Q1 2021 Molina Healthcare Inc Earnings Call
And welcome to the Molina healthcare first quarter 2021 earnings call.
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Julie Trudel. Please go ahead.
Good morning, and welcome to Molina Healthcare's first quarter 2021 earnings call.
Joining me today are Molina, as president and CEO, Jos abreast ski and our CFO Mark <unk>.
A press release announcing our first quarter earnings was 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 the presentation. We remind you that the remarks made herein are as of today Thursday April 29th 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 first quarter of 2021 press release.
During our call, we will be making certain forward looking statements, including but not limited to statements regarding to the COVID-19 pandemic.
The current environment recent acquisition <unk>.
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 2020 year filed with the SEC as well as risk factors listed in our form 10-Q, and form 8-K filings with the SEC.
After the completion of our prepared remarks, we will open up the call and take your questions.
Lastly, we want to invite you to attend our virtual 2021 Investor Day meeting scheduled for Friday September 17th where we will share more about our future growth plans and longer term strategy.
I would now like to turn the call over to our Chief Executive Officer, Jos the breathy Joe.
Thank you Julie and good morning.
Today, we will provide you with updates on several topics.
We will cover our financial results for the first quarter 2021.
We will update our 2021 guidance in the context of our first quarter results.
And we will then provide an update on our growth initiatives and outlook for the future.
Let me start with first quarter highlights.
Last night, we reported adjusted earnings per diluted share for the first quarter of $4 44.
With adjusted net income of $260 million in premium revenue of $6 3 billion.
Our results for the quarter were strong across many dimensions.
The 86, 8% MCR demonstrated solid cost management fundamentals, particularly in light of some of the challenges presented by the pandemic.
We managed to a 7% adjusted G&A ratio as we continue to reinvest the benefits created by our strong enterprise wide fixed cost leverage in our growth initiatives.
We produced an adjusted after tax margin of 4% squarely in line with our long term targets and exceeding our first quarter expectations.
Our $4 44 adjusted earnings per share in the quarter were a 47% increase over the first quarter of 2020.
And we accomplished all of this as we are generating 47% year over year premium revenue growth and successfully integrating businesses, representing approximately $5 billion in annual revenue.
In summary, we are very pleased with our first quarter performance as we executed well and delivered solid operating earnings and continued to deliver on our growth strategy.
Let me provide some commentary highlighting our first quarter performance.
Premium revenue was $6 $3 billion.
A 47% increase over the first quarter of 2020.
Reflecting increased membership in line with our expectations in both Medicaid and Medicare and exceeding our expectations and marketplace.
We ended the quarter with $4 6 million managed care members, an increase of 573000 over the fourth quarter 2020.
Our Medicaid enrollment at the end of the quarter was $3 9 million members an increase of 260000 over the fourth quarter of 2020.
This sequential increase was the result of strong organic growth of 63000 members.
As the suspension of Redetermination and a slowly recovering economy continued to positively impact Medicaid membership.
Although this growth catalyst seems to have moderated.
And growth of 197000 members from the acquisition of Magellan complete care, which closed on December 31.
Our Medicare membership was 126000 at the end of the quarter representing growth of 11000 over the fourth quarter of 2020, which was primarily related to our acquisitions.
Our marketplace membership grew by 302000 in the quarter to 620000 exceeding our initial forecast of at least 500000 members.
This growth was driven by several factors.
From product design and competitive pricing.
<unk> rates substantially higher than historical averages.
Lower than expected natural attrition rates.
And the extended open and special enrollment periods.
Turning now to our medical margin results for the quarter.
Our first quarter 2021, MCR was 86, 8%, reflecting modest COVID-19 related to utilization curtailment.
Severe winter weather.
And the absence of a traditional flu season.
Offset by the direct cost of COVID-19 related care.
While the net effect of COVID-19 for the total company was negligible in the quarter and in line with our expectations the impact varied by line of business.
Our Medicare and marketplace businesses experienced a disproportionately negative impact from the net effect of COVID-19 ex.
<unk> pressure on their respective MCR.
This was offset by a modest favorable net COVID-19 impact in Medicaid.
Some additional comments on performance by line of business.
In the Medicaid business, we achieved an 87, 5% medical care ratio for the first quarter.
Performing in line with our expectations.
In addition to the external factors mentioned previously which were unusually favorable in the quarter. The medical care ratio was also supported by our performance and utilization management and payment integrity.
A portion of our Medicaid outperformance was recaptured by the risk sharing corridors and impact which was well within our expectations.
The corridors are designed such that they will act as a buffer to absorb some of the over and under performance related to medical margin no matter how that performance is derived.
Our Medicare business produced a medical care ratio of 93% from the first quarter.
The medical care ratio was negatively impacted by higher than expected direct cost of COVID-19 related care and the temporary industry wide challenge of risk score capture which results in risk scores that do not fully reflect the acuity of the membership.
The Medicare business performed as expected when normalized for these two discrete impacts.
Finally, our marketplace business experienced a medical care ratio of 77, 3% for the first quarter.
