Q4 2020 Molina Healthcare Inc Earnings Call
Good morning, and welcome to the Molina Healthcare fourth quarter 2020 earnings Conference call. Please note. This event is being recorded I would like to turn the conference over to Julie Trudell Senior Vice President of Investor Relations at Molina Healthcare. Please go ahead.
Good morning, and welcome to Molina healthcare its fourth quarter 2020 earnings call.
Joining me today are Molina, as president and CEO Jos Debrett ski our current CFO, Tom Tran, who is retiring later this month.
And our current head of transformation in corporate development and CFO elect mark kind.
A press release announcing our fourth quarter earnings with distributed after the market closed yesterday and is available on our Investor Relations website.
Shortly after the conclusion of this call a replay will be available for 30 days the numbers to access the replay are in the earnings release.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today Thursday February 11, 2021 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 fourth quarter 2020 press release.
During our call, we will be making forward looking statements, including but not limited to statements regarding the COVID-19 pandemic. The current environment recent acquisitions 2021 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 SEC as well as the risk factors listed in our form 10-Q, and our form 8-K filings with the SEC.
After the completion of our prepared remarks, we will open up the call and take your questions.
I would now like to turn the call over to our Chief Executive Officer, Jos Debrett Ski Joe.
Thank you Julie and good morning.
Today, we will provide updates on several topics.
First we will cover enterprise wide financial results for the fourth quarter and full year 2020.
Second we will provide initial earnings and earnings per share guidance for 2021.
And lastly, we will conclude with some thoughts on our compelling strategic position and our future growth prospects.
Let me start with the fourth quarter highlights.
Last night, we reported GAAP earnings per diluted share for the fourth quarter, a 56 assets with net income of $34 million in total revenue of $5 $2 billion, a revenue increase of 22% over the prior year.
On a normalized basis.
Defined as adjusted earnings per share.
Excluding the net effect of Covid, our earnings per diluted share were $3 29 for the fourth quarter.
This is consistent with our performance in the first three quarters of 2020, each of which produced approximately $3 per share GAAP.
After adjusting for the effect of Covid.
Two items significantly impacted the earnings in the fourth quarter.
The first and most prominent of these items was the net effect of Covid.
Which decreased net income in the quarter by $3 80 per share.
The most significant contributor to this impact with the continuation of rate refunds already in flight.
And the introduction in the quarter of Covid related retroactive rate actions in California, Michigan and Ohio.
These refunds taken together more than offset the net effect with modest utilization curtailment and a high level of COVID-19 direct cost of care.
The second significant item, having an impact in the quarter came from adjustments that produced a combined net benefit of $1.07 in earnings per share.
The most significant of these was a net benefit from the proceeds of federal litigation.
Which was partially offset by a charitable contribution to our foundation.
In summary, we are pleased with our normalized fourth quarter performance with respect to both 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 the global pandemic.
Now turning to the full year.
We reported full year 2020, GAAP earnings per diluted share of $11 23.
With net income of $673 million.
And a three 5% after tax margin.
We generated premium revenue of $18 $3 billion, an increase of 13% over 2019, reflecting increased membership.
We ended the year with $4 million managed care members, a 700000 member increase year over year, primarily due to growth in Medicaid.
Our Medicaid enrollment finished the year strong at $3 6 million members representing growth of over 640000 members or 22% over the prior year.
This increase reflects.
Strong organic growth of 450000 members or 15%.
As the suspension of re determinations with a major catalyst for our Medicaid membership growth in 2020.
Growth of 370000 members related to the acquisitions of your care, which closed on July one.
And passport, which closed on September one.
This organic and inorganic growth was offset by the 180000 member decline related to our planned exit from Puerto Rico.
I will now provide additional color on our full year normalized financial performance, which better expressed as the underlying strength of our business by isolating the transitory effects of Covid and adjustments.
On a normalized basis, our earnings per diluted share were $12 97 for the full year.
Our normalized performance comfortably exceeded our full year guidance of $11 20.
To $11 70 per share, which was established in the absence of Covid and is therefore, the most relevant comparison.
With respect to medical margins for the full year, our MCR on a normalized basis was 85, 9% compared to 85, 8% in the prior year.
In Medicaid and Medicare are performance met expectations, while in the marketplace. Our performance was below our expectations.
Our normalized G&A ratio for the year was seven 3% compared to seven 7% in 2019.
Reflecting disciplined cost management and the benefits of scale produced by our substantial growth.
We produced a normalized after tax margin of three 9%, despite our marketplace business underperforming.
We are very pleased that while dealing with the medical cost distortions and operational complexity caused by the pandemic, we produced a normalized margin consistent with our long term target.
Now I will comment on the item by item effects of Covid on our full year 2020 results.
The net effect of Covid decreased pre tax income by approximately $180 million or $2 30 per share.
This result is the sum of several identifiable positive and negative factors as follows.
For the full year, the net benefit from Covid related utilization curtailment offset by direct care related to Covid patients was approximately $420 million on a pre tax basis.
I should note that while utilization was moderately curtailed in both the fourth quarter and the full year.
In the fourth quarter direct Covid medical costs were higher than in any other quarter of the year.
For the year.
Covid related risk sharing corridors.
Premium revenue and earnings by approximately $565 million on a pre tax basis.
$400 million of this amount was reported in the fourth quarter.
As the three new Covid related risk sharing corridors were enacted.
In the corridors already existing at the end of the third quarter remained in effect.
