Q3 2022 Molina Healthcare Inc Earnings Call
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Good day and welcome to the Molina Healthcare third quarter 2022 earnings Conference call.
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I'd like to turn the conference over to Joe Kruszewski Senior Vice President of Investor Relations. Please go ahead Sir.
Good morning, and welcome to Molina Healthcare's third quarter 2022 earnings call.
Joining me today are Molina, as president and CEO and 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 27 2022.
I have not been updated subsequent to the initial earnings call.
On this call we will refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures for 2022 can be found in our third quarter 2022 press release.
We are unable to provide a reconciliation of our adjusted earnings with GAAP measures for the years beyond 2022.
Unreasonable efforts due to the difficulty of predicting the timing and amount of various items.
A reasonable range.
During our call, we will be making certain forward looking statements, including but not limited to statements regarding our 2022 guidance. Our long term growth strategy. Our recent RFP Award RFP submission and projected revenue and earnings growth associated with these awards our outlook with regard to both.
Fiscal year, 2023, and 2024 hour acquisition and M&A activity.
The COVID-19, pandemic and termination and our current and future earnings power and margins.
Listeners are cautioned that all of our statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We.
We advise listeners to review the risk factors discussed in our Form 10-K, and our reports filed with the SEC as well as the 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 the call to take your questions.
I will now turn the call over to our Chief Executive Officer Jonathan.
Joe.
Joe and good morning.
Today, we will provide updates on several topics.
Our financial results for the third quarter 2022.
Our full year 2022 guidance in the context of our third quarter results.
Our growth initiatives and our strategy for sustainable profitable growth.
Our outlook on 2023 premium revenue and earnings growth.
And lastly, given our recent new business success and early outlook on premium revenue for 2024.
Let me start with the third quarter highlights.
Last night, we reported third quarter adjusted earnings per diluted share of $4.36.
Representing 54% growth year over year.
Our earnings growth reflects strong premium revenue growth sustained target margins and the realization of a meaningful portion of our 2021 embedded earnings.
Our third quarter 88, 4% consolidated medical care ratio.
Six 9% adjusted G&A ratio.
Four 3% pre tax margin demonstrates strong operating performance, even as we navigate prolonged pandemic related challenges.
Our year to date performance highlighted by an 87, 9% MCR a six 9% adjusted G&A ratio.
And a four 5% pre tax margin is squarely in line with our long term targets.
This reported pre tax margin increases when normalized for the effects of revenue pass through payments and the marketplace prior year risk adjustment true up previously reported.
Medicaid our flagship business, representing approximately 80% of enterprise revenue continues to produce very strong and predictable operating results and cash flows.
The rate environment is stable Colby.
Covid costs have tempered and we are executing on the sound fundamentals of medical cost management.
The year to date reported MCR of 88, 2% is at the lower end of our long term target range, reflecting the underlying strength of our diversified portfolio and our focused execution.
Our high acuity Medicare niche, serving low income members, representing 12% of enterprise revenue continues to grow organically and demonstrates strong operating performance.
The year to date reported MCR of 87, 4%, even with sustained cost pressure from Covid related care is squarely in line with our long term target range.
Marketplace at 7% of enterprise revenue continues to track towards a return to profitability in 2022 on a pure period basis.
We have succeeded in keeping the business small keeping its silver and keeping it stable.
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 deliver on our growth strategy.
Turning now to our 2022 guidance.
We now project, our 2022 premium revenue to be approximately $35 billion.
Our $500 million above.
Above our previous guidance.
From the time of our pivot to growth in 2019.
This updated 2022 revenue guidance represents a three year, 23% compound annual growth rate.
Excluding the estimated impact of the Redetermination pause our three year compound annual growth rate is 19%.
In addition, we have increased our full year 2022 adjusted earnings per share guidance to at least $17 75.
This represents a 75 cent per share increase compared to our initial 2022 guidance.
Despite absorbing an additional 50 per share from the net effect of Covid and 44 per share for the prior year marketplace risk adjustment true up.
As we prepare to head into 2023, we have a very solid earnings baseline off of which to grow.
Turning now to an update on our long term strategy for sustained profitable growth.
We are executing well and the many dimensions of our growth strategy.