The medical care ratio was negatively impacted by higher than expected direct cost of COVID-19 related care as the COVID-19 infection rate researched and many of our marketplace geographies.
We did however achieve our pre tax earnings target due to the increased membership volume.
We continue to effectively manage our resources.
Our adjusted G&A ratio for the quarter was 7% identical to the 7% reported in the first quarter of 2020.
Our performance reflects disciplined cost management and the benefits of fixed cost leverage produced by our substantial growth.
We have set somewhat by the higher than targeted G&A ratios of our acquired businesses, which will improve as our integrations progress.
We are pleased with our first quarter results as we continue to demonstrate the ability to produce excellent margins, while substantially growing top line revenue.
Managing through the ongoing effects of the pandemic.
Turning to our 2021 guidance beginning with premium revenue.
For 2021, we now project premium revenue to be more than 24 billion.
A 31% increase over the full year 2020, and a $1 billion increase from our previous guidance.
Specifically, our premium revenue guidance now includes <unk>.
Medicaid enrollment benefiting from the expected extension of the public health emergency period, and the associated pause on membership Redetermination, which we are now projecting through the end of the third quarter.
Recall, we had said that for each month public health emergency has extended beyond the month of May.
Could increase our full year revenue outlook by $150 million.
And updated marketplace revenue, reflecting the strong enrollment and retention performance mentioned previously.
We expect to end 2021 with slightly more than 500000 marketplace members and marketplace premium revenue growth is now expected to be over 50%.
We have excluded from our premium revenue guidance any impact of the affinity and Cigna acquisitions we.
We do expect these transactions to close this year, representing upside to our premium revenue in 2021.
In summary, we are very pleased with our growth trajectory our growth is well balanced between our new contract wins and organic growth.
Bolt on acquisitions.
<unk> expansions in our existing geographies and greater penetration of our marketplace and Medicare products in our Medicaid footprint.
Turning now to earnings guidance.
We are raising our full year 2021, adjusted earnings guidance to be no less than $13 per share.
An increase from our prior guidance of $12 50.
To $13 per share.
Specifically the increase to our 2021 earnings guidance reflects the favorable impacts of the increase in our revenue guidance and the associated margin.
First quarter earnings outperformance and the combined effect of other individually minor impacts such as the sequestration delay in Medicare.
We have however, hedged our guidance due to a variety of exogenous factors.
First and foremost we are still in a pandemic, which introduces a level of uncertainty with respect to any healthcare utilization forecast.
We have continued to be cautious in forecasting utilization trends and the remaining nine months of the year as the COVID-19 pandemic subsides.
How quickly and to what extent utilization rebound will depend upon the strength of the economy consumer behavior.
Provider capacity and the level of COVID-19 infection rates.
With respect to forecasting our marketplace utilization trends, we recognize there is an inherent level of uncertainty with regard to new member acuity levels, which we will monitor closely.
And the risk sharing corridor is create an added element of variability.
While any individual state corridor can be a buffer to that states over or underperformance.
Predicting in which states over or underperformance may occur can create an element of forecasting variability.
Turning now to an update on our growth initiatives.
We are very pleased to have been re awarded our major Medicaid contract and the state of Ohio.
We were awarded contracts in all three regions in the state maintaining our statewide presence.
This re procurement wind is a testimony to our excellent service innovative programs strong relationships and a reputation as a business partner that can be counted on.
While Ohio did introduce at least one additional player to the statewide program <unk>.
Continuity of care.
The utmost importance to our Medicaid program.
As such we have every reason to believe our current business profile should not materially change.
The agreement to acquire Cigna's, Texas Star plus membership is yet. Another example of an accretive strategic bolt on acquisition.
The business serves approximately 50000, Abd and MMP members across three regions from Texas.
Full year 2020 revenue is approximately $1 billion.
With a modest purchase price of $60 million, we project the acquisition will deliver returns well in excess of our cost of capital.
Benefit from local and enterprise operating leverage and will be immediately accretive.
The expanded presence in Texas should position us well in the re procurement should the state proceed with that process.
Finally, some comments about the longer term outlook for our business.
The current rate environment is stable and rational.
We continue to believe that the Medicaid risk sharing corridors that were previously introduced are related to the declared public health emergency and will be eliminated as the COVID-19 pandemic subsides.
We continue to be bullish about the performance of our acquired businesses.
The operational integrations are proceeding as or better than planned and we have high confidence in achieving our original accretion estimates and possibly even exceeding them.
In the context of the pandemic subsiding and our acquisitions maturing the embedded earnings power of the business as it exists today is at least $4 higher than our adjusted earnings per share guidance.
The emergence of embedded earnings combined with our future growth creates a very attractive earnings growth outlook.
Our first quarter performance demonstrates that our growth plan is working well.
We have built sound operational infrastructure, which allows us to operationally execute and maintain these attractive margins.
We have reinvigorated our platforms to drive organic membership growth.
We have built winning RFP in M&A capabilities that have catalyze our growth and accessing new opportunities.
We continue to focus on capital allocation and free cash flow generation to create shareholder value.
The political.
Legislated and regulatory trends are positive for the businesses we're in.