For the year Covid related activities increased our G&A spend by approximately $35 million on a pre tax basis.
Without question the effects of Covid created significant distortions to our 2020 operating metrics.
But the underlying operating fundamentals and financial metrics remained strong.
Turning to our 2021 guidance beginning with premium revenue.
We are very pleased with the rapid activation of our growth strategy.
In 2021, we project premium revenue of at least $23 billion.
A 25% increase over 2020.
This growth is well balanced between a new contract win.
Organic growth.
Bolt on acquisitions.
Benefit expansions in our existing geographies and greater penetration of our Medicare and marketplace products into our Medicaid footprint.
More specifically our premium revenue guidance includes.
A full year of the acquired Magellan complete care businesses, which we closed on December 31.
A full year of Kentucky revenue, which commenced on September one 2020.
A full year of revenue from the York tiered membership in upstate New York, which we assumed on July one 2020.
Marketplace revenue growth of 25% to 30% as we begin this year with more than 500000 members.
The full year carve in of the pharmacy benefit and the state of Washington, which is somewhat offset by partial year pharmacy carve outs in New York and California.
And the revenue decrease associated with our planned exit from Puerto Rico.
The impact of the affinity acquisition is not included in our premium revenue guidance.
We expect the transaction to close as early as the second quarter. So the acquisition could provide $600 million are a more and additional premium revenue in 2021.
Our guidance includes membership growth relating to the current public health emergency extension set to end in mid April 2021.
With a steady decline over the remainder of the year as Redetermination is activated.
But by the administration has recently indicated that it is likely the public health emergency will remain in place for the entirety of the year.
If so.
<unk> could continue to receive the additional six 2% F map match.
2021, which would likewise extended redetermination suspension requirement for the states.
Although we have been adding more than 100000 Medicaid members per quarter during the redetermination suspension in 2020.
It is unclear whether this pattern will continue should the Phd be extended further.
Therefore, we have not included in our guidance an estimate of revenue associated with additional volume from potential extensions.
However, any extension of the pag.
Company by Redetermination suspension could.
Certainly represent upside to our 2021 revenue outlook.
We estimate that for every month the Redetermination suspension has extended past April.
It could provide additional revenue of approximately $150 million per month.
Turning now to earnings guidance.
Given our recent and expected continued M&A activity adjusted earnings per share has become a more relevant measure of our earnings going forward and will be the focus of our comments today.
Our initial full year 2021 adjusted earnings guidance is in the range of $12 52.
$13 per share or approximately 20% growth from 2020 adjusted earnings of $10 67 per share.
The upper end of our 2021 guidance range, it's essentially equal to our 2020 normalized earnings per share of $12 97.
Our 2021 earnings profile reflects durable and sustainable operating improvements and earnings growth.
Which are being temporarily muted by a femoral industry wide challenges.
Specifically, our 2021 earnings guidance reflects the following positive long term value drivers.
Continued strong performance in Medicaid and Medicare, reflecting an actuarially sound base rate environment.
Margin recovery and growth in our marketplace business, which we target to achieve mid single digit pre tax margins for 2021.
As a result of our intense focus on operational improvements and continued competitive prices and product designs.
And accretion from the Magellan complete care businesses, and our Kentucky and passport installation.
Our earnings guidance also considers the following industry wide environmental challenges, including another net negative impacts from COVID-19, although at a reduced level due to the continuation of many of the risk sharing corridors that existed in 2020 and the direct core.
That's COVID-19 related patient care offset by moderate utilization curtailment.
And lower than expected Medicare risk scores, which are an industry wide challenge that will pressure results.
Our risk scores do not fully reflect the acuity of our membership.
In 2020 seniors reduced their access to healthcare services, and therefore risks for capture with more challenging.
Referencing these catalysts and challenges we now quantified the progression from our 2020 normalized earnings of $12 97 per share to the midpoint of our 2021 adjusted earnings guidance of $12 75 per share.
We expect strong core performance to contribute approximately $1 25, and adjusted earnings per share growth emerging mostly from marketplace as Medicaid and Medicare margins are near optimal.
And accretion from our acquisitions, along with share repurchases will positively impact adjusted earnings by approximately $1 per share.
Offsetting these positive factors are to industry wide environmental challenges that temporarily pressure earnings.
Specifically.
We expect the net effect of Covid, consisting of utilization curtailment and direct cost of care.
Offset by risk sharing corridors to continued to negatively impact earnings, but in 2021 by approximately $1 50 per share.
And the temporary Medicare risk score shortfall phenomenon will pressure results by approximately $1 per share.
All of these items when combined with the initial performance of recent acquisitions operating below target margins impact.
Impact our 2021, MCR by approximately 200 basis points when compared to 2020 normalized.
This corresponds to a 90 basis point impact on the net income margin.
Our 2021 guidance represents solid underlying earnings growth, but it is a constrained picture of embedded earnings power of the company.
The financial profile that we can develop when COVID-19 and industry related headwinds abate and when our acquisitions achieved their full run rate potential would include.
First the net effect of Covid and the Medicare risk or disruption have created approximately $2 50.
Adjusted earnings per share overhead.
We would expect this overhang to disappear as Colgate abates.
Second once we obtain our targeted margins on Magellan complete care and Kentucky.
And once affinity is closed and synergize, we would expect to achieve additional adjusted earnings per share of at least $1 50.
In short our pro forma run rate after the natural relaxation of these temporary constraints.
Would produce an after tax margin of approximately 4%, which is in line with our recent performance and produced adjusted earnings per share comfortably in the mid teens.
