Q3 2021 Molina Healthcare Inc Earnings Call
Good day and welcome to the Molina healthcare third quarter 2021 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
Now I'd like to turn the conference over to Jo Christian Kruszewski. Please go ahead.
Good morning, and welcome to Molina Healthcare's third quarter, 2021 earnings call.
Joining me today are in Bolinas, President and CEO, Jos the Bruski, Andy our CFO Mark time.
A press release announcing our third 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 this presentation. We remind you that the remarks made are as of today Thursday October 28th 2021 and will not be updated subsequent to the initial earnings call.
In this call we will refer to certain non-GAAP measures.
Conciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2021 press release.
During our call, we will be making certain forward looking statements, including but not limited to.
Statements regarding the COVID-19 pandemic.
The current environment.
Acquisitions, what's the 'twenty, one guidance 2022 premium revenue outlook.
Our embedded earnings power and our long term outlook and expected EPS growth.
Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that could 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 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.
Open the call to take your questions.
I will now turn the call over to our Chief Executive Officer, Jos Dobrowski Joe.
Thank you Joe and good morning.
We will provide you with updates on several topics.
Our financial results for the third quarter of 2021.
Our 2021 guidance in the context of our third quarter results.
Our initial outlook for 2022 premium revenue embedded earnings power.
And lastly, our growth initiatives and reaffirmation of our outlook for the future.
Let me start with the third quarter highlights.
Last night, we reported adjusted earnings per diluted share for the third quarter of $2 83.
With adjusted net income of $164 million in premium.
Revenue of $6 8 million.
The 88, 9% consolidated medical care ratio demonstrate solid performance, while managing through pandemic related challenges.
The net effect of Covid increased our consolidated medical care ratio by 110 basis points and decreased net income per diluted share by approximately one dollar.
We manage to a seven 3% adjusted G&A ratio, reflecting continued discipline in cost management, while making the appropriate investments in our business to fuel growth.
We produced an after tax margin of two 3% meeting our third quarter expectations.
Our year to date performance metrics highlighted by an 88% MCR.
Seven 1% adjusted G&A ratio.
A three 1% adjusted after tax margin.
We're all squarely in line with our nine month expectations. Despite the significant COVID-19 related impacts, we experienced totaling $2 per share year to date.
And.
We accomplished all of this as year to date, we generated approximately 50% year over year premium revenue growth.
First fully integrated businesses, representing approximately $5 billion in annual revenue.
And continued to execute on our growth initiatives.
In summary, we are very pleased with our third quarter and year to date performance, we executed well and delivered solid operating earnings and continued to drive our growth strategy.
Let me provide some additional commentary related to our third quarter performance.
As we stated in the second quarter year over year comparisons are less meaningful than they would be in a typical year due to pandemic related effects.
Therefore, we will again focus our comments this morning on sequential comparisons.
In the third quarter, we produced premium revenue of $6 8 billion.
A three 3% increase over the second quarter of 2021, reflecting increased membership across our entire portfolio.
We ended the quarter with approximately $4 8 million members an increase of 142000 members over the second quarter of 2021.
We have now grown to serve approximately 800000 additional members since the end of 2020, a 20% increase.
Our Medicaid enrollment at the end of the quarter was approximately 4 million members an increase of 53000 over the second quarter of 2021.
This increase was due primarily to the continuing suspension of Medicaid redetermination.
Which has resulted in an increase of over 700000 Medicaid members.
Since the beginning of the pandemic.
Our Medicare membership was 138000 at the end of the quarter.
An increase of 8000 members driven primarily by organic growth as we follow our Medicaid footprint with an enhanced distribution strategy.
Our marketplace membership with 719000 at the end of the quarter.
Representing growth of 81.
Over the second quarter of 2021.
Due to continued lower than expected attrition rates.
And membership additions during the special enrollment period, which ended in mid August.
Turning now to our medical margin performance in the third quarter by line of business.
Medicaid our flagship business, representing 77% of premium continues to drive premium revenue growth and stable earnings as we execute on the underlying fundamentals.
For the quarter, our Medicaid business achieved a medical care ratio of 89, 6%.
<unk> with our expectations as the net effect of Covid was notable but manageable.
Year to date, our well diversified portfolio of state contracts continues to perform well across all dimensions.
Medical cost trend is stable and well controlled while we continued to deliver high quality care, particularly to high acuity populations.
The underlying rate environment is stable.
Risk sharing corridors continued to capture some of our outperformance, but many have been and continue to be eliminated.
We are winning new state contracts and we are consistently finding attractive acquisition opportunities.
Moving on to Medicare.
Our Medicare results exceeded our expectations.
For the quarter, our medical care ratio was 82, 8%.
Lower net effect of COVID-19, including utilization curtailment and risk corridor true ups combined with improved risk adjustment revenue served to drive a 490 basis point sequential improvement in the MCR.