Our management team is well established disciplined and laser focused on our mission to serve members and shareholders.
I look forward to sharing more about our future growth plans and longer term strategy at our Investor day in September.
As I conclude my remarks, I want to express my gratitude to our management team and our nearly 13000 Molina colleagues.
There is skill dedication and steadfast service formed the foundation for everything we have achieved and everything we will achieve in the years to come.
With that I will turn the call over to Mark <unk> for some additional color on the financials.
Mark.
Thank you Joe and good morning, everyone.
This morning, I will discuss some additional details on our first quarter performance and then turn to our growth strategy balance sheet and some thoughts on our 2021 guidance.
Beginning with some detailed commentary about our first quarter results.
There was virtually no incidence of the normal flu in the first quarter.
Historically, a normal flu season would have resulted in $25 million to $40 million in medical costs in the first quarter.
Severe winter weather resulted in unusually low utilization in many areas of the country in the month of February.
While it's difficult to separate weather effects from other effects. There is no question it had an impact on the month.
To the extent the types of services not utilized during the time, our elective and discretionary that utilization will likely begin to rebound much of the impact is timing.
While the net effect of COVID-19 was in line with our expectations and negligible to the quarter in total the impacts were varied across our lines of business.
We experienced higher direct cost of COVID-19 related care in January, which then tapered off as the quarter progressed.
We saw some pockets of non COVID-19 related utilization increases, but overall utilization was in line with expectations.
In Medicaid, we generally experienced a modest utilization curtailment on inpatient and outpatient services.
A significant portion of the resulting medical margin outperformance was recaptured by the COVID-19 risk sharing corridors in several states.
In contrast, our Medicare and marketplace businesses experienced disproportionately negative impact due to an increase in direct cost of COVID-19 related care in the quarter.
The year over year MTR comparisons in these lines of businesses are less meaningful as the current quarter includes these impacts from COVID-19 in the first quarter of 2020 does not.
In Medicare the net effect of COVID-19 increase the MCR by approximately 400 basis points in the quarter.
In addition, the Medicare MCR was negatively impacted by the temporary challenge of risk scores that do not fully reflect the acuity of the membership.
This is an industry wide issue that we mentioned when we gave our initial guidance.
We are expecting COVID-19 to dissipate through the year and anticipate full year Medicare MCR in the high eighties.
Marketplace experienced a high level of COVID-19 cases, early in the quarter, which moderated throughout the quarter.
Several of our markets were disproportionately impacted by COVID-19 as a result of higher local infection rates.
The COVID-19 impacted marketplace increase the MCR by approximately 500 basis points in the quarter with that said, we expect the net effect of COVID-19 to subside and continue to expect full year pre tax margins in the mid single digits.
I will now provide some commentary on our growth strategy beginning with M&A.
Last week's announcement of our intent to acquire Cigna, Texas, Medicaid and MMP business marks our fifth acquisition since our pivot to growth.
Ultimately, reflecting the addition of <unk> 7 billion in annualized revenue.
The Cygnet transaction is expected to increase our Texas membership by 50000 provided approximately 1 billion in annualized revenues and drive accretion of at least 40 per diluted share in the first full year of ownership.
This transaction is expected to close in the second half of 2021 and is not included in our full year 2021 guidance.
We now expect the affinity transaction to close in the third quarter.
Affinity is expected to increase our New York membership by approximately 300000 provided approximately $1 5 billion in annualized revenue with accretion of 15% to 20 per diluted share in the first full year of ownership.
The impact of the affinity acquisition is also not included in our full year 2021 guidance.
Acquisitions will continue to be a meaningful part of our growth strategy.
While we are a scaled government sponsored managed care company. We are still at a size that our pipeline of smaller consolidation targets can have a meaningful impact on our growth rate.
We see significant earnings growth from these acquired revenues.
We have demonstrated our ability to fix underperforming businesses had the discipline to harvest fixed cost leverage and have every expectation of managing our acquisitions to margins that are reflective of our current portfolio performance.
Our pipeline of M&A opportunities is robust.
We continue to pursue bolt on acquisitions single state plans and provider owned plans.
We will not pursue capability place.
We are a pure play premium risk bearing government sponsored managed care business and we see significant growth opportunities within this space.
Our strong cash flow it makes the acquisition growth possible.
At our current margins, we generate significant excess cash and additional debt capacity.
Between cash on hand near term cash flow and additional debt capacity. We currently have acquisition capacity of over $1 3 billion.
At the multiples we are paid and recent transactions. This gives us the current ability to drive well in excess of $3 billion in annualized revenue growth.
And more importantly at our current level of performance. This acquisition capacity is repeated and produced every single year.
Turning now to our balance sheet.
Our reserve approach remains consistent with prior quarters, and our reserve position remains strong.
Days and claims payable at the end of the quarter represented 48 days of medical cost expense compared to 50 days in the fourth quarter and 49 days in the first quarter of 2020.
Prior year Reserve development in the first quarter of 2021 was modestly favorable.
But any P&L impact was absorbed by the COVID-19 related risk corridors.
Debt at the end of the quarter is one nine times trailing 12 month EBITDA or.