I will now provide a few concluding comments that frame the compelling strategic position we have created.
The execution of our margin sustainability and revenue growth strategy has allowed us to create a very attractive financial profile.
Despite all of the near term distortions caused by Covid the.
The achievement of our 2021 guidance implies.
Generating EBITDA of $1 2 billion.
With adjusted EBITDA margins in excess of 5%.
Producing a return on equity of nearly 40%, which is a function of our attractive margin position and disciplined deployment of growth capital.
Projecting contribution margin upside as we soon expect to achieve our target margins in our acquired businesses.
Generating excess cash flow, which when combined with leverage gives us the continued ability to acquire businesses in our corner.
Producing a two year compound annual growth rate of 20%.
And to summarize with the durable earnings catalysts being sustained and as the temporary earnings challenges dissipate.
Our operating profile would produce mid teens earnings per share.
Despite the challenges in near term distortions caused by the global pandemic our confidence in the growth.
Earnings power and resilience of our business remains high.
The inherent growth characteristics of these businesses are exceptionally strong and we will execute and harvest growth through winning new states.
Growing market share in our existing states.
Increasing penetration in high acuity populations.
And actioning accretive acquisitions in our core business.
We will continue to sustain best in class operating metrics and margins drive top line growth and remain relentlessly focused on our value creating mission.
I will note that despite the vicissitudes of the economy and despite the pandemic our management team and our associates have demonstrated a tenacity a day.
Termination and an ability to deliver.
We are in the right businesses with the right people at the right time, our future is very bright.
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 discuss our balance sheet cash flow and 2021 outlook.
Operating cash flow for the full year 2020 was $1 $9 billion, reflecting the strong operating results gross paid membership.
And the timing of government receipts and payments.
Our reserve approach remains consistent with prior quarters, and I'll reserve position remains strong.
Days and claims payable at the end of the quarter, representing 50 days of medical cost expense compared to 52 days in the third quarter of 2020, and 50 days in the fourth quarter of 2019.
Prior year's reserve development in the fourth quarter of 2020 was modestly favorable and was negligible in the comparable period in 2019.
We extract $280 million of subsidiary dividends in the quarter.
And $635 million year to day.
The parent company cash balance at December 31, 2020 was $644 million.
A decrease from the prior quarter cash balance of approximately $1 $3 billion due primarily to the cash outlay for the Magellan complete care acquisition.
As of December 31, 2020, our health plans had total statutory capital and surplus of approximately $2 billion.
This equates to approximately 330% of risk based capital.
Total December 31, 2020, we repurchased an aggregate of approximately 760000 share.
$159 million.
At an average price of approximately $208 per share.
We continue to reduce our cost of capital.
In November of 2020, we closed on a private offering up $650 million senior notes due November 2030.
And use a portion of the proceeds to repay debt $330 million senior notes.
Debt at the end of the quarter is two one times trailing 12 months EBITDA.
Our leverage ratio is 53%.
However, on a net debt basis net of parent company cash the leverage ratio is 45%.
Taken together these metrics reflect a reasonably conservative leverage position.
Now turning to guidance.
We introduced our initial full year 2021 adjusted earnings per share guidance range.
$12 50.
$213.
We expect premium revenue to exceed $23 billion, a greater than 25% increase over 2020.
And total revenue is expected to exceed $24 billion.
We expect the medical care ratio to be approximately 88%.
The MCR increase over 2020 is primarily due to the continuing net effect of Covid.
Temporary Medicare risk score disruption.
And higher MCR from recent acquisitions.
We.
Our adjusted G&A ratio to improve to approximately 7%.
This reflects continued disciplined cost management and revenue growth and fixed cost leverage.
Low tax rate is expected to be approximately 25, 6%.
And adjusted after tax margin is expected to be approximately 3% wishes.
Which is impacted by approximately 90 basis points related to the items I just mentioned.
Including the continuing net effect of Covid met.
Medicare risk scores and initial performance of recent acquisition operating below target margins.
This concludes our prepared remarks, operator, we are now ready to take questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at anytime your question Thats been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Matt Borsch with BMO capital markets. Please go ahead.
Yes. Good morning, I was hoping you could just talk a little bit about.
Yeah.
Humming.
Sorry marketplace special enrollment period, and how you expect that to.
The impact to you when.
When you take into consideration what you characterize as underperformance in 2020.
Sure Matt.
Our forecast for membership in the marketplace, starting the year with 500000.
Ending the year with just under 400000.
Didn't contemplate other special enrollment period, we are certainly aware of it we certainly have forecast of what it could provide.
And for those 90 days.
It could provide anywhere from 20 to 30000 additional members.
We are forecasting that potentially it could provide an extra $100 million to $150 million of revenue for the year now.
Now in the context of our margin recovery process.
Unaffected by that.
We're very comfortable with the pricing we put into the marketplace, we're very comfortable with our product designs and our our our benefit designs and our product positioning and we're very comfortable in achieving our mid single digit pre tax margins for the year irrespective of any additional revenue obtained through the special enrollment.
Alright.
And maybe if I just just related to that how much do you think the competitive environment in the marketplace.
Impacts your efforts to get to the mid single digit level.
Well. It is it is very competitive there is lots of new entrants.
But we're very confident in one of the reasons. We're confident is the two areas of operational let down if you will in 2020.
Utilization review.
And attainment of risk scores.