Our year to date, Medicare MCR of 86, 8%.
Other reflects the underlying performance of this business and.
And demonstrates our ability to clinically and financially manage the high acuity lives in both our D SNP and MMP programs.
Our marketplace medical care ratio in the quarter was 91, 3%.
This reflects increased costs related to the net effect of Covid the.
The impact of the special enrollment period, and the natural seasonality of the business.
Recall that many of the new members, we attracted when regions disproportionately affected by Covid, particularly in Texas.
Moreover, we experienced higher non COVID-19 utilization by members enroll to the special enrollment period due to the relax eligibility guidelines.
Our year to date marketplace MCR was 84, 8% and includes over 500 basis points of pressure from the net effect of Covid.
As well as 280 basis points of impact from the special enrollment period.
We remain confident that we can achieve mid single digit pre tax margins in 2022.
We will accomplish this through actions already taken and changes to the environment that have already occurred.
Specifically, we priced it to a higher medical cost trend.
We redesigned our product offerings, focusing on the silver tier in response to the increased premium subsidies.
We note the conclusion of the 2021 special enrollment period and the more restrictive 2022 special enrollment eligibility rules.
In summary, our third quarter and year to date enterprise results continued to demonstrate our ability to produce excellent margins, while growing top line revenue and successfully managing through the ongoing clinical and financial impacts of the pandemic.
Turning to our 2021 guidance beginning with premium revenue.
At our recent Investor Conference, we increased our 2021 premium revenue guidance to be more than 26 billion.
With our third quarter results and the closing of affinity. We're now projecting 2021 premium revenue of no less than $26 5 billion.
Which represents a 45% increase over the full year 2020.
We are maintaining our full year 2021 earnings guidance of no less than $13 25 per share.
This represents a <unk> increase compared to the midpoint of our initial 2021 guidance <unk>.
Despite absorbing an additional $1 50 per share from the net effect of Covid.
Revealing an improvement of $2 per share in underlying performance.
Excluding the impact of the net effect of Covid, our 2021 guidance results in a three 4% after tax margin.
This performance is consistent with our initial 2021 guidance and squarely in line with our long term target margin expectations.
We do however remain cautious in projecting our fourth quarter earnings due to a variety of exogenous factors primarily related to the net effects of COVID-19 across all of our businesses.
Turning now to our 2022 revenue outlook.
At our September Investor Conference, we provided the components of our initial 2022 premium revenue outlook.
That delivers premium revenue growth of more than $3 billion over 2021 guidance.
Specifically $2 $3 billion from already announced acquisitions, including affinity, which we just recently closed.
And the Cigna, Texas, Medicaid business, which we expect to close in January of 2022.
<unk> growth of $1 billion.
Representing approximately 4% growth across our current footprint.
Approximately $400 million for our Nevada, Medicaid launch, partially offset by a projected $500 million impact from Redetermination, which.
Which we expect to occur throughout 2022.
Since then we announced the <unk> acquisition.
Any incremental revenue from age well in 2022 would likely be offset by pharmacy, carve outs, and California and Ohio.
A reminder, this 2022 outlook is prior to marketplace membership changes and any additional strategic initiatives and acquisitions.
Bear in mind that our marketplace approach in 2022 emphasizes margin over membership growth.
At this early stage, we expect 2022 marketplace membership to be flat to down when compared to 2021.
No matter, where the marketplace membership and revenue eventually lands, we expect the business to generate mid single digit pre tax margins in 2022.
Turning now to our longer term growth outlook.
At our September Investor Conference, we laid out our strategy for sustaining profitable growth a strategy that delivers 13% to 15% annual premium revenue growth off of our 2020 to baseline.
We expect approximately two thirds of that growth to be organic driven by a combination of underlying industry growth in a set of specific strategic initiatives that we described in detail.
The remaining one third will be derived from inorganic growth.
<unk> of which is supported by our current track record of M&A execution.
Our profitable growth outlook as a sustaining our 4% to 5% pre tax margins harvesting the potential for operating leverage and accretively deploying excess capital to deliver a very attractive EPS growth rate of 15% to 18% on average over time.
The components of this growth engine are well established and working.
Our year to date performance is testimony to the strength of that growth engine.
Specifically.
The Nevada Medicaid contract award speaks to our ability to win new state contracts to drive organic growth and we continue to participate in additional rfps, we find attractive.
And our M&A team continues to deliver.
This acquisition complements our expanding New York footprint, serving high acuity populations in the state.
<unk> serves approximately 13000 members with full year 2020 premium revenue of approximately $700 million.
We expect age well to deliver accretion of <unk> 15 to 20 per diluted share in the first full year of ownership.
The M&A target pipeline is vibrant and gives us confidence and continued execution.
To recap our strategy, we remain committed to staying close to the core.
