieve margins consistent with both the leanest performance track record and the industry norm for the New York Metro area.
The purchase of affinity is another milestone in a growth oriented 2025.
Our growth initiatives continued to be anchored by our capital allocation priorities first organic growth of our core businesses.
Second inorganic growth through accretive acquisitions, and third programmatically, returning excess capital to shareholders.
We previously provided you with a 2021 premium revenue outlook.
This outlook included a pro forma estimate of the revenue associated with our announced acquisition of Magellan complete care.
Which is on track to close around the end of the year.
You have an estimate of the revenue expected from auto assigned membership in our new Kentucky Medicaid contract.
That outlook, which included only a modest early estimate over organic growth was.
It was 2021 premium revenue of $21.5 billion.
This 2021 outlook has improved now that we are currently serving all with passports existing membership in Kentucky, the majority of which we are expecting to keep.
Our expectation is not affected by a court ruling last Friday that a six player to be added to the Kentucky Medicaid program for 2021.
That ruling did not we send our Medicaid contract award.
It does not impact the earlier novation of the passport Medicaid contract to us and does not affect our status as a current incumbent in the program.
Our 2021 outlook has also improved the announcement of the affinity acquisition.
We will provide we find revenue guidance with all the supporting details when we announce our 2021 full year guidance.
There is so much activity related to the political arena legislative actions and judicial review that we feel obligated to provide some brief commentary on these topics.
We have no new perspective to add on the upcoming election, except to say that all of the most likely potential clinical outcomes are generally positive for managed Medicaid and related government subsidized programs, although some political scenarios are more favorable than others.
On the Legislative front, the recently announced extension of the code to public health emergency is likely a positive indicator for continued membership gains and to provide more support for an actuarially sound rate environment.
Much has been written and discussed regarding the affordable Care Act case that is scheduled to be argued before the Supreme Court on November 10th.
We believe that even if the court were to find the individual mandate to be unconstitutional.
It should nevertheless, find the individual mandate to be separable from the balance of the law, both as a matter of logic.
And based on the clear intent at the 2017 Congress, which zeroed out the individual mandate tax penalty.
It is also clear as a factual matter that the marketplace business can function effectively without any penalty for failure to purchase health insurance.
Regardless of the Supreme Court's ruling we believe there is a high likelihood of a legislative text of the law before any final legal opinion would go into effect.
As I conclude my remarks I offer another heartfelt. Thank you to our management team and our 10000 associates for delivering excellent results, while dealing with their own stresses in life challenges.
Even when facing these challenges our associates are inspired and motivated by the opportunity to make positive change by delivering high quality health care to the country's most vulnerable populations.
Our associates continue to itself and I stand an aberration of their dedication and desire to serve our membership base. During these most challenging times.
In conclusion this was yet another meaningful quarter for the company we.
We are pleased with our third quarter performance, especially in light of the turbulence caused by the Cobi pandemic we.
We took major steps forward in our transformation, we sustained our margins and did right by our members and customers.
We continued to execute on our revenue growth strategy and deployed excess capital and strategic acquisitions.
This strong performance points to a 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 good morning, everyone.
I am going to provide highlights of our financial results for the quarter and then discuss our balance sheet cash flow 2020 guidance and 2021 outlook.
We reported GAAP earnings per diluted share up $3 from 10 cents and adjusted earnings per share up $3.36, representing 13% and 19% growth respectively over the same period in 2019.
These solid results were supported by freemium revenue of $4.8 billion.
Which grew 17% from the third quarter up 2019.
And include 22% year over year growth in Medicaid membership inclusive of the passport and Youre care acquisition.
As it relates to the topic Nike impact by line of business.
Oh this reduced the Medicaid MCR by approximately 90 basis points.
And the Medicare MCR by approximately 130 basis points.
However, cobot related impacts increase the marketplace MCR by approximately 410 basis points.
Overall, the impact of Cove. It on third quarter earnings was negligible to slightly positive.
The G and H ratio improves and came in at 7.3% compared to 7.6% in the prior year due to the fixed cost leverage we created from the increase in revenue offset somewhat by increased.
In coal, but specific cost and the integration of passport.