We have introduced operational excellence of those two operating fundamentals in our other two businesses, we're really good at it and Medicaid and really good at it and Medicare and we were adjusted behind and importing those skills that exist in our company to the marketplace platform that has been corrected.
So we're very comfortable debt by executing across those two fundamentals, we will get back to mid single digit margins.
Thank you.
Our next question comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.
Yeah, Hi, good morning.
Ask questions here, just thinking about the one time items from 2020 line just to clarify as we.
Think about 'twenty 'twenty two.
What can we exclude.
From the sort of temporary.
One time headwinds.
As we think about sort of kind of like the starting point for next year.
The COVID-19 close to us.
A number of moving parts in it.
Sure.
During our prepared remarks.
We gave a sort of a.
Qualitative quantitative.
Quantitative bridge and understanding.
The catalysts and pressures inside our 2021 guidance all with the goal of helping our investors understand what might be looked at as a jumping off point into 2022. So here are the puts and takes.
First of all.
The net effect of Covid of $1 50 per share or $110 million of pre tax.
Dissipate overtime.
Utilization comes back to normal as the risk quarters disappear.
Net $1 50 overhang will evaporate as the pandemic is solved.
In addition, the Medicare risk score phenomenon last year was an interesting year seniors didn't access healthcare and so interacting with them getting the right codes to obtain the right risk force was a challenge not just for us but from any of our competitors.
Next year, we will either meeting this year, we will either attained the risk scores.
Because there'll be.
Getting services or if we arent satisfied that we can we can include that in our bids.
And last year, obviously, the bids were done far before the impact of Covid who's ever known so we're very comfortable that combine that $2 50 overhang sort of disappears as COVID-19 gets behind us.
As we said in addition.
<unk>.
Our acquisitions are being integrated really really well and we're very comfortable with the one dollar of accretion that we're putting in this year's guidance, but we're also comfortable in saying that when they hit their target margin and when affinity is closed and hit its target margin. There is an additional $1 50 of earnings per share there.
So all in there's a good $4 of earnings per share embedded power sitting inside our 2021 guidance.
Okay.
Just a follow up when we think about day acquisitions, I mean, clearly you've done multiple acquisitions in 2020.
How should we think about management bandwidth.
To continue to do acquisitions in 2021 or.
Should we think about you kind of like taking care as opposed to this year, making sure that they are all integrated getting to that target margin and then coming back to the market.
We have created the bandwidth we have an expert M&A team that finds the properties and knows how to action them and close them, we built a world class integration team.
Passport integration is going really well and the early read on the Magellan integration is going really really well that's why we're so comfortable and affirming the accretion targets that we've given you they've actually very fortunately laid out quite nicely on a timeline.
By the time Magellan is fully integrated will just be closing on affinity perhaps by the second quarter and so if reaction one two or who knows how many more this year and they close either late in the year early next year.
Online couldnt be more amenable to.
To be very effective at integrating them and harvesting the accretion that we promised our investors.
Thank you.
Thank you our.
Our next question comes from Robert Jones with Goldman Sachs. Please go ahead.
Great. Thanks for the questions I guess, maybe just two on the bridge and appreciate you guys breaking out a lot of these components. It looks like the core growth off of that 2020 baseline of 12 97 would be somewhere in the 95% range I'm not sure how much of the hips benefit would be flowing through but obviously that's.
Below the long term target of 12 to 15, just wanted to see if you could maybe walk through some of the moving pieces here and probably more importantly, how youre thinking about the timeline to get back into that into that long term range of 12 to 15.
Want to make sure I understand your question, you're talking about the puts and takes within our 2021 guidance or beyond.
Yes, sorry, J, yes, no just in 2021.
It seems like if you if you look at the core gross.
That you've laid out in the slides of $1 25 on top of the 12 97, obviously that would be below the long term targets. Just curious if you could talk through true.
Kind of getting getting back towards that range and obviously it sounds like there is some tailwind that are not necessarily baked in yet, which I'm sure would be helpful. But just wanted to get your thoughts on the debt.
The growth you've laid out here at the core versus getting back to the long term range sure well bear in mind debt. The core performance here is irrespective of the net effect of Covid, which is tracked in a different place.
The way we've articulated this so the $1 25 is mostly the marketplace since that was the business that underperformed last year. It was just about breakeven in 2020.
And we're targeting mid single digit free tax and if you look at the potential for.
$192 billion of revenue you can start to formulate a picture of how that is a significant contributor to the $1 25 core performance.
Tailwind into this year.
There are some puts and takes from there, but with Medicare and Medicaid margins, where they are.
We're going to grow the top line and obtain the margin position there is but theres not a lot of margin upside in Medicare and.
In Medicaid.
So we're very comfortable with the position that we presented here from a core business perspective, Medicare and Medicaid are pretty much optimized with respect to margins, but marketplace as a first step to getting back to where we said we would be.
Mid single digit pre tax margin would be our target for 2020 with no debt.
That's super helpful. I guess, just one follow up on the bridge. The dollar you have here for acquisitions in repos and if I remember I think you guys had called out 50 to 75 expected from Magellan sounded like your share in maybe the Puerto Rico exit would roughly net out so 40 for repo and I think task force.
It would be the other swing factor I guess versus debt.
Does that math makes sense as far as trying to bridge to that dollar and then.
How should we think about the split between repo and passport to make up that 40 balance yes, you're generally in the right area.
Were to break apart the dollar I would say that 75.
Magellan, which is the top end of the range that we committed to for the first full year of ownership.