We are a pure play government managed care business.
We believe the government managed care business has very attractive growth characteristics demographically and politically.
We aspire to provide high quality care to our members while driving to the lowest cost of delivery to produce attractive margins in this high growth industry.
We believe we have the right strategy and the right team to execute our sustaining profitable growth agenda.
We remain extremely confident that we can achieve our long term targets of 13% to 15% premium revenue growth and 15% to 18% earnings per share growth.
As I conclude my remarks, I want to express my gratitude to our management team and our nearly 13000 Molina colleagues.
Their skill dedication and steadfast service continue to form 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 time for some additional color on the financials.
Mark.
Thanks, Joe.
Everyone.
This morning, I will discuss some additional details of our third quarter performance and then turn to the balance sheet and some thoughts on our 2021 guidance.
Beginning with our third quarter results.
The net effect of Covid negatively impacted third quarter results by $77 million or approximately a 110 basis points of our reported 88, 9% MCR.
During the quarter, we experienced higher COVID-19 related inpatient costs that begin to taper off late in September.
While the total company net effect of Covid at about one dollar per share was very similar to the prior quarter the components and impacts vary greatly within our segments.
Total company MCR is up 50 basis points on several segments specific items.
In Medicaid the net effect of Covid was a cost of $49 million or approximately 80 basis points of our reported 89, 6% MCR.
Sequentially, the 60 basis point increase in our Medicaid MCR over second quarter was driven largely by the higher net effect of COVID-19 in the quarter.
Our year to date MCR is 88, 8%.
We continue to expect the full year Medicaid MCR to be in the high eighties.
In Medicare the net effect of Covid had a favorable impact of approximately $16 million or 180 basis points of our reported 82, 8% MCR.
Sequentially to 490 basis point improvement in our Medicare MCR was driven by two items.
Approximately 390 basis point improvement in net effect of Covid, which includes curtailment and corridor related true ups.
And approximately 100 basis points related to improved risk adjustment revenue.
Our year to date Medicare MCR is 86, 8%, we continue to expect our full year Medicare MCR in the high eighties.
And marketplace. The net effect of Covid was a cost of approximately $44 million or 570 basis points of our 91, 3% MCR in the quarter.
Sequentially, our marketplace MCR increased approximately 640 basis points, reflecting several items.
Approximately 90 basis points of higher net effect of Covid.
Roughly 250 basis points from normal third quarter seasonality associated with members, reaching their policy deductible limits.
And.
Approximately 300 basis points from higher non COVID-19 utilization by members enrolled through the special enrollment period and higher expected risk adjustment expense.
Our year to date marketplace MCR of 84, 8% includes over 500 basis points of the net effect of Covid as well as 280 basis points from the impact of the special enrollment period.
Due to the higher than expected impact, we now expect marketplace pre tax margin for the full year 2021 to moderate to roughly breakeven.
We expect our 2022 marketplace pre tax margin will be squarely in line with our mid single digit pre tax margin target.
Turning now to our balance sheet.
Our capital Foundation remains strong.
We harvested $127 million of subsidiary dividends in the quarter, which brought our parent company cash balance to $703 million at the end of the quarter.
We have ample capacity to fund the announced acquisitions and additional strategic initiatives.
At our current margins, we generate significant excess cash and additional debt capacity.
At our Investor Conference in September we size that recurring parent cash capacity at $1 $4 billion annually.
Importantly, as we grow that cash capacity also growth.
Turning to reserves.
Our reserve approach remains consistent with prior quarters, and we remain confident in our reserve position.
Days and claims payable at the end of the quarter represented 49 days of medical cost expense, an increase of one day sequentially.
Prior period reserve development in the third quarter was modestly favorable but any P&L impact was mostly absorbed by the COVID-19 related risk corridor.
Debt at the end of the quarter is two three times trailing 12 months EBITDA.
Our debt to cap ratio was 48%.
However, on a net debt basis net of parent company cash this ratio would fall to one six times and 40% respectively.
These metrics reflect our conservative leverage position.
A few additional comments related to our guidance, we increased our full year 2021 premium revenue guidance to no less than $26 5 billion.
Reflecting the closing of affinity and growth in all segments.
Earnings per share guidance remains at no less than $13 25 per share which reflects the following.
The net effect of Covid, which we recently increased to approximately $3 per share for the full year.
Offset by our underlying outperformance.
And continued caution in forecasting utilization trends in the remaining months of the year due to the Covid pandemic.
As previously conveyed we continue to believe the incremental embedded earnings power of the company is in excess of $6 per share.
This is composed of several items.
The net effect of Covid of approximately $3 per share that should dissipate as the pandemic subsides.
Medicare risk or disruption of approximately $1 per share.
And as we attain our target margins on the closed deals, including Magellan complete care passport and affinity and the pending acquisition of Cigna, Texas, Medicaid business and as well, we expect to achieve additional adjusted earnings per share well in excess of $2.