Our leverage ratio is 52% however.
However, on a net debt basis net of parent company cash these ratio has fallen to one six times and 47% respectively.
Taken together these metrics reflect a reasonably conservative leverage position.
In the quarter, we repurchased an aggregate of approximately 577000 shares for $122 million at an average price of approximately $211 per share.
Our full year guidance continues to be based on 58 5 million shares.
At the ended the quarter, our parent company cash balance was $436 million.
A few additional comments related to our earnings guidance.
In raising our full year 2021, adjusted earnings per share guidance to be no less than $13 per share. The following assumptions are relevant.
A higher proportion of medical margin performance will be absorbed by the risk sharing corridor is over the remainder of the year.
The net effect of COVID-19 remains a net cost of approximately $1 50 per share for the full year.
And lastly, we expect 55% to 60% of full year EPS to be produced in the first half of the year.
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.
Press Star then one on your touch time.
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At this time, we will pause momentarily to assemble our roster.
Yes.
Fischbeck Bank of America. Please.
Go ahead.
Alright, thanks, good morning.
I guess I wanted to go to the source of the comment about.
$4 of upside still to the guidance I guess.
Like the guidance raise was due in some part of at least two re determinations in the revenue and earnings from there, which obviously not something we would forecast going into next year as your $4 number now include the Sigma deal in there or are there any kind of other.
There are puts and takes all day.
We're affirming the $1 50 COVID-19 impact.
It Hasnt changed.
Let me summarize what is in our guidance Kevin This is Joe.
The.
When we guided to no less than $13 a share.
We are including.
And additional margin on $600 million of Medicaid revenue due to the extension of the Redetermination pause, we're also including a margin on the additional $400 million of <unk>.
Marketplace revenue due to the increased membership.
We are then hedging our forecast due to the uncertainty related to utilization in the last nine months of the year, So very clearly.
Leasing our guidance to no less than $13 a share.
We have said when we gave our original guidance and continue to say is that the net cost of COVID-19 inside that forecast is $1 50, a share and if you recall the way we measure the COVID-19 impact is any impact of curtailment or suppression of utilization.
Offset by the direct the direct cost of COVID-19 related care.
Absorbed then by the risk sharing corridor, we continue to believe that will cost our earnings of $1 50, a share. So if you look at the impact of COVID-19 as being an overhang of $1 50.
The disruption to Medicare risk, scoring costing about another dollar per share and then extend our acquisitions to their full state of maturity, where say the embedded earnings power of the business currently is $4 higher than our current year guidance.
Yes, I guess, if that's what you said last quarter or two but you've taken up the core number this year.
In part on things that don't seem sustainable so I guess.
I was wondering if there's any other kind of moving pieces in there.
Yes.
And to be clear that $4, that's not a 2022 guidance number outlook that is as we sit here today there are certain overhangs on the earnings.
Projections of the business that are causing our earnings to be lower this year than they otherwise would be when our acquisitions mature and when COVID-19 disappears.
Obviously there'll be a lot more puts and takes into next year.
And when we give our outlook in September at Investor Day, We will give you a better look of what 2022 looks like obviously, the redetermination pause incur.
Increasing revenue this year, where does it peak how far does it fall how quickly does it a trip is going to be a major item in a year over year comparison.
47% revenue premium revenue growth. This year, we're not at all concerned with the optics of 2022 versus 2021 at this point.
Great.
It's really just a last question you mentioned that the S&P membership.
Right now the acuity is hard to forecast do you have any early data points around metal types are.
Demographics on that enrollment that might give you some comfort that that's not going to be.
A significantly higher acuity population.
Well anytime you take on new membership.
By its very nature inherently you don't yet understand the acuity that population I mean, you start with an assumption that if somebody buys insurance they generally need it.
But our bronze silver mix is about what we forecasted for the year. We are we have improved dramatically and attaining risk scores. We've improved that operation from last year you recall it was a a.
<unk> glitch last year, we've improved on it all I can say at this point is we know we've improved in attaining risk scores compared to ourselves. Obviously, we don't have the industry data yet to compare how we're doing to our competitors, which will ultimately decide what risk scores. We've attained but we are doing better compared to ourselves, we'll be we'll be able to give a much clearer.
Were forecast.
On utilization trends generally marketplace Medicaid Medicare when we reported our second quarter, but at this time. It is very prudent just to remain cautious given the effects of the pandemic as it is still in full throes here in the first quarter and subsides into the second and third.
Alright. Thanks.
Thank you.
Your next question comes from Robert J.
Thanks.
Please go ahead.
Hey, this is Kevin on for Bob This morning.
I just wanted to clarify so you made some comments just about hedging as it relates to COVID-19 I was curious if theres anything that you are actually seeing today that would make you more cautious sources is just reflecting some conservatism given the environment just generally uncertain.
No I mean, Robert we tried to be clear on this we're not implying primarily suggesting we're being conservative we're declaring we're being conservative.
We worked through the quarter over quarter effects of the pandemic starting all the way back in the second quarter of last year, the mini and micro inflections up and down that occur are very geographically dispersed very much tied to local infection infection rates very much tied now to the improvement in the acuity of the population due to the vaccination rates and opening up.