Turn on Kentucky.
B J.
Very close to breakeven in the first full year of ownership and will drive it to peak margins after that at about 15 on buyback that's how you get to the dollar.
Super helpful. Thanks, Joe Okay.
Okay. Thank you.
Our next question comes from Charles <unk> with Cowen. Please go ahead.
Yeah, Hi, Thanks for taking the question Joe.
So I just wanted to just follow up just to clarify one other thing.
Apologize if I missed that when we talk about the net effect of Covid in the dollar 50.
Is there any is that pulling out all the effect of COVID-19, even for acquisitions, because I guess the question is in your assumptions for accretion here in 'twenty, one for four or something like Kentucky.
Are you factoring in the impact of Covid.
Passport within the acquisition bucket or is it all in the net and the Covid bucket.
Alright.
Tried we've attempted to capture all COVID-19 impacts in the Covid line items.
And just to sort of reframe, how we track that.
Our estimate of Covid impact.
Is the amount.
The amount of medical cost suppression, we believe.
Observe offset by the direct cost of caring for Covid patients and then of course, both offset by the impact of any liabilities generated due to the.
Retroactive.
Refunds or corridors, that's how we capture it and if it related to an acquisition is captured in the Covid line.
Okay. Thank you.
Just a quick follow up in in Kentucky, and passport do you have a sense do we have a sudden share on timing for when they are going to do sort of the odd enrollment.
So you'll know what youre sort of membership numbers will look like.
In Kentucky, the open enrollment period was extended to March 15th.
So theres still members moving around we began the year with 320000 members.
<unk> accounting has us about in that same zone.
But on March 15th the period will shut down and we'll know how many members.
We are beginning a new contract with.
Okay, great. Thank you.
Our next question comes from Gary Taylor with J P. Morgan. Please go ahead.
Hey, good morning, Joe.
I just wanted to make sure I understand.
What youre, saying about your re verification.
Assumption so when we look at for example, the bridge between 'twenty and 'twenty one.
Net dollar 25 of core growth Youre, saying most of that is from <unk>.
Exchanges, but if if you're anticipating at this moment that you're still gonna have reef verifications in midyear start to take place in some of your Medicaid enrollment.
Rolling off.
Zooming theres like a net negative number embedded in there is that is that the right way to think about it and I just wanted to make sure you're suggesting it is.
That doesn't happen this year.
Whatever that embedded negative number is that comes back and can you size that force.
Sure.
It's interesting because it's all about your assumption of how fast membership roles will attrit once the states turn back turn Redetermination back on but I would tell you in our numbers.
The member ship flows both in 2020 and in 2021, there is actually a member month increase.
In 2021, just based on the timing of both acquisitions and Redetermination. So no.
I'd say that the Redetermination process is with the 100% upside to our revenue and earnings picture in the year. We just felt it wasn't prudent nor did we have any credible way of estimating how many more members we would get if the redetermination pause was extended and then how fast would they add.
<unk> roll off depending on how states plan to implement.
The reintroduction of Redetermination, So I would just say that the redetermination.
You are phenomenon as upside to both our revenue and earnings guidance for the year.
So you've still got.
Enrollment growth playing out now through the first half some assumptions about some leakage in the second half, but that debt weighted average is still positive year over year.
Yes.
The way the way we look at it as we're beginning on a Medicaid basis, we're beginning the year with $3 6 million members on January one 200000 members come over.
Due to MCC.
And in the first quarter based on our historical average of about 30000, a month during redetermination suspension, we pull out another 100000 members. It would hit its peak at three nine, but then 600000 would roll off through the balance of the year now that's a pretty quick roll off.
And it might happen slower, which is another perhaps element of conservatism in our forecast.
But that's and yes. If you then process that against 2020 and the timing of our membership grew and the timing of our acquisitions. There is actually a 9% member month growth.
In 2021 on Medicaid.
Very helpful. Thank you.
Thank you.
Our next question comes from Justin Lake with Wolfe Research. Please go ahead.
Thanks, Good morning, a couple of questions here first Joe it'll be a lot of people at J P. Morgan got the impression that.
The debt the Covid headwind was gonna be materially less than the $2. So I'm curious if there's something that happened between then and now pushed that number up closer to $2. And then you did a great job of kind of laying out for us the 2020 components within the Covid headwind.
Can you do the same for 2021 and specifically on utilization can you tell us how much what do you expect COVID-19 caused to be versus normal utilization.
Sure sure.
So let's provide the context for 2020, our estimate of medical cost suppression for the entire year was about $620 million.
That was offset by approximately $200 million.
The direct cost of Covid care for Covid patients netting to a $420 million.
Plus we hesitate to call it a benefit of surplus due to the <unk>.
Impact on medical costs from the Covid pandemic.
We then and this is not an estimated to an actual number.
We recorded $565 million of rate refunds risk sharing quarter of liabilities in the year and that combined with additional G&A of $35 million resulted in the net $180 million pre tax cost of Covid and our company for the year, which is $2 30 a share.
Juxtaposed against that J.
To answer now your direct question.
We are forecasting a more moderate more modest level of depression and the reason is.
Both the supply and demand side of the healthcare economy were shut down last year for a while patients were afraid to go into services and if they wanted them there were many.
Executive orders and direct mandates not to provide elective and discretionary procedures. The supply side is open for business. This year, but we still think there'll be a demand side softening.
And will result in utilization suppression of somewhere around $200 million for the year, which is one third of the amount of pressure we experienced in 2000.