Now turning to balance sheet and cash flow.
Our reserve approach remains consistent with prior quarters, and our reserve position remains strong.
Days in claims payable represents 52 days of medical costs funds compared to 52 days in the second quarter of 2020 answer.
And 60 days in the third quarter of 2019.
Prior year reserve development for the quarter up 2020 was negligible as was the case with the comparable period in 2019.
Operating cash flow for the nine months up 2020.
Was $591 million.
Reflecting the strong operating results and the timing of government receipts and payments.
We extract $120 million of subsidiary dividends in the quarter, which brought our parent company cash balance.
$1.3 billion.
And gave us ample capacity to fund, our recent acquisitions and organic growth initiatives.
Debt at the end of the quarter is 1.6 times trailing 12 month EBITDA.
A leverage ratio is 48.2%.
However, on a net debt basis net of parent company cash the leverage ratio is 25.8%.
Taken together these metrics reflect a conservative leverage position.
Oh unsecured debt rating was recently upgraded by two adoption to be a three by Moodys.
A recognition of our operating performance growth prospects and financial strength.
As of September Thirtyth 2020.
Health plans have statutory capital and surplus of approximately $2.2 billion.
Which equates to approximately 365% of risk based capital.
Now turning to our 2020 guidance.
We increased our full year 2020 total revenue guidance.
Approximately $19.6 billion from $18.8 billion, mainly due to the completion of the passport acquisition in Kentucky, and the novation of its Medicaid contract to Molina on September 1st.
As previously noted we are maintaining our existing earnings guidance let.
Let me provide more color on the reasons or just cautious approach.
First.
While we have you closed all known Covance, we laid a great response in our guidance.
Additional right refunds be enacted Psoc three funds would have a more disproportionate impact in the fourth quarter because they are retroactive nature.
And second.
There remains a level of uncertainty about cobot itself and a related medical cost increase or decrease that could occur.
If you recall in the second quarter.
We report approximately $190 million to $240 million of met coal, but related medical costs decrease due to utilize station curtailment.
And in this quarter.
Medical costs could Calvin was $95 million to $105 million.
We have been averaging $12 million to $13 million a month in coal, but direct costs of care.
How these many dynamics play out in the fourth quarter is a matter of significant uncertainty.
As Joe mentioned previously.
Core performance each quarter has been strong and stable producing at or about $3 of earnings per share.
In our business performance is expected to remain strong through the fourth quarter.
Well, we might invest or up the seasonality of the marketplace NCR and higher open enrollment expenses in both the Medicare and marketplace businesses in the fourth quarter.
When we report our fourth quarter results, we will provide a clear picture of the run rate of the business, excluding the distortions caused by called it.
All with a goal of presenting a clear baseline off of which to gauge how 2021 guidance.
This concludes our prepared remarks, operator, we're now ready to take questions.
Yes. Thank you we will now begin the question and answer session to.
Last question you May Press Star then one on your Touchtone phone.
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This time, well pause momentarily to assemble the roster.
And the first question comes from Matthew Borsch with BMO capital markets.
Discourse commensurate with the acuity that population.
We have those disciplines in place for our other products and our other businesses.
Through various organizational design issues, we have not yet excelled at those two operating disciplines in the marketplace business and we'll fix that the way we fixed everything else over the last couple of years.
And if I could just ask.
Given maybe where you're expecting a full year margin to land for the marketplace businesses is is that above or below what you would view is sort of target sustainable.
It will likely be below.
As you know a couple of years ago. The last time, we gave you long term targets is that our investor day.
Where we suggested that the long term after tax margin for the marketplace business was 85% to 95%.
Certainly backing off that long term target this as a mid single digit business yeah.
But we're likely to underperform the half of the year, but I think that's where our once or margin expectation will lie mid single digits. Thank you.
Thank you and the next question comes on Kevin Fischbeck with Bank of America.
Great. Thanks, maybe just to follow up on that so I guess, when we think about the business for 2021, you're saying it sounds like you're saying that you're not worried about the pricing for this visit in 2021.
Even though it costs are up priced appropriately it's really just operational changes that need to be made for next year and you should get that business back to normal next year.
That is correct.