On the RFP front, we continued to build on our track record of success in both retaining our existing Medicaid contracts and winning new ones.
The quarter's highlights where many.
In Mississippi Molina was selected to continue serving Medicaid members across the entire state.
In California, we've not only retained our current footprint, but were also selected to serve the important county of Los Angeles, which will add significant membership and premium revenue.
In Iowa, we were awarded a new statewide contract entering as one of three managed care organizations, serving a total managed Medicaid population currently at 800000.
And we were awarded a new statewide contract in Nebraska as one of three managed care organizations, serving a total managed Medicaid population currently at 360.
Once it commences in January 2020 for the California contract Award is projected to provide membership growth measured on current membership roles in excess of $1 2 million members.
As well as the associated significant premium revenue growth.
This projection is based on the states own published County by County, Medicare membership count.
We were one of two plans selected and each of Sacramento County, and San Diego County, which are existing Molina counties, but where we now expect additional membership in 2024.
We were also selected to be the sole commercial health plan in Los Angeles County, which is a two plan model County.
Finally, we also won awards in both San Bernardino and Riverside counties known as the inland Empire, where we expect our current membership levels to remain the same.
With awards in each of these five California counties, we were successful in being selected in every county on which we bid.
We are very confident in our ability to operationally prepare for this expansion.
We have a deep knowledge of the Medicare program, and we have an existing long term presence in Los Angeles.
We have already commenced the 15 month build out for this significant expansion.
In combination all of these contracts will expand our Medicaid portfolio to 20 states.
These new contracts are expected to add approximately $5 8 billion.
And annual premium revenue and at least $3 of earnings per share.
Once we achieve full run rate margins.
Looking forward. Our RFP response has been submitted protect to start plus it is pending evaluation and subsequent award announcements.
We believe we are well positioned to retain this contract due to our track record of operational clinical excellence.
Standing and reputation cutting edge innovation and the demonstrated ability to write winning proposals.
With multiple new state RFP opportunities over the coming years, we remain confident in our ability to win additional new state contracts.
We have submitted our proposal for the Lts S contract in the state of Indiana and have many other new state business development initiatives well underway.
Including the potential for returning to new Mexico, and expanding to our former nearly statewide footprint in Florida.
In summary, our track record of success validates our long term revenue growth strategy and its value creation potential.
Before I turn to some further particulars regarding our outlook for both 2023 and 2024 I want to briefly put a point on the magnitude of the company's achievements in the third quarter.
And what those achievements mean for the future of our company.
Stated at a high level, the new business wins will have a profound impact on our company over the next few years.
As a matter of year by year sequencing.
2023, we will be busy scaling our proven operating infrastructure to service this new revenue incurring front and implementation costs.
In 2024, we expect to achieve full run rate contract revenue with earnings beginning to emerge from this significant new revenue and finally in 2025, we expect to achieve our full run rate target margins.
Against the background of this sequencing and high level view I will now provide some color regarding our 2023 outlook.
2023 will be an important year as we prepare for our new revenue growth.
We will be hiring and training additional staff to expand our already expert teams and extending our systems to ensure ample capacity.
We expect that the onetime nonrecurring expense in 2023 associated with this robust growth will be 75 per share.
Given our strong current performance we are raising our 2023 core earnings outlook. The earnings that would have been produced by our company before these recent wins.
At least $20 per share to at least $20.25 per share.
This core earnings outlook, a meaningful measure of underlying performance represents 14% growth on today's updated 2022 guidance of at least $17 75 per share.
When we include the onetime nonrecurring 75 per share implementation costs, our reported earnings per share outlook for 2023 is now at least $19 50.
Turning now to our premium revenue outlook for 2024.
While it is far too early to provide specific financial guidance for 2024, we do have line of sight to many of the premium revenue growth drivers that we expect to materialize in 2024.
First we expect to continue to grow organically and our current geographic footprint.
Second we expect our recent RFP wins in California, Iowa, and Nebraska, as well as our age well and my choice, Wisconsin acquisitions to be operating at or near full run rate revenue.
And third we expect that these growth drivers will be partially offset by the impact of redetermination and two potential pharmacy carve outs.
Combined these revenue building blocks create an attractive growth trajectory and path to at least 37 billion in premium revenue in 2024.