Economies and it is.
The variation in modeling utilization from the balance of the variation in their various models is so wide that we believe it's prudent just to be very cautious on how fast utilization will rebound when.
Does it rebound to pre COVID-19 levels does it rebound fully to pre COVID-19 levels.
Where and when and how is very much.
A variant at this point and it just is very prudent to remain cautious on utilization for the balance of the year.
Got it that's helpful. And then just one quick follow up I know you touched on still thinking about the COVID-19 headwind being about 50 I know last quarter. You also talked about the MRA had $1 billion is the <unk>.
The silver I kind of headwind to think about or is your assumptions changed on that at all.
No that's still that's still a good number.
The.
The disruption in risk, scoring cost about 300 basis points and our Medicare.
For the quarter.
And so you can do the math on that that's still pretty much a $1 per year.
Got it helpful. Thank you.
Yeah.
Thank you.
Your next question comes from J, Brian at Credit Suisse. Please go ahead.
Thanks, Hi, everybody.
Maybe just two quick questions one.
Here's some about.
Marketplace environments that maybe there is some shifting competitive landscape.
It's just more narrow network programs that maybe theres also been an uptick in.
Sure Bob.
The members.
Youre growing that better than you expected or are you seeing any of that or how would you put any of that in perspective.
Yes, the competitive landscape hasn't changed all that much yes, some of the new entrants came into some of our markets and started too.
Build market share in those markets.
We're a very niche business, we do not serve affluent suburbanites, we serve the working poor.
We've always said, we built our marketplace networks offer Medicaid networks, we price them off of our Medicaid networks.
And we're seeking out fully in highly subsidized members that are on government assistance. This is clearly an extension of our Medicaid strategy servicing the working poor.
We like the position we're in not only are we improving our performance and growing.
It is now right sized in the portfolio early on as we as we.
This journey three years ago. There was no question that the marketplace earnings were outsized in relation to the portfolio now with marketplace revenues, representing about 10% of the total.
Margins mid single digits. So.
The earnings about 10% of the total as well.
Physician nicely in the portfolio strategically leverages, our Medicaid infrastructure and is now a very good complement.
<unk> and operationally good complement to our Medicare business.
Okay. That's great and then my follow up would be.
On the risk corridor comments I think your original guidance had that being about a $250 million impact. This year. It sounds like maybe it's a little more given how things have trended, but I wondered if you've updated that number Ed.
It sounds like you're thinking at some point these risk quarters, you're going to roll off can you just tell us have you seen any states that are actually began to take action.
Eliminate these are what are you hearing as you talk to the states about any kind of timing around eliminating these risk corridors.
Sure a J when we gave initial guidance, we never actually parse to be components.
Curtailment direct cost of COVID-19 care or the corridors, we said that the components are highly variable, but the fact that the quarters do exist. They do act as a buffer that we were very comfortable in that projection debt COVID-19 in total net would be a drag on earnings of $1 50 per share and we continue to say that we never actually gave.
<unk> a specific corridor, a number and you are really good.
Reported numbers going to flex up and down with curtailment in the direct cost of COVID-19 related care Thats, how they work so to me it's really the net number that's really important.
Obviously at the component parts.
Get materially different maybe we've reported on that but right now.
Saying, it's going to cost us a $1 50, a share is the best metric to to hang on with respect to your second question, Yes. There is.
Positive momentum.
Debt not only suggest but his concluding that the risk sharing corridors were related to the public health emergency. They were fully intended to recapture a portion of the capitation rate that was never paid out in benefits due to the pandemic.
And there is growing momentum with many of our state customers. The actuarial community the public policy pundits et cetera that these will disappear as the COVID-19 pandemic subsides in fact, New York did not introduce a.
The risk sharing corridor.
'twenty two fiscal year, which started on April one.
California publicly declared that it is not introducing a corridor for F. 'twenty two fiscal year, which starts on January one of 2022.
And there is lots of good momentum legislatively or administratively.
And many other states that are suggesting that these were related to the public health emergency and will begin to fall away as the pandemic subsides, obviously as that happens as they become enacted are not enacted when we see draft rates.
Reported as we report our quarters.
Okay, great. Thanks, a lot.
Okay.
Thank you.
Our next question comes from Scott Fidel from Stephens.
Please go ahead.
Hi, Thanks, good morning, everyone.
Wanted to first just ask about the Texas deal with Cigna and it seems like very attractive price that you're paying on a price per revenue basis.
Obviously, you're expecting it to be nicely accretive as well. So just wanted to get some more insight into essentially how you were able to acquire that asset for that type of pricing, maybe some insight into the existing margin profile as it is at underperforming now and you think that you'll be able to approve that improve on that or or entity.
Margin profile already running at a pretty solid level.
Well Scott on the price.
Willing buyer willing seller.
And that's the price, we agreed to and without an allocation of capital 6% of revenue.
Is clearly attractive.
Now.
It's all about the Texas re procurement and how this positions us in the re procurement so bolting on $1 billion of revenue to our Texas Medicaid business, which is 2 billion.