In that bronze product or bronze mix is slightly higher this year than last.
And the bronze membership actually had a higher churn and as you know when you are.
Trapped a new member you are always starting with a risk score of one and they're new members. They haven't interacted with the healthcare system. Yet so you need to work really hard at making sure you get the right risk force so.
So the fact that a higher percentage that membership with new and our.
Bronze mix is slightly higher.
Product is adequately price product design and our zero-base are zero premium products are in the right Geography's, we're well positioned for next year.
Companion question is did you consider all this in the pricing that you filed recently.
And the answer is yes.
Filed prices that included a very conservative pre covid medical cost baseline and reasonably conservative trends off that baseline. So our view of this is not a pricing issue. This is a performance issue and we plan to get that back next year.
Okay, Great and then just just to confirm.
Confirm some of the numbers that you mentioned are covid.
The.
90 525.
5 million dollar number was that Ah gross number I think he's also said 30 million of Covid costs. So is there any talk to one O five at about 30 or should we think about it is the gross benefited or as a 30 million offset note. There you are correct that's net.
The gross range of cost curtailment.
Due to the pandemic was 130 to 140 million.
And direct costs related to cope over 35 Purdue.
Producing minute range of $95 million to $105 million.
Okay, but the 95 <unk> five is is.
On the same basis as the 190 or 240, you mentioned last quarter that is correct. The estimates we gave in the second quarter, where net of their direct in patient medical costs related to Covid.
Alright, perfect. Thank you you're.
You're welcome.
Thank you and the next question comes from Charles right with our talent.
Please go ahead, Missouri you're alive.
Alright, well moving on the next question comes from I, just don't like with Wolf Research.
Thanks, Good morning first question Oh eight.
They would be more than corridor and state reducing joking you I think you said Morgan corridor course at a little over 80 million this quarter.
You paid back numbers you have an estimate for the full year on both Morgan corridor, reducing and how you're thinking about that going into next year.
Sure well just to recap.
The entire year.
$75 million, when we reported the second quarter due to six enacted.
Retroactive rate refunds, all clearly contained in related to Covid curtailment.
That same number for the third quarter was $88 million meeting we've occurred $163 million year to date.
The third quarter number included one additional state, Michigan that introduced a refund mechanism.
And many of those corridors and refund mechanisms extended to the fourth quarter.
We haven't disclosed exactly what that number is it obviously depends on a lot of other profitability factors, but various of those mechanisms do extend into the fourth quarter and will report that number against the Covid curtailment just the way we did in the second and the third quarters.
Long term.
We are very comfortable that the time tested mechanism of prospective right development off incredible cost baseline in a reasonable a trend off that baseline will result.
These refund mechanisms are clearly related to the recruitment of money that was paid to us with the full intention of us.
Paying it out to members and benefits and due to the Covid.
That level of utilization didn't occur so again, Barry contained very specific all related to covid when all that.
The pandemic debates, we believe that the system will function as intended.
[noise] time-tested tested process of prospective right development and we'll resume.
Thanks, and then Joe when you think about these members who have a growth in membership at home from the locker Chung English and get that.
I don't I don't think any of US know when you know the federal government's it'll take off the frontal emergency status of these numbers will start is gonna be.
<unk>.
I'm curious if you're thinking of 2021 whenever that does happen.
Do you have a view on how how these members kind of move off Medicaid how long it takes.
The state's W.
It's a really interesting question because we have begun conversations with many of our state customers.
About the prospects of moving members, who are no longer eligible for Medicaid, but we're on it due to the Redetermination pause how they will move them off obviously and not for revenue reasons, we're not suggesting that they do at this stage process for revenue generating reasons, but for the.
The lack of tumult and the lack of churn.
And the and the disruption it'll create for members who are on Medicaid and are suddenly taken off so we're certainly.
Arguing in support of a more staged approach, but RSA customers are still deliberating in terms of whether they are going to turn the switch off immediately or whether they're going to phase this over time, which again causes yet another.
Variable and what the re determined member re determined Asian based revenue will look like for 2021, how fast those members rohloff is still yet to be determined.
Great. Thank you get.
You're welcome Justice.
Thank you and and that's how she got some day windley with Jeffries.