As a reminder, this embedded earnings power does not represent 2022 guidance, but rather an accounting of the dynamic impacts that are temporarily suppressing our earnings profile.
There are many other items that will affect our actual earnings guidance for 2022, including several possible scenarios for the impact of marketplace membership.
As well as the ongoing impact of the pandemic and ongoing strategic initiatives.
In short our 2021 earnings jumping off point into 2022 remains very strong.
This concludes our prepared remarks, operator, we are now ready to take questions.
Thank you.
We'll now begin the question and answer session to.
To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
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 from BMO capital markets. Please go ahead.
Yes, I was just hoping we could revisit the topic of the re determinations and how you see that playing out next year.
You talked at the beginning of the call about 700000 members.
That you estimate has been added as a result of these determinations.
Jewelry.
How many of those you think will.
<unk> roll off.
Perhaps potentially more and over what timeframe.
Matt we are forecasting that.
When the public health emergency ends and all the Redetermination activity.
Is fulfilled that we will end up with half the members we gained during the pandemic.
And we say that because the low wage service economy has been ravaged.
The stimulus money is still out there.
And.
Time has shown that over past recessions when Medicaid rolls have swelled they stay increase when the crisis abates.
So we're pretty confident that membership in Medicaid post pandemic will exceed.
Medicaid membership pre pandemic.
Now over what period is a matter of judgment.
As you know the PHA is now planned to extend into mid January.
Which means the first members with notice periods and membership.
Sure.
Notification periods. The first members are eligible to roll off the books on April one.
So we have forecasted that we will be down $500 million in revenue in 2022, an additional $800 million and revenue in 2023 of the.
$2 9 billion of revenue gained.
Yeah.
The result in $1 6 billion of permanent revenue game $500 million in 'twenty, two and an additional $800 million and 20 329 billion moving to one six.
Fantastic. Thank you.
The next question comes from Josh Raskin from Nephron Research. Please go ahead.
Thanks, Hey, good morning.
My question is just on that embedded earnings power that you guys speak to and trying to figure out the cadence of realizing sort of those embedded earnings.
Covid feels a little bit like a step function potentially next year. So I'm just curious if theres big sort of step function impacts or if this is more a series of many many incremental benefits and may be just rough ballparks of sort of how we think about 'twenty two 'twenty three 'twenty four.
Sure Josh.
A few of them are a function of time.
Our acquisitions mature and then the wildcard obviously is how much comfort will persist into 2022, so I'll turn it to Mark to give you an accounting of how we see the $6 emerging over time, Mark Hey, Josh It's Marc just a reminder, on the $6 three of Covid.
<unk> of Medicare risk scores and as Joe mentioned $2 of the M&A.
Let me add a little color to each one of them on the Medicare risk scores, we should see that dollar next year.
Our team can get out there has gotten out there in a meaningful way to produce that dollar next year. So we feel good about that one.
On the M&A Theres $2, we think about that $2 in two categories.
The deals that are already in our P&L, probably have another dollar of upside to get to the target margins.
Magellan, Kentucky stuff like that.
The other dollar is deals that we've announced or in the case of affinity just closed, but they're not in our P&L yet.
About half of that dollar we should get in the first year next year and the other half thereafter.
So thats some expectation on the M&A. So then youre back to the net effect of Covid and that's the wildcard.
A bunch of drivers there sitting here at the end of October I don't know that were ready to give a view on how COVID-19 progresses through 2022.
But there is a couple of things you can think about there.
Of the $3 is in our marketplace business and we've had some headwinds this year.
We clearly priced for those headwinds next year. So we should see some reversal on that within the $3 <unk>.
The rest is going to be a function of what does the pandemic actually do do we have another varian what is the non COVID-19 utilization and of course, the core doors everything we know about the corridor. So far is quite.
It's quite positive.
Several states for states that have terminated the corridor for next year.
Many that haven't given a formal view yet, but it looks very encouraging.
So a number of drivers around that $3 will we see some of it I am pretty sure, but I think it's just a little early to hazard a guess on how much.
Okay.
Perfectly fair and just one quick follow up on the risk adjusters.
I know you said you are feeling that I think in your prepared remarks, Mark you actually mentioned that you are seeing some benefit already from risk adjuster improvement and I was curious how does that happen entry year in.
In Medicare in particular.
A couple of things so.
CMS actually extended the window for risk adjustment submission this year, which gave everyone the ability to get more work done and more adjustment in so thats certainly a good guy the other thing.
Illinois, Illinois expanded their MMP coverage to the full state. They were just a few regions before so we went in and picked up a number of new members, who are coming in really positive on a risk adjustment basis. So two nice drivers for us there.
Thanks.
The next question comes from Stephen Baxter from Wells Fargo. Please go ahead.