Strong right now increasing it by 50%, adding two new regions, where we're not present overlapping third is very very attractive to our statewide presence.
This is profitable marginally profitable, but again, we bring Texas scale, we bring a lot more infrastructure and we're going to leverage the daylights out of our fixed cost structure in the state of Texas, So we'll be able to improve the margins due to our existing presence.
So attractively price.
We will recover the purchase price of the two first years of cash flow, making it a free option upon re procurement.
Got it.
And second question just wanted to sort of net out I guess the framing on the.
The exchange business and.
Obviously, you had the COVID-19 costs in the first quarter that youre not expecting to recur throughout the year.
You said youre keeping your outlook conservative but at the same time you are keeping your mid single digit margin target in place.
The hedge business. So just interested maybe did the competition within that mid single digit margin view change a bit where you are maybe assuming a bit higher on the MLR and you're getting more G&A leverage off to growth or just trying to sort of take off.
So in thinking about that would be conservative.
The margin targets. Thanks.
Youre actually captured it perfectly.
Our.
<unk> will likely be in the mid to high seventies, where previously it was a mid to low <unk>, but we're getting the G&A leverage our G&A ratio is improving by two to 300 basis points, which.
Clearly puts us in the mid single digit pre tax category now yes, there is.
A range around what pre tax.
Single digit pre tax means but we have every reason to believe that given what we experienced in the first quarter. If the pandemic does subside we we.
Get appropriate risk scores on the new membership.
That will achieve mid single digit margins, even on the increased size of the business anytime you grow a business. It puts pressure on margins, but we're still committed to and forecasting that we'll be at mid single digits pre tax even on the increased revenue.
Okay. Thank you.
Thanks.
Our next question comes from Justin Lake from Wolfe Research.
Please go ahead.
Thanks, Good morning.
Morning first question.
A lot of talk about the federal emergency and the benefits of this year as you go through the year just wanted to get an idea within that $4 of kind of upside you talked about the earnings power how much are you calling out.
Or the assumption that the federal emergency goes away. So if that does that.
Got it off completely for 2022 and all of those members leave is there a number that you could share with us I know, that's not going to happen that way, but just kind of understanding what youre pulling out of that earnings power of the four box.
The first answer to the very specific question you asked is no that was.
A embedded earnings where it wasn't a 2020 to forecast it wasn't a bridge to 2022 it was.
When these three or four factors disappear the earnings power of our business. The embedded earnings power is $4 higher it was not a projection. It was certainly not a forecast of the peak in membership and the attrition rate.
So here's what here's what's in our guidance, we extended the public health emergency and the Redetermination period out four months, we originally said debt for.
For every month it gets extended it would produce about $150 million of revenue to our annual total so that's the $600 million. If it gets extended to the end of the year, it's probably another three or $400 million.
Now where does it peak and how far does it fall and where does it fall is very much unclear.
<unk> maintained that.
All of the membership that we grew since the pandemic started organically at its peak it will be 750000 members 600000 to the end of last year.
650000 to the end of last year. Another 60000 in the first quarter, maybe another 40000 in the second so at its peak, we have added 750000, Medicaid members organically and whether that's through the Redetermination pause struggling economies. It doesn't matter that was the organic growth how fast that it trips and where does it bottom.
Unclear I maintain that a larger proportion of those members will step because the low wage service economy has been ravaged we all see the economy coming back, but if you look at the numbers the low weight service economy, the sandwich shops, the restaurants, the dry cleaner shops aren't coming back real fast and I still think there'll be a.
The amount of that membership that will be on Medicaid for an extended period of time. So no that wasn't a 'twenty two forecast, but your supposition is correct. When we do view of 2022 guidance later this year into next year.
Have to bridge you from.
The peak of Medicaid membership this year to the truck next year and that'll be a year over year comparison items.
So.
We're moving 2022, Joe just just to be clear like in the $4 are you assuming that debt membership goes away or would it be current run rate plus $4 minus whatever happens great.
Federal emergency.
Membership at 750000.
What we're saying is.
No, we're not saying that what we're saying is this year with the membership we have.
We're earning $13 a share.
And inside of that number is a $1 50 overhang due to COVID-19 has nothing to do with the membership its just the direct cost of COVID-19 related care utilization suppression in the corridors. So the only thing thats in the 150 of those three items those three <unk>.
Not included in net COVID-19 impact is any impact from increased membership.
Okay. So we would have to subtract that just to be clear from a $4.
If that was if that was the calculus that you were doing yes.
But again, we would not we were not giving a 2022 forecast we are giving a pro forma view of embedded earnings power of the business as it exists today it was not a forward forecast.
Got it alright, thanks for the color Jeff.
Youre welcome Justin.
Our next question comes from Ricky Goldwasser from Morgan Stanley.
Please go ahead.
Yeah, Hi, good morning, just wanted to go back to your comments around the exchange strength and one of the things that you talked about was the strong product design, we saw it in Ohio you embedded.
Primary care business city blocks.
The RFP.
Just kind of wanted to get some more color on your primary care strategy and how we think embedding it in other states.