Hi, Good morning, it's based Stylo in for four windley.
Was hoping you could talk Joe a little bit more about how you think about the boat margin profile for Kentucky and year, one usually margins on a new contracts are well below the target or even negative earnings in that first period. However, does it does it considerably help you that you'll have an existing platform via the passport acquisition might allow you to earn something close.
Her to your target margins for all of your Kentucky business and the first year.
Yeah.
Sure.
When it comes to our acquisitions, we certainly in the extensive due diligence that we perform we certainly able to give our investors a clear view of the early accretion as we've done a magellan and as we just did an affinity when it came to pass for it was a different mop.
We actually we're buying into a membership base a revenue stream not necessarily in earnings stream. So we view, Kentucky is sort of a hybrid between a new installation and the integration of a business now as you know the passport.
<unk> margin profile was not where marina is operated in the past.
So it's going to take some time to get it there. So we're going to be very cautious with our early estimate of how much how many dollars of earnings will flow Arpey, Kentucky Medicaid business in the first year and when we report our 2021 guidance.
Certainly have a reasonable estimate at that time, but right now we are in full mode of of analyzing passport and integrating it due to the contract novation we have.
Getting ready for open enrollment all those processes are fully emotion, but it's too early to actually have a point estimate on the first year, but I will say that the passport acquisition clearly allowed us to avoid a lot of the very expensive startup costs that are normally associated with.
A new contract.
Got it thanks, and then just a follow up on the parent cash can you give us some sense of a roll forward over the next year or so.
Obviously, you got a couple of acquisitions that you'll have to pay for but how we should think about.
That cash at cash balance in towards the end of next year. So we can schedule a bit more about your propensity to an appetite for acquisitions of of these assets that you'd like to have a bolt on such as affinity.
Sure.
Way to think about the capital model goes something like this.
You can look at our forecasted earning.
And except for the amount of capital that one would need to reserve. It is regulated subsidiaries to fund organic growth, which averages between eight and 10% of premium.
That cash flow ought to be able to be extracted in the form of dividends from our operating subsidiaries. Once it's brought to the parent company you can put leverage on it and pick a leverage ratio of 50% you can double your capacity.
So earnings less retained capital.
For organic growth ought to be dividend it to the parent double the size of it for for a deck capacity and that gives you you're you're sort of view.
View of how much free cash flow you have available for acquisitions and other activities.
Thanks, so much.
Thank you and then ask question constant Joshua asking about that one research.
Hi, Thanks. Good morning first question is just around utilization patterns and if you feel like towards the end of the quarter U R back to whatever normal is supposed to look like our baseline and maybe a progression through the quarter as well as an early view on October.
Sure Josh.
At the beginning of the quarter, we still have the curtailment effect in place and that sort of evaporated as the quarter move done I will tell you.
That towards the end of the quarter when the infection rate.
And many of our geographies and across the nation spite.
We saw a reaction to that.
We're learning a lot about consumer behavior and about how the healthcare economy works and how reactive it is.
It's very reactive to the Covid infection rate both in the number of hospitalizations, we have directly related to covid and how quickly elective.
And.
Discretionary procedures.
Begin to to Wayne when the Covid infection rate is reported so the healthcare economy is very responsive to that infection rate and towards the end of the quarter we saw it.
Like back a little bit.
Not commenting on October at this point, but as I said, it's very very responsive and the fact that we're now seeing a resurgence of Covid I believe will impact the fourth quarter, you will see more covid related costs and I believe you will see the shadow effect of continued curtailment.
Perfect and then the second question is should think about 2021, you guys gave some visibility into a revenue number last quarter. It sounds like you were updating it to be just simply larger.
Is there any major difference expect it between the top line and bottom line I want to make sure I'm not missing something it sounds like passport kind of maybe a little bit lower than typical.
Earnings, but just want to make sure. There's no. There's nothing brought I'm missing that large acquired books aren't going to be similar margins. You know when you think about the synergies et cetera.
Well ultimately.
The premise of your question is correct. We plan to get these two are target margins producing 665% EBITDA margins.
Depending on the geography, we plan to get them there.