Hi, Thanks, I wanted to ask about the exchanges and your comments on <unk>.
Refocusing on the silver plan that does look towards like you might be pulling back somewhat on the Brahms offering in some states. If that's right we'd love to understand the thinking there and why you think pulling back versus repricing is the right approach and just as you think about the comments around maybe flat to down enrollment for next year, how much of your exchange book today is coming from products that you offer next year. Thanks.
Sure.
Our repositioning of the product portfolio is really a function of the enhanced subsidies.
We can move and our brokers can move members from bronze silver at zero premium and high subsidies with no additional cost to the member and they get a plan with a higher actuarial value. So it's better for the member.
Our perspective, our silver is more flexible and easier to manage.
As you to develop risk scores and theres more pricing flexibility in silver so we're going to emphasize more silver next year than we did this year our bronze silver mix is about 50.
<unk> $55 45, this year and will be more skewed to silver next year.
So that's that's sort of our mix currently.
Clearly the special enrollment period was another headwind this year and with the change in the rules bat now people eligible people that will be eligible or only below 150% of federal poverty means that.
The membership flows some special enrollment in the industry should be a lot lower in our case, we estimate about half of what they were this year. We added 200000 members and special enrollment this year and with the cutoff at $1, 50% of 150% of FPL, that's likely to be at least cut in half so were were.
Forecasting that our membership will be flat to down off the 719000, this year, which means revenue will probably be flat to down but no matter where revenue lands, it's going to be earnings accretive in 2022, we are very confident in hitting our mid single digit pre tax margin target next year.
Even on a membership base, that's likely to be lower than this year.
Got it thanks, and just as a follow up to that last point I guess.
I assume that when you made the comments about mid single digits that doesn't require the impact of Covid to go to zero doesn't require you to necessarily get back that entire 500 basis points above just to kind of hear about your thought process on how much of that you could continue to tolerate and still achieve the margins. Thank you.
On that clearly, we're carrying 500 of Covid this year I.
I am not going to get into our specific pricing assumptions, but we clearly anticipate more of that headwind next year.
As well as just a little bit of what Joe mentioned about on the S&P.
But we're pricing in a manner to hit that mid single digit pre tax.
The next question comes from Michael Hall from Morgan Stanley Morgan Stanley. Please go ahead.
Hey, Thank you guys.
So just a quick question on the 2022 embedded earning profit clarification. It sounds like you mentioned greater than $6, EPS, which it feels like a little bit of an increase from prior peak.
Which might be coming from pending acquisition margins now well in excess of $2 is that true.
Are you guys seeing better margin performance on acquisition.
I think I'll turn it over to Mark.
Yes.
We add the acquisitions theyre going to be accretive we are buying them very efficiently. Many of these properties are underperforming our integration teams are hitting if not exceeding our accretion targets.
So as we add these acquisitions.
And to be accretive we wouldn't do them.
If they arent.
Yes, the <unk> acquisition now that affinity in the fold has served to sort of increase our forward look on embedded earnings.
We still say its $6 plus.
And again, how much of that emerges next year and into 2023.
Wait until we give specific guidance on 2022 in February.
Got it thank you and just one more question if I can.
On exchanges it sounds like back in your Investor Day, you picked up 50000 lives in July and August.
It feels like it looks like you gained another 30000 on top could.
Could you talk about what Youre kind of seeing with special on long period now having ended.
And then just like typical exchange attrition.
With the premium tax credits and maybe some membership recapture from Redetermination do you anticipate at some point returning back to.
Normal attrition level.
Well the special enrollment period ended in August.
We believe that we will see attrition between now and the end of the year and will likely be lower than it was pre pandemic.
We have 719000 members now we'll lose some and probably end of year, maybe slightly below 700000.
And remember normal attrition for us is about 2% a month as Joe mentioned this should be a little bit less than that going through the rest of the year, but I think thats a fair outlook.
The next question comes from Justin Lake from Wolfe Research. Please go ahead.
Thanks, a couple of questions first can you can you talk a little bit about the difference in COVID-19 spread for.
The exchanges Medicaid obviously, you've given a lot on the exchanges, but we think these membership populations is somewhat fungible I guess outside of the duals.
But.
I'm curious why you think that the.
The exchange population is such that it tends to be COVID-19 costs versus the Medicaid population really not being there and then my second question is just on California, Medicaid with the.
With a potential we're going to see an RFP here soon I was hoping you could give us a little bit of an update I know all your business there in terms of.
Yes, I know I think you have some business Thats correct and then some that's part of it and.
And how you would think this RFP is going to shake out in terms of what the state is looking for.
Sure Justin on the marketplace and the Covid impacts there are really two factors one is geography.
Our marketplace business just happens to be.
In places that were hit hard, particularly by the Delta variant floor.