20.
We will incur direct cost of Covid care and the net of all that is somewhere between $140 million to $150 million.
Most of this we forecast will happen in the first half of the year hopefully the vaccinations in the vaccine.
And social distancing will cause all of this to really dissipate in the later half of the year now against that we're also forecasting approximately $250 million.
<unk>.
Impact from retroactive or not retroactive, but risk sharing quarters, I should say, which nets to about 100 $110 million, which is your $1 50, a share. So the gross numbers are a lot.
Less dramatic, but it's still netting to $1 50, a share one of the reasons, we are very comfortable with this estimate.
Is really we focus on the net impact because if theres, if utilization is higher or lower than expected there'll be some flex up and down with the risk sharing corridor. So there is actually sort of a natural hedge between the suppression in the quarters themselves. So we look at the net number we're very comfortable.
<unk> debt net number.
As the pandemic goes away. We think this goes back to normal times and there'll be no impact from from Covid on a going forward basis obviously.
I hope that helps debt Peel the tape I know that was pretty detailed but that's what's included in our $1 50, <unk> estimate for the cost of Covid for 2021.
That's really helpful and just so so what youre, saying youre effectively as you've got $110 million risk corridor hole, where theyre just setting your margins lower than your typical target.
And that's really the problem the other stuffs going to flex up and down.
But you are below target year by $110 million.
All the all of your states at this point have risk corridors is there any uncertainty around more of them coming on.
Net well let me.
Address the first part the answer to the first part of that response is yes, that's true if you're already in a risk corridor.
Your medical costs go up or down there is no net impact from the company, but that is the way to look at it that because the risk sharing corridor didn't.
Address COVID-19 <unk>, specifically it just address your MLR than if you're outperforming your MLR targets youre, giving back some money to the states so right.
Pension was to have a direct correlation between COVID-19 suppression in a corridor, but.
Quarters against medical cost generally so the fact that we're very profitable in some states. The fact that we outperform.
Many of the market participants in some states the rate refund.
Number is probably a little higher than people might have expected, but the answer to your second part of your question is correct. It will flex up and down in a state where we're already in a corridor and we're as state where there is not we would either enjoy the benefits of additional surplus or the effects of Av.
Additional higher medical costs.
The only state that made the biggest state that does not have a corridor in 2021 is California.
Texas, and Washington already happen and all of our other states.
Continue them on into 2021.
Thanks.
Our next question comes from Scott Fidel with Stephens. Please go ahead.
Hi, Thanks, good morning, all.
First question Joe.
Joe just wanted to just talk about conceptually about the long term margin targeted debt. It looks like you gave us a crosswalk back.
Back to that 4% level.
Level that you had.
Guidance for the long term view for the last couple of years and just interested though.
Maybe taking the other side of that a bit just in terms of comfort with that sort of longer term.
Just when we think about the exchange margin profile you have rebates Hudson.
Our Investor day, a couple of years ago.
You guys are doing more inorganic growth acquiring lower margin businesses. So.
Certainly that could shift a mix shift impact that will likely from that.
And then also just ex some of these risk quarter over quarter, our programs. The states end up liking them a bit light and then end up keeping them. So so just wanted to get your thoughts on sort of framing some of those may be longer term headwinds against that 4% long term target.
Sure Scott.
As we sit here in the second year of this global pandemic, we're not going to update our long term margin guidance, we're just sort of going to as you go as you plow through this start to form your views of what the landscape is looking like as you plow through it I think that's a more prudent approach.
Right.
Having said that when you actually look at the pro forma impacts of many of these phenomenon that we consider quite temporary.
You can pro forma this thing back to the high threes or close to 4% from.
The second part of your question I actually hope that we always have a decrement sitting inside our margin for acquisitions that do not perform in their first year.
That's a good decrement to have because if we can buy properties that are underperforming and with sweat equity get them to perform debt.
Just another form of accretion.
No.
The 40 basis points to 40 basis points in our margin in 2021, and our guidance that is literally related to the underperformance in the first year of our acquired properties.
Both on the G&A line and on the MCR line.
And the last part of your question was.
Related to the risk quarters book when they were introduced in 2020, they were clearly related to pandemic.
There were presented that way.
Were retroactive because they had to be because they were introduced mostly after the pandemic started as they were reintroduced for 2021, they were presented as pandemic related.
The feeling was that.
There could be strange effects from the pandemic additional COVID-19 costs the cost of the vaccine additional suppression.
Thats why they are introduced on a symmetrical basis, you are protected on the downside and the state's protected on the upside.
And CMS is approval guidelines they have clearly stipulated that when they receive these for approval.
We are viewing these as being attributed to the utilization impacts related to the pandemic. So it's been pretty clear to us that they were presented as related to the pandemic.
CMS is approving them on the basis of relating to the pandemic and we believe when the pandemic.
Dissipates debt.
These will disappear as well and we'll be back to the traditional rate setting environment, where rates are set prospectively using a medical a credible medical cost base line and a trend off that baseline.
Got it and then just for my follow up question.
A lot of the content is just coming out of the last day or two and you guys are probably absorbing a fight up just interested Joe in sort of your framing on some of the proposals that came out of ways and means on expanding the heck subsidies in from <unk> on some of the Medicaid expansion proposals and how you would frame the opportunity from that and then I guess also.
Caveat it with that because they usually reconciliation the funding for it is only temporary for two years. So I guess there would be questions on sustainability right at the filing at FERC capital Republicans took back into the house or the Senate Inc. 2022.