We gave the accretion numbers four Magellan, we just gave them the at least the first 12 months for affinity and I would say you are right on Kentucky, given that it's a hybrid between and installation.
And the integration of a non for profit plan.
I would not giving you a forecast, but I would say that in the first year that is likely not to perform to our target margin.
Alright, that's awesome. Thank you.
Thank you and then as far as the cost comes from Sarah Jane just Piper Sandler.
Hi, Thank you and I appreciate the commentary on the payback situation in multiple states in Medicaid and I'm wondering if that also indicates that Medicaid margins are operating near peak.
Then if you layer the lower long-term Hicks margin.
Guidance and I'm wondering if the right number sorry, the total call. It's still that 38242 that you gave it last I day. Thanks.
Well, let me comment on our margin performance visa visa long term targets and you're absolutely right at the last time, we updated US which is now some time ago. We gave you a long term target of 3842 and we just produced.
A quarterly margin of three seven which had some of you have recognized falls just slightly out of that range I will remind you that 3842 included a marketplace target of 85% to 95%, which were clearly going to come off of that is going to land in mid single digits not picking a point estimate now so the fact that we're.
Actually able to produce three 7% after tax when the marketplace. This quarter was breakeven.
I think we're still in the in the strike zone of our long term targets, even though we can pull back or projection of what the marketplace.
Business will produce.
And the fact that we're not.
The the the.
The shatter.
Shatter two years ago and it was it was legitimate was that our financial profile was over relying overreliance on on marketplace revenues and profit that's certainly not the case anymore, but if we can produce our long term target margins, having pullback our marketplace estimates.
I think that's.
Certainly bodes well for the future.
Okay, and then the bronze Hicks, but lost quite a you guys talked about covid seating. Some challenges are delays in getting that just at risk scores I'm. Just wondering if you learned anything from this year's process that makes you.
I'm more optimistic about the new members that come on next year and the pace at which you might get <unk>.
Well, yeah, I mean, the entire industry is facing the same challenges is you know.
In order to get the right codes and the right intervention people need to go to the Doctor and when they start going to the doctor to the hospital.
You don't have the data to support their risks.
Some of these require face to face interventions, we have a fantastic arm of our business.
With nurse practitioners and visit patients in their home they were unable to do that for a long period of time so.
Sort of facing the same headwind at the rest of the industry is facing with respect to the attainment of risk scores, but as the economy opens up.
People get back into.
The field again, we think this will come back quickly we know how to get them, we know how to chase the charts get the codes.
And when the world returns to normal movements and consumer activity. We believe this thing snap back into place.
As you know the marketplace business reacts quickly to risk adjustment immediate medical Medicare.
One year delayed unmet Medicaid two years to wait so there is a lag effect, but we believe is the world comes back to normal will be able to.
To get our metrics back to where they need to be.
As well the rest of the industry.
Thank you.
Thank you and then ask question conscious carpet out with Stevens.
Hi, Thanks. Good morning first question just interested in China, you talked about how you're comfortable with the pricing for 2021, it with your exchange products as it relates to the bronze just interested in how you're looking at the overall market pricing environment for the marketplace for next year and how can I.
<unk> did you see that and how that positions.
You for for growth in that market next year, giving some of the pricing that you're taking on your on board based us.
Sure.
There are some new entrants that have entered some of our.
Some of our states.
But you know who the big competitors are we.
We operate at a much different level than many of our competitors that we're going after the highly subsidized members, who perhaps just earn.
A little more money then.
That would qualify them for Medicaid and we're leveraging our Medicaid network. So we're in a slice of the market that's heavily dependent.
On the federal subsidy.
We think we can grow the for profit.
Trust management to pick the right Geography's pushed price.
And he's up on membership or he's on price to push membership will make those judgments geography by geography, depending on the strength of the competition the strength of our network.
And we believe as we always have that we can grow the pull of profit obviously, we will be growing it off of a smaller base given our performance this year, but we're still pretty confident we can do that.
Got it.
And then just on my follow up question why don't you just ask maybe a little conceptually about how how you're thinking about the new York market and and confidence in the right in regulatory environment, when we take a bit longer term off clearly you've been deploying a meaningful amount of capital into New York and from our bottoms perspective. These are all deal with that.