Florida, Texas, California, Washington.
So it follows the geography and follows our marketplace footprint.
Second we believe is our marketplace population skews younger.
On vaccinated people.
<unk> are being infected.
But the cost of care on a episode basis is actually a bit lower.
But the infection rate is high and the younger population that tends to be on vaccinated. So those are the two factors that we cite that.
That seems to disproportionately affect our marketplace business.
On the California RFP.
We believe.
Very very optimistic about our ability not only to hold on the business, we have but to grow it.
As you know, we're very strong in la we're very strong in Sacramento and San Diego, we have a nice business in the inland Empire.
We have a great <unk>.
Reputation with the state we perform well.
We do all the hard work, we need to do with respect to community involvement.
And charitable giving.
We're in really good shape for the California, RFP, which supposedly at least the latest announcements will come in early 2022.
For our contract date and $1 24.
So we're we're in good shape in California, we're very optimistic.
About our prospects not only to maintain what we have but to grow.
The next question comes from Steven Valiquette from Barclays. Please go ahead.
Great. Thanks, Hey, good morning, everybody.
So with the list of action items, you are taking to get the marketplace MLR and the pre tax margins back on track for 'twenty two versus 21.
Among those pricing probably is the biggest lever but for the other ones you mentioned such as just redesigning the plan offerings and the more restrictive eligibility rules.
Is there any color just on the range of how much those might move the needle on margins like it does move margins in the one hundreds of basis points or is it mainly really about the pricing to move your margins by let's call. It 500 basis points or so in 'twenty two versus 21 in the marketplace business.
Yes.
Little bit of both I mean, we priced to a medical cost trend in marketplace that was somewhat reflective of the increase.
Baseline that we experienced this year impacted by Covid.
Second.
So we priced two and increased medical cost trend.
The special enrollment members were <unk>.
Experiencing a loss ratio in the mid nineties.
If that membership some of that membership will renew.
Some of it will go away.
And then of course next year, the special enrollment period or will be targeted at folks with 150% of federal poverty level incomes are down so we believe that the <unk>.
Special enrollment period membership will be half or less than half of what it was this year. So all of those factors combined put us in really good shape in producing our mid single digit pre tax margin target for next year, but as I said likely on membership that is flat to down over 2021, and the only thing I'd add there Steven.
With a big focus on margin.
Rather than membership we will have a much higher component in our book of renewals and the way risk adjustment works is we get much better scores on those renewals once we've lived with the member for a year or two.
So we derive better risk adjustment revenue and certainly.
More confidence in the outlook of that revenue.
Okay. That's helpful. Thanks.
The next question comes from a J Rice from credit Suisse. Please go ahead.
Hi, everybody.
Two quick questions one.
Sort of talked around it on the marketplace.
But a lot of people came on board. This year, you said and others have said.
During the extended SCP and it sounds like there may have been some adverse selection. There do you think these people will re up next year are you assuming.
The aggregate enrollment on the exchanges is actually down because some of these people won't renew proactively and then my other question was I know you said you were up 300 basis points sequentially and non COVID-19 utilization in marketplace can you comment on where you are in the non COVID-19 utilization.
Relative to 2019 or pre pandemic or baseline whatever you want to do in Medicaid Medicare and I guess, even that basis in marketplace. If you don't mind.
Sure I'll try to parse through the various questions on.
On the first one we did assume in our pricing.
That some of the SVP membership would renew and therefore increased our the cost trend that we included in pricing to accommodate that.
Now how many actually do renew and how many just joined because of an episodic health care condition and will leave.
We'll have to wait and see but we did price as though some of those renewal remember some of those FEP members would renew.
And we think we've captured that in the medical cost trend we've included in our pricing.
The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.
Alright, great. Thanks.
Just wanted to go back to the $3.
Covid impact.
Thank you.
I've heard a lot of companies initially size the COVID-19 impact number and then slowly walked back.
How we should expect it to come back or when we should expect that to come back are almost if we should expect it to come back and I just wanted to hear you.
Great. Thank you hey, guys it sounds like the.
Medicare risk assessment number is relatively clear, but just want to make sure. There's no issues about reinvesting some of that or something like that so that the net number might be lower.
And that if we should expect you guys to continue to kind of.
So that number for us as we head into next year.
Give us an update on where we are versus that $3 number or is that just get hard to do and you.
Youre not going to be breaking that out for us.
I'll answer the first part of that Kevin.
And then I'll turn it to Mark it's really difficult because even though our COVID-19 results quarter to quarter costing US 77 million Bucks in a $1 per share.
Like if it's stable the stories are quite different.
In the second quarter.
The Cobra direct cost of care were less than $100 million and it's twice that in the third quarter and what ends up happening.
Is when the Covid infection rates are really really high and it is really intense you get this counter balancing impact of.
Utilization curtailment people fear of contagion of going in for services.