Our network strategy.
<unk>.
Is very traditional.
On.
Yes.
We build the networks off of our Medicaid networks.
In many cases, they are slightly wider bearing in mind that wider networks are always very attractive from a membership perspective, but they carry a cost.
But our marketplace network strategy is very traditional when it comes to the hospitals when it comes to specialty services are primary care services.
We are introducing.
Our Ohio RFP win.
A few new twists and turns with.
Vendors partners that are going to help us.
To deliver more community based care.
Wrapping around primary care physicians to make them more effective but I would say on balance our marketplace network strategy is very traditional we did introduce a couple of very innovative programs in our Ohio RFP.
Does the company by the name of a city block, which has a very very.
Innovative approach to delivering care in the communities in the home setting reaching out into neighborhoods to find people that need care.
This is a big problem in Medicaid.
When people come into the hospital will get them the care, we need refining them before the bad stuff happens is really a challenge and I think.
This company City block, which is a great partner is going to do a great job for us and the state of Ohio.
How should we think about this as sort of a pilot and if this is successful it sounds like that you can expand into other states.
I would I would answer the question more generally that.
We are passionate about serving our state customers and I talk to my team talks to the leaders of the Medicaid agencies.
Governor.
People and high administrative positions in government always trying to understand what theyre, most burning problems are and whether it's social determinants of health, whether it's the opioid use.
Epidemic.
Ratio disparities in healthcare.
We are creating and providing innovative solutions to solve those problems not only through our delivery.
Our Medicaid product, but also in our $150 million commitment in what we call. The Molina cares accord to put money back into the communities we serve.
This is really important part of our relationship with the state customer not only innovative programs that help.
Drive down cost in the Medicaid program, but being committed to the communities that we serve.
So yes. It is a very common theme no matter, where we go in our existing states or will be pitching new state.
Thank you.
Thank you.
Our next question comes from Steven Valiquette from Barclays. Please go ahead.
Hi, Thanks, good morning, everybody so.
Just for the public health Emergency you changed your expectation for this to run through the end of <unk> 'twenty one.
Some of your <unk> peers have seen this around three year end seems HHS themselves have given some signals reported in the press that it also good line for year end.
I'm just curious if there's any political two major sudden that suggest to you that maybe it's less likely to run through year end just any additional color on your thought pattern the extension through <unk> versus something beyond that.
Thanks for the question Steve.
Thanks for the question, Steve I know don't read any political insights into that we just chose to extended four months out to the end of September at $150 million per debt to $600 million of additional revenue, but no. We have no. Other insights if it gets pushed out to the end of the year, it's likely at a minimum 300 million.
More in our 2021 premium revenue forecast.
So no no no other insights, except perhaps a measure of conservatism.
Okay, Alright, thats perfect. Thanks.
Okay.
A question and you can make stood by pressing Star then one on this line. Our next question comes from Josh Raskin of Nephron research.
Please go ahead hi, thanks.
Thanks, Good morning.
So I just want to clarify I think you said no new corridor in New York I think that was just for 2022, but I assume you got that 2021 with the retro and then are any states actually contemplating new corridors that are still kind of a little bit behind in the game that are trying to look back and figure that out.
Last part of the question would be why would a state eliminated what would the rationale be for a state to operate into the future.
Theres other issues et cetera, what would be the rationale for saying, Hey, we don't need debt.
Corridor in place.
Yes.
Answer to the first question you asked very specifically was yes fully captured the retro corridor.
From April 22 back, but they did not introduce one for April one I'm.
I am sorry April 'twenty, one back we did not introduce one for the 'twenty one 'twenty two fiscal year. So that is correct.
No.
The white papers have been written on this.
<unk>.
In the midst of the pandemic when you believe that a lot of the <unk> rate is not going to get paid in services you come up with a construct as arbitrary as it is to recapture a portion of that rate.
There are lots of ways to do that.
We believe and many others believe that the risk sharing corridor, even as even being symmetrical are not the appropriate way to do that and use the basic reason why it actually penalizes, an efficient operator, and promote and rewards and inefficient operator.
These things are symmetrical.
If you had a 90% MLR target and you're beating your pay it whether you beat it because of COVID-19 or did it just because you are better you pay it and if someone's operating at 92, they get a check.
So it promotes inefficiency by not allowing efficient operators to hold onto the portion of the capital rate debt there truly driving through performance knowing.
Whatever cost actually emerged and up in rates eventually if we keep driving down the cost of the program by being efficient that ends up in the rate base on a lag basis.
And that's why we should go back to and most people believe that the traditional rate setting process setting a rate prospectively based on the observed trends in the business is the right way to go.
Clearly during the pandemic they needed to do something quick vague I'd actuarial advice that supported this but the momentum for these things is waning.
And the discussions that we're having with various of our state customers.
Is suggesting that these things are going to disappear as the pandemic subsides.
That makes a ton of sense. So do you have alternatives I mean, I understand the rate setting processes attrition rates in our process is your preferred way, but clearly in a pandemic, it's very difficult to parse out to your point what was COVID-19 related versus what was company efficiencies or inefficiencies is there have you.