Very much are attractive and fit the melena profile at the same time, you'd obviously, New York does have.
Some larger longterm budget gaps relative to a lot of other states that are projected. So just obviously I know that you think about the top down as well so interested in how you're evaluating just the broader market dynamics.
Welfare point, but obviously you are always balancing those dynamics against where the population is.
Yeah, if you want to be in the Medicaid business, you can't ignore places like California, and New York, where the Medicaid population lives. So clearly in New York Metro as a place we want it to be we have a nice blend of business. There now we have a traditional Medicaid business with the purchase of affinity and we have a manage long term care business with the purchase of seed.
Your whole help in New York.
And you are right New York, clearly has budget pressures and lots of other factors that are indigenous to New York.
But in buying these properties and projecting the earnings stream off of which they are valued we certainly took all of that into consideration. So.
When you're an incumbent and those things happen might have some issues, but when you are contemplating all those puts and takes when youre value of the property in order to buy it we're pretty comfortable that we paid for them correctly. We considered all the puts and takes that could happen in both New York Metro and the state of New York and we're very comfortable that these are going to.
Great long term value with the accretion numbers we've given.
Okay. Thank you.
Yeah.
Thank you and the next question comes from Georgia show up towards your bank.
Hey, good morning, guys and thanks for taking my question I guess, Joe circling back to the.
Texas Exchange and Medicaid issues are you able to call out what types of utilization you guys saw the drove the MLR up and I guess, what I'm looking for a kind of any any consistency or correlation that that might I guess, it might kind of rear its head in the future or or maybe even more color on what what makes you think that this is kind of a contained issue that's readily fixable.
And I'm, sorry, George I couldn't hear the first part of your question, which business, where you're referring to.
The bronze business the exchange business.
And we try to be very clear and transparent if we have an operating issue that didn't meet our expectations, but.
I think we need to put a box around this.
Our entire a marketplace business is 8% of our total revenue and to Brian's business is about a quarter of the total marketplace business. It did underperform, but this is box. It's contained it's identified it's clearly related to operational performance and we.
Fix it so many.
Operating protocols introduced so many different performance improvement initiatives over the past couple of years, we're going to fix this.
Again, when you look at where it is and how much of the company's profile it actually consumes.
It is a very contained easy to fix issue so I don't want to.
Have this painted with a broad brush because it's very specific and very contained.
Okay, and then maybe just a quick follow up to the question that Justin asked earlier I don't know if you guys quantified desk, but have you talked about what percent of the membership and Medicaid that you think is at risk of falling off wouldn't redetermination tourism.
No we haven't.
We continue.
Renew to see the Redetermination pause.
Last quarter, we broke protocol by giving an inner quarter update I'll do the same now we saw more membership increase in October I think the number of increase is.
Slightly over 30000 in the month of October so far now that would be offset by our Puerto Rico exit, but in terms of new members members coming on through Redetermination. It continues into the quarter.
No as we said in our prepared remarks, how high this the the people will be how far how quickly it will fall off as the economy approves and to.
To the point someone made earlier, how will the states actually unwind this in a staged approach or an E.
A sudden approach is still yet to be determined so no we have not given any impact of this on our revenue forecast either for the balance.
February of 2021, it's certainly increased our revenue outlook for the rest of the year.
Okay. Thank you.
Okay.
Thank you and the next question comes from Stephen turn out with Us semi lyric.
Good morning, all states are so much detail today I guess I'll just two quick ones that article I missed this but I don't think he commented on the risk corridor settlements on then I think they expected to go to that 128 $9 does that still I can in the any any plans for that money.
Yes.
That is accurate.
We received it $128 million pretax it will be reported in the fourth quarter.
And we are likely.
To have an offsetting amount in the quarter, where we will be making a sizeable contribution to our new 501 C. Three charitable trust called the Melena cares cord Foundation.
So likely awash in the quarter.
When we report the fourth quarter, but yes $128 million was the pretax number.
And much of that will be.
Deposited or contributed I should say two or five <unk>.
Great well. Thank you and then maybe one last one so maybe the Ohio.