Hospitals are teaming with COVID-19 patients and can't accept discretionary in elective procedures and the like so the third quarter actually was one of our highest quarters, if not the highest quarter for the COVID-19 the direct cost of COVID-19 related care, but significantly offset with utilization curtailment.
And then the corridors the brisk trailing quarters, just kind of ripple through on a very stable basis.
It is going to follow the infection rate, which makes it very hard to forecast as we sit here today, we hope that Delta variant is over we hope there are no additional variance, but we just don't know that yet and so as we get closer to February when we announce our fourth quarter results will probably have a better handle we will have a better handle on.
On what we think Covid will do in 2022, and we'll announce it then but the quarter to quarter results seems favorable on a net basis, but the components are quite volatile and it just follows the infection rate.
And just to build on that Kevin than what you have within what we call. The net effect of Covid is the curtailment in the direct cost of Covid that Joe talked about.
As a company those two have worked in tandem.
So far but youll have to take a view on that next year.
How does COVID-19 evolved and do we continue to see curtailment is the offset to that.
Well I'll need to take a view on that going into the new year and then lastly on corridor that is a component of our total net effect of Covid as well as I mentioned earlier, we're optimistic that many states have already announced they won't have corridors in the new year, but how much of a continued drag what we have in some of the other states.
To be seen but we are optimistic on that one.
So that was $3 of the embedded earnings around the net effect of Covid.
A dollar you mentioned on Medicare risk adjustment.
As I mentioned, we continue to be very very positive on the development of that dollar ring.
Remember the pieces that we gave our guidance there embedded earnings, which along with other headwinds or tailwind can emerge Medicare is looking pretty good we'll see that dollar emerge, but don't forget we will have things like sequestration next year and a few other factors that could add additional headwinds a tailwind, but we feel good.
That dollar.
The next question comes from Scott Fidel from Stephens. Please go ahead.
Hi, Thanks, good morning.
Interested if you can give us some of your initial observations on how the 2022 Medicare AEP is progressing so far and just interested in particular with a bunch of those new non D. SNP products that you rolled out for 2022.
How those seem to be recognizing in the market.
We think we're in good shape for growth next year, we're not giving a growth expectation on Medicare at this stage.
But you're absolutely right.
We launched some traditional Medicare advantage products in some of our and our D. SNP footprint to capture folks who had incomes that didn't allow them to be eligible for decent footwear low income.
Using the same network the same facilities.
And access to the same type of brokers, who operate in those various areas. So we're really optimistic about our growth prospects as we launched our <unk> products to low income individuals and our expanded decent footprint.
And additional penetration in our existing footprint, we still do not have the market share that we think we can ultimately attain.
In our D. SNP footprint. So we're really bullish on the prospects during AEP this year.
Bearing in mind that we do get to enroll a certain people throughout the year as well.
Got it and then just as.
As a follow up just interested if we can go back to the marketplace and just how youre thinking about the overall market environment for 2022 now that we have all the landscape data out et cetera, I mean, we could certainly see that your pricing.
As firm as firm certainly relative to the market as you've been talking about looking to you.
To regain margin clearly from the market overall lot more issuers right in the market benchmark premiums are lower again next year. So just interested in how youre thinking about the competitive environment.
The level of rationality in it.
For that marketplace next year.
Yeah.
Sure Scott our strategy is somewhat different than many of our competitors strategies, where we're targeting the working poor we leverage our Medicaid network, we leverage our Medicaid network pricing in our target market is fully are highly subsidized members.
Not targeting the.
Mass affluent.
That's number one.
Number two.
We did price this year to make sure that we hit our target margins of mid single digit pre tax.
The way we look at this business is the revenue is going to float up and down.
With a fixed target margin at mid single digits.
We will price for mid single digit margins and we'll let the revenue float up and down the marketplaces of residual market, it flexes up and down with Medicaid eligibility.
It's 15 million members nationally strong.
Great shape and the markets that we choose to play in.
And our target market is somewhat different than the target markets for many of these new competitors.
So.
Wherever revenue and membership plans for next year, it will be earnings accretive in 2022.
The next question comes from David Windley from Jefferies. Please go ahead hi.
Thanks. Good morning, Thanks for taking my question, Joe I wanted to just kind of marry a couple of four percents together your in your Investor Day, you talked about.
And your long term growth expectations for Medicaid kind of a 4%.
Growth on the like for like base Presuming I don't think you've talked in detail, but presuming some of thats enrollment some of thats a little bit of rate.
When we look at your assumptions around retention of the Redetermination.
Youre kind of assuming.
The $3 75.
On your base at the beginning of the pandemic also works out to be about 4% per year growth. If the pandemic work to have happened I guess.
I'm wondering if.
The elevated retention of these pandemic lives. The Redetermination lives is not a little bit of a pull forward on the future or or a double dip and just wondering if you could elaborate on your thoughts around.