Well thanks for that question.
Sure.
We're only three weeks into the new government and look what's been done we all knew that the new government would be proponents of the social safety net.
Making sure the disadvantaged.
Access to high quality healthcare.
And plenty of subsidy so they can afford it and look what's happened just in the first three weeks.
In terms of the executive order leased the intention to extend the phe to the end of the year the executive order to introduce the special enrollment period on the marketplace.
The executive order that the euphemism in the executive order was encouraging states to look at prior administration policies, which was really taking a shot at the public charge rule and Medicaid work requirements.
So just what's come out of the White house and the past three weeks is incredibly bullish on government sponsored healthcare, particularly for the disadvantaged.
To your other point.
<unk>.
Things can get done through the reconciliation process and they are going to the three committees in the house that generally right to healthcare issues are way.
Waves and beams.
Energy Commerce and oversight and.
Look at the language that they're introducing.
Increasing sub.
Subsidies in the marketplace.
Up to 150% of FPL.
Making.
The product accessible to people over 400% capping the cost at eight 5% other income and so on and so on and so on.
Just in three weeks of the new government both in the legislative bills that are coming out of the house and from executive order and the White House just couldn't be better for government sponsored managed care and we're pleased to see that progress already being made.
Okay.
Our next question comes from Dave Windley with Jefferies. Please go ahead hi.
Thanks for taking my questions good morning.
I wanted to follow on Gary Your line of questioning on the Redetermination last time around when that was turned back on and there was kind of this realization that.
The per risk profile or the margin on those folks re determined off was pretty attractive like maybe even included a lot of zero utilize there's I'm wondering if you think that is likely to happen. This time around when that debt. Finally gets turned back on and have you made that assumption.
In your in your in your guidance on your estimates.
The answer to your last part of your question David No, we havent, but its still remains to be seen.
What it does to the acuity of the population now because we haven't introduced many more members in our forecast or our guidance only includes a 100000 member growth in the first quarter of the year and then the attrition starts in the last three quarters of the year.
But we certainly have not forecasted.
Continued.
Sure.
Softening of the acuity.
The profile of our membership base.
And in fact, if that in fact happens and it happens in a quarter stage I will go back against the quarters anyway. So net net the impact of the extension of the Redetermination suspension is a net positive on any dimension. It's a net positive to our guidance. We did not include any members per.
The first quarter, we rolled them off pretty quickly.
As I said in my prepared remarks, if you take 500000 members, which is sort of what we got in Redetermination for every month at 300 Bucks per M. P. M Theres, a $150 million of additional revenue.
What's the margin profile debt revenue.
You could speculate that it's very very good as the acuity of the population improves as you get more members, but we have not included any of that impact in our guidance for the year, either the membership flow or a.
Acuity improvement that is sort of a a jolt of positive Joel to our earnings and earnings per share.
Okay and follow up then separate topic as you think about to your comments earlier on having built the bandwidth and the integration team to continue to look at M&A as.
As you look at targets.
Does the does a thought around the balance of how you'd like to build your book of business influence what youre looking at I E.
Increasing MAA in and well really MAA I guess from an acquisition standpoint.
In your in your mix or is it more opportunistic in what looks the best how do you think about the balance of your book as it relates to inorganic growth.
We'd love to balance it out with more Medicare.
It's.
They're hard to find.
But we'd love to balance out with more Medicare we're growing it nicely organically, but we'd love to find properties that have Medicare advantage or D. SNP populations.
I'd say along the lines you've asked the question, we more look to the.
The state is it a bolt on within a state where we don't have so much market share that we couldnt get it done lighting up new states really important high acuity really important or where.
Good day high acuity and Theres a lot of players out there that have a lot of high acuity lives and have little ability to manage them. So the upside on 1500 Bucks of premium per month is huge huge margin potential. So I would actually say that the geographies important we love high acuity and if they are underperforming.
Forming but not broken all the better because then we will take our operating team opened up the Molina playbook.
Drive accretion through margin expansion.
Alright, thank you.
Our next question comes from Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks, just wanted to make sure that I understood you talked a lot about redetermination this year.
But I guess in theory. It is a headwind in 2022 guidance, it's not something that you guys spiked out.
It's something that would be contrary to that $4 of earnings power I wasn't sure. If that was included in your kind of net Covid <unk>.
Or when you thought about 2022 or that's something that we should separately identify and if it is separate are there any other factors, we should take into account.
No I mean, since we did not put be any impact if there is a positive impact from redetermination in 2021 since it's not in our guidance. We did not been therefore create a headwind into 2022, so just to be very clear because I. Appreciate the question any impact from the extension beyond April.
Of any additional membership or a slower attrition of membership is not in our revenue guidance and any profit enjoyed by additional member months in 2021 is not in our guidance.
No.
Got it.
As I said, we're very comparable free theres only upside to 2021 on the Redetermination suspension.
Talking about what's in 2021 and your guidance because you have it going through April and then slowly coming off as the year goes on so to your point about member months, you'll end the year with that with at your Medicaid enrollment number but your member months in 2021 will be higher than your 2022 member months, just because we have terminations and for the first full quarter and partially.
Rolling off as the year goes on sure I understand your question I'm, sorry, I apologize I misunderstood. Your question is no and again, we werent, giving a specific 2022 outlook were more trying to craft. The bridge that we gave you as.
If we are guiding to 13 Bucks a share for 2021 sitting inside that is an earnings power that's.