<unk> data to these states do you feel comfortable that they actually know what the COVID-19 impact was or is that kind of why they are using the blunt object of risk corridors. Good question.
It has been provided and of course, they have their own actually relieve some of the largest firms in the country household names that are recognizable to you.
So they have their own ex where resources, but yes, that's exactly the point and.
Trends come back to normal without these mini and micro inflections that happen across the country.
We believe and I believe the actuarial committee believes that will just revert back to the traditional rate setting prospect process on a prospectively set basis.
Eventually cost end up in rates when costs are reflecting high may lag and managed care suffers and one trends are trending low and rates lag.
When you just work the ebbs and flows in the many cycles of the business that served this business well for decades and decades, and we believe that most Medicaid directors and most actuarial firms get that and our other mind that as the pandemic subsides and disappears these contracts will disappear as well.
Thank you.
Thank you.
Our next question comes from net bullish from BMO capital markets. Please go ahead.
Maybe I could just pick up on Josh is question Darrin.
Or the timing of the risk corridor is rolling off is that actually going to be.
Yes.
Essentially a net.
<unk>.
Net negative to you at least relative to <unk>.
E.
You might have experienced with those risk corridor remains in place, but what I'd really.
Pointing to is the potential for above trend.
Utilization in maybe the back half of this year or going into 2022, where the risk corridors would have served.
As as something that was actually helpful to you and so I guess, what I'm wondering.
I'm wondering are they being pulled away at exactly the wrong time.
Good question.
Here's the way, we think about them first of all.
<unk>.
Sort of getting surprised by them, we're having an inordinate and factor in unanticipated effects. They can no longer be retroactive. So the ones that are in place are in place.
In order to be enacted they have to be prospective in nature and they will coincide with the rate cycles.
Most of our rates are one one January one rates, we have a couple of this fall, Michigan, Texas.
We have from July ones, Mississippi, and South Carolina, So they will follow the rate cycle.
So the quarters that we're now recording are the ones that have been enacted you can't record a quarter that hasnt been enacted now.
Any one of these states that comes up for renewal inside the year and ex one.
It could be an additional items for the year, but our feeling is that most of the states that come up this year, it's either late in the year or they are smaller and it shouldnt have a big impact the real wildcard and forecasting these is where youre under and over performance happens there is very very clearly that you're in.
The money on our corridor a dollar of over performance goes against the quarter very simple, but where is the dollar over underperform its going to occur if it occurs in California that has no quarter, where we get to keep it as it happens in Michigan, where we have a corridor or we don't.
And so when we said that the.
The existence of these corridors adds an element of variability.
It's projecting where youre going to over and underperform that adds the element of variability, but right now we know where they are they cannot be enacted retrospectively.
It could be introduced for the 2022 fiscal year in a couple of states. We don't think that'll happen, but it's possible. So we don't think theres a huge element from variability with respect to the introduction of the quarters, but there is an element of forecast variability to where you're under or over performance actually occurs.
Yes that makes sense, thank you and net.
I'll follow up on a slightly different point.
With the Medicare risk adjusters and the impact there it.
It seems like it.
Having a <unk>.
Larger basis point impact on your MCR in Medicare if I compare that to some of your.
Some of the other companies did of course have much larger books in Medicare is that is that some somewhat.
Law of large numbers or law of small numbers debt that would account for the higher volatility.
Yes.
We're very concentrated.
This happens at our MMP book.
Michigan, which had a very very high infection rate and we have a very robust Medicare business.
Got hit specifically, so yes, it's the law of large numbers, we're not nationwide. We're in a handful of places with material membership I cited one but that's what it is it's the it's the randomness of where the infection is and where our membership is.
Okay got it thank you.
If I may I may operator before the next question is asked.
Because no questions were really asked along these lines I did want to make a comment that doesn't respond to a question, but last night. There was some very positive news that broke and I wanted to take this opportunity.
Appliance format to mention it.
Last night.
<unk> State Court issued an order.
Which supported.
Molina is positioned as a Medicaid participant.
Dave There was as you know there were some legal challenges to our award itself denied their legal challenges to our purchase of passport denied there are legal challenges to the novation of the passport contract to our business on September 1st denied.
What was upheld was the six planned model that the court stipulated.
Many many months ago, so as it stands today.
The ruling is that the Medicaid program continues on as is we are operating in Kentucky under the passport brand. We have 326000 members at the end of the quarter performing really really well and we're in good standing with the state and the court has ruled as such now having said that the one stipulate.
<unk> Court did say it was there was enough.
Oh.
I would say irregularity, but at least some.
Aspects of the proposal process that perhaps warrants to their liking and they asked for a re procurement, but didn't stipulate a date or time to debt. So our point of view is whenever that happens we will be bidding on a contract but will be bidding as a strong incumbent we've already won the contract.
Twice, where when it a third time and we're great standing in the states. So positive news out of the Kentucky State Court last night and just in case Nobody asked the question that got to that issue I wanted to use this format to give you our position on that thank you.
Thank you that does conclude our conference for today. Thank you all for joining US you may now disconnect your lines.
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