The ability to continue to grow the base, 4%, even if you retain this higher level of re determined lives.
Hey, it's Marc I'll take that one so you are right on Medicaid, we talked about the base growing at 4%.
Which is as you mentioned, probably half and half between rate and.
And membership growth.
That's the market continuing to grow now what we stacked on top of that was the headwinds of Redetermination.
Joe talked through earlier, how that was a $5 billion in 'twenty, two and another 800 in 'twenty three.
To your question gets back to does that dampen the 2% membership growth I think is where you're going.
We don't think it does because at the end of the day.
The pool of Medicaid eligible population continues to grow. So yes, you have redetermination, which is addressing people over the last two years, which may be have lost eligibility.
But if the overall pool is growing and we believe it is we showed a chart at Investor day that shows every time the country goes through a crisis of one kind or another these Medicaid rolls increased but they don't go back to where they were they are sticky at maybe half the growth quite frequently so we think that overall.
Paul is growing so we will have a little bit of a headwind of people from the past, losing eligibility, but the pool of new folks coming in and newly eligible continues to grow so we feel pretty confident in that.
Outlook.
David I would say.
Say that our weather Redetermination is a headwind or tailwind depends on where you are measuring it from.
We like to think of it as a value creator because we measure it from pre pandemic. The Medicaid roles will be higher post pandemic than they were pre even though year over year, there might be some choppiness got.
Got it thanks, and just one more question on non Covid utilization are you seeing signs of changing acuity as non COVID-19 utilization comes back and it's not a topic that's gotten discussed very much.
No.
And many of our markets and in many of our products it appears to be business as normal as usual.
Particularly as the Delta variance started too.
Dissipate.
In late September into October.
The Delta variant was was.
Really intense.
In August utilization was very high and we saw some curtailment, there, but again, it flexes up and down almost.
Almost routinely flexes up and down with the intensity of Covid infection rate.
And many of many of our states and many of our.
Products.
Curtailment is no longer, but it flexes up and down with the Covid infection rate.
Got it thank you.
The next question comes from Gary Taylor from Cowen. Please go ahead.
Hi, Good morning, just a couple of quick questions as you were talking about.
2022, you laid out some nice potential.
Tailwind so I'm wondering if there's anything notable on the headwind side to talk about now I know you suggested cove. Its obviously an unknown you talked about a couple pharmacy carve outs that it wouldnt imagine are material to earnings otherwise you would have mentioned it but any any notable potential.
And we should be thinking about as were updating models.
No I think.
Obviously, yes.
Yes, I would say we.
We've made some judgments around redetermination.
Certainly how much COVID-19 persists into next year that you've identified.
And then Theres just the puts and takes of managed care.
You're capturing.
Are you managing medical costs year trend, but I can't think of an event driven.
A headwind that is kind of event driven or situationally driven.
Managing managed care, but we have a proven ability to always manage our medical costs.
I am so I think your point is a correct one it whatever happens will likely expect our quarter to quarter results next year, whether it's back into the front end loaded I don't know yet, but the only corridor, that's actually has been announced.
Persist into 2022, because they are state fiscal year straddles the calendar year is Mississippi.
Thanks, Joe.
And our last question comes from Mike New shelf from Evercore ISI. Please go ahead.
Thanks <unk>.
So you talked about the adverse selection and the special enrollment period. This year are you worried at all that you might just see some similar ever selection maybe to a lesser degree from the multi special award winning periods for low incomes.
And I guess in the same vein.
For the Medicaid lifestyle determination that you mentioned would you expect differences in the acuity of margin profile of the half you expect to keep versus the half that goes.
No I'm I'm, a Medicaid answered the Medicaid question first on the Medicaid side, we're pretty comfortable.
Wherever membership goes.
How much.
Reduced membership there is because of redetermination.
The margins that we're experiencing on the population should be thought of as our portfolio averages.
Is actually very little evidence that the acuity of the population shifted all that much and if it did.
Some of the states enacted retroactive acuity adjustments that are already embedded in earnings and and then of course, there's the quarters, where any favorable experiences giving back through the corridor and not through your rates. So.
We're pretty comfortable saying when you think about membership increases and decreases and Medicaid due to redetermination.
We think of it in terms of portfolio.
Portfolio averages.
On the marketplace side.
We really increased the trend we embedded in the pricing of our product, which I think is demonstrated through some of the findings you've seen where we really tried to capture not only the higher baseline due to COVID-19, but the higher acuity and what we are experiencing very early in the special enrollment process.
And that coupled with the fact that we should have fewer members coming in to our membership roles in special enrollment next year again gives us great confidence that that mid single digit pretax margins attainable.
There are no more questions.
I'm sorry, there are a number of questions in the queue. This concludes our question and answer session.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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