Debt higher than $13 due to some temporary phenomenon, but we weren't necessarily trying to extend into 2022 with an earnings our revenue bridge sorry, I misunderstood your initial question but.
That will come at a later date.
Okay. So that is something else, we should factor in when we think about earnings power that.
Sure unless of course unless.
The suspension goes on in members stay on through the end of 'twenty, one depending on other acquisitions that we might do in the affinity piece thats coming in.
We.
We're not doing a 2022 guidance bridge per se, but I understand your question and its a legitimate one.
Okay and then maybe just second question then.
The exchanges, obviously unusual to see a company grow very quickly and expand margins. The way that you guys did obviously it sounds like risk coding is part of it.
But how should we think about that business.
Is 2021 guidance normalized margin.
And how do you think about long term top line growth outlook for exchanges.
We're going to be guarded and giving a forecast for where the margins will land the competitive landscape changes every day, we're very comfortable.
And getting this to mid single digit pre tax this year now our hope.
Again, given the competitive landscape that would lead to mid single digit after tax in the future.
That's where we think the business could perform but let us work through the 2021.
A lot of revenue to bring on a lot of members to service.
Some of them are new will have to get their risk scores. So, let's let's one step at a time.
Asthma team, let's get to the mid single digit pre tax margin. This year and then as we prepare our bids for 2022, let's sort through how much margin. We think we can get and how much membership. We think we can get but starting the year with 501000, and a 25% to 30% revenue growth year over year was a nice start.
<unk>.
Ill get back in the game in this business.
Great Alright. Thanks.
Okay. Thank you.
Our next question comes from Josh Raskin with Nephron Research. Please go ahead.
Thanks, Good morning.
Question on the Medicare risk score headwind of the dollar per share it sort of calculate that to about 3% of your total Medicare revenues, which seems a little bit higher than I think what some others are suggesting so I guess my question would be how much of your overall Medicare premium dollar actually comes from risk Adjustors and then are there any actions you are taking sort of shorter term to try and improve that.
Risk scoring.
This year as you're trying to get ready for next year and into the bids in the middle of the year.
Yes, Josh truth be told in that dollar.
Is a little bit from the.
The physician fee schedule so.
We just didn't think it was that big enough to call out so there's a little bit of physician fee schedule in there, but youre in the right zone, two 5% to 3%.
Our risk scores risk score revenue is multiples of that two to three times debt at least from what I recall.
And the industry had a choice last year, we were in the middle of a pandemic. It just started in March and April you are now starting to develop your bids.
And for the most part while we always tend to be conservative in our bids we didn't put in a specific load.
Okay, we're going to fall short on risk scores.
Obviously.
With hindsight it cost us three points on the revenue line, but next year meeting this year will either.
Have an estimate of what we think we can attain and then based on what we target for our benefit design and our margins. We would then allow for that and the data we submit so either way, whether we get the risk score or whether we price to it. We think this is a one year phenomenon. That's the way we look at it okay alright.
Alright, but it could be as much as a third to even half of your total risk score revenue is disappearing.
This year, that's sort of the math right.
I think it's about a third I will check that but I think it's about a third.
Okay, and then just a quick follow up on your margins, where did you end 2020 full year margins in Medicaid and Medicare.
Where did we end well again, depending on whether you look at a normalized basis or not but.
On adjusted earnings for 2020, we're at three 3% net income margin normalized three nine and I would tell you that the individual margins for the lines of business were generally in line with our long term targets.
The three 3% adjusted three 9% normalized in the lines of business, except for marketplace, obviously, which was close to breakeven we're pretty much in line.
Okay.
Our next question comes from George Hill with Deutsche Bank. Please go ahead.
Pardon me George your line might be muted.
It was thank you for that.
I'm, sorry, Joe as it relates to the Medicare risk, scoring I guess can you talk about the timing or your expectations as it relates to the ability to conduct.
The beneficiary valuations, maybe talk about what you've seen in the back half of 'twenty and kind of the expectations as we roll through 'twenty. One just is your ability to get in front of these people.
Sure well utilization did remain suppressed through the balance of <unk>.
2020.
It wasn't as depressed late in the year, but our team is on this we have a crackerjack Medicare team there.
They are all over this and their instructions are very simple have a credible estimate of how many interactions you can actually achieve.
What's your reasonable estimate of risk proper risk scores attained.
And to the extent it fall short of your long term expectation make sure you consider it in your bid.
So either way.
Obviously with the goal of making sure your product remains competitive with benefit designs from competitors. So the team is all over it.
And the good news is this year, we will have full visibility last year.
Five of war and Youre submitting your bids right as the pandemic was in full throttle.
And we made the conscious decisions decision not to introduce that into our bid. This year, we would think otherwise.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Joseph Brzycki for any closing remarks.
Thank you operator.
When we started this transformational journey over three years ago.
The work ahead loomed pretty large.
New that if we form the right team.
We could succeed so we thought.
To recruit managed care industry veterans Battle hardened veterans, if you will who would know exactly what to do.
Tom Tran Personifies bad.
We developed a durable financial infrastructure that has been instrumental in our early success and which will have lasting impact.
The team <unk> built as a high performing one and we are very confident in their continued success.
Tom's tireless energy steady hand, and good nature, we will certainly be missed by us all.
Tom.
Half of all of our constituents and from me personally. Thank you for your immense contribution to our success and we wish you the best of luck and good health and your retirement.
Operator with that we'll end our call today.
The.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Total.
[music].