Did she wanted to get your your gauger sort of confidence there will likely sources vulnerability HMO or any commentary there'll be helpful.
Well, we have a we run a fine business in Ohio.
12, 15% market share, we're well positioned.
Across the entire state.
And obviously, we have our team on this key state for us.
And we're very confident that we'll submit a high quality proposal.
That'll be scored well.
But it's.
It's a re procurement.
And will submitted on November 20th when it's do.
And when the announcement comes out we'll certainly report that but we have our ATM on this we run a great business there and we have every reason to believe we will be successful and.
And not only retaining think perhaps even expanding.
Yeah, there was an opportunity okay, great. Thank you.
Thank you and the next question comes from Gary's handle with J P. Morgan.
Hi, good morning, Thanks for all the the detail and the.
Transparency.
Most of my questions are answered so I'll just ask a couple a little farther down the list just going back to Kentucky passport what are the applications, though of adding the six player well, they're just be auto assignments and we just.
Take a sick staff here expected membership or is or is it unclear how how the allocations will be made at this point.
It's unclear and we don't want to get ahead of our customer on this one.
Because they have the jurisdiction over how to allocate and a portion membership but yeah. That's the way we're thinking about it we are an incumbent we're servicing 320000 members say as we sit here today.
The passport brand out of the Melena healthcare, Kentucky legal entity.
And when you introduce a six player if in fact, that's what's done.
We believe the state will have to go through some process of Reapportioning members.
How that is done through auto assignment through.
Judgment, we just don't know and we don't want to speculate but.
That is the practical application of that ruling that was made last Friday introduction of the sixth player, which will have to be a portion of membership.
Okay. My one other is just thinking about when you looked at the Covid impact on your exchange business geographically called out Texas. If we look at the the positive net benefit of of Covid and care deferrals on your Medicaid.
MLR would you similarly call out, California geography.
That disproportionately benefit or is there anything else to say about the geography on the medicate them a lot.
Now the reason that it's less pronounced on the Medicaid Mlr's, it's a more diversified book of business in 15 States.
So no I mean, there is California was certainly a pressure point.
And all of our businesses with Covid as was Texas.
But it's just less pronounced in Medicaid just because of the geographic diversification that we have.
Okay.
Thank you.
Thank you and the next question is another tough for Charles Radio Psychology.
Hi can you guys hear me.
Yes, perfect low.
Okay, Yeah, sorry about that earlier.
Uhm similar I think I've got to most of my questions here I just wanted to follow up maybe Joe.
When you were talking about the 21 outlook here obviously some of your peers have is being a little bit more cautiously I think you've obviously given us some very solid targets and a positive outlook here uhm.
Any other additional comments you could add maybe in terms of what other areas maybe conservatism that you're.
Thinking about building in as you're approaching guidance, maybe relative to prior years, given sort of given the heightened higher uncertainties that were in here any other puts it takes that we should take into account you know obviously taken too account all the other comes you made earlier thanks.
No I think I think actually the word you used to ask a question are actually reflective of the situation, there's clearly more uncertainty.
And risks to consider as you move from this very intensive.
Pandemic into what may be less.
Intensive covid pandemic environment, but all the puts and takes on managing a manage medic K business are certainly and play.
It's what is the medical cost baseline look like for next year, how it will be influenced by covid, either increased or decreased by direct covid or covid curtailment, and then how that cost baseline is reflected in rates.
We have good visibility into.
Our rates at this early stage.
Four 2021 rep.
Revenue base, we know about we know the rates in about 40% of the revenue base at this point when we give guidance.
In February will.
Understand the rates on about 70% of our revenue. So we'll have good visibility into that and the conversations we're having with our stay customers are very balanced there actuarially sound, they're based on reasonable cost baselines, but.
To be the big issues that you always consider going into a year when you're trying to forecast earnings is medical costs projection and how rates will be reflective of that medical cost baseline and those certainly are the two issues that have to be considered as you look forward to next year not to mention the accretion that we're going to produce from.
The recent acquisitions that we've integrated.
Right.
That's helpful. Thanks, a lot.
<unk>.
Thank you and is there are no further questions that does conclude today's question session as well as a conference call. Thank you. So much for attending today's presentation may not a central lines.