With over a year ago, additional M&A announcements and new Medicaid procurement wins would add to this already attracted 2024 premium revenue picture.
A few words on our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023.
As previously described the $5 $8 billion in incremental revenue in 2024 from our recent RFP wins adds at least $3 per share in incremental earnings.
These earnings are anticipated to begin to emerge in 2024, when all of our new RFP wins will then be operational.
With this $3 per share addition, our total 2023 embedded earnings power is now nearly $6 per share.
This is strong latent capacity to achieve our near and long term earnings objectives.
In summary, we are very pleased with our business performance and the exciting developments over the past few months.
Combined this has created a solid and growing financial profile.
At least $20 25 per share of core earnings in 2023.
$37 billion of premium revenue in 2024.
2023 embedded earnings power of nearly $6 per share and all of this is before any impact from the continued execution of our growth initiatives.
Of course, we could not accomplish all of this without our excellent management team and dedicated associates now approaching 15000 strong who in concert with our hallmark proprietary operating model and management process have produced these results.
To the entire team I once again extend my deepest thanks and heartfelt appreciation.
With that I will turn the call over to Mark for some additional insight on the financials.
Mark.
Thank you Joe and good morning, everyone.
Today, I will discuss some additional details of our third quarter performance, our strong balance sheet, our updated 2022 guidance and some additional color on the revenue and EPS building blocks driving our outlooks for 2023 and 2024.
Beginning with our third quarter results.
In Medicaid are reported MCR was 88, 5%.
This strong performance squarely in line with our long term target range was driven by strong medical cost management.
The net effect of Covid in the quarter with a modest 10 basis points within our reported MCR.
Year to date, our reported MCR was $88 two and at the lower end of our long term target range.
In Medicare our reported MCR was 88, 7%.
Figure, which is above our long term target range, driven by higher COVID-19 and non COVID-19 utilization <unk>.
During the quarter the net effect of Covid increased our reported MCR by 350 basis points.
Despite continuing COVID-19 related utilization.
Our year to date reported MCR of 87, 4% was squarely in line with our long term target rich.
Yeah.
In marketplace, our reported third quarter MCR was 86, 3%.
Similar to previous quarters, the MCR was impacted by higher utilization and approximately 90 basis points of net effect of Covid.
We remain on track to return our marketplace business to profitability on a pure period basis in 2022.
Though it varied by business in aggregate the net effect of Covid was consistent with our expectations and decreased net income by <unk> 59 per share in the quarter.
Our full year outlook for the net effect of Covid remains unchanged at $2 50 per share.
Additional drivers of our strong third quarter results include a six 9% adjusted G&A ratio, a 40 basis point improvement over the prior year third quarter and.
And higher net investment income from recent increases in interest rates.
Turning now to our balance sheet.
Our reserve approach remains consistent with prior quarters, and we continue to be confident in this reserve position.
Days and claims payable at the end of the quarter was 50 consistent with prior quarters.
Our capital Foundation remains strong.
Debt at the end of the quarter was one seven times trailing 12 months EBITDA and our debt to cap ratio was 44, 2%.
On a net debt basis net of parent company cash these ratios fall to one five times and 41% respectively.
Our leverage remains low all bond maturities are long dated on average eight years and our weighted average cost of debt fixed at just 4%.
We harvested $120 million of subsidiary dividends in the quarter.
Parent company cash at the end of the quarter was $298 million.
With substantial incremental debt capacity cash on hand, and strong free cash flow, we have ample cash and capital to drive our organic and inorganic growth strategies.
Now a few comments on our updated 2022 guidance.
We increased our full year premium revenue guidance by 500 million to approximately 35 billion driven.
Driven by three components.
Approximately 200 million for the third quarter outperformance.
Approximately 200 million for the addition of <unk>, which closed October one.
And approximately 100 million to reflect the impact of the latest extension of the public health emergency through January .
And the related delay in resuming Redetermination, which we now expect to begin in 2023.
We also raised our full year 2022, adjusted earnings guidance by <unk> 15 per share to at least $17 75.
The increase is driven by several items.
Third quarter outperformance of about <unk> 15 per share.
Margin on the additional revenue from the extension of the public health emergency, which we estimate at about <unk> <unk> per share.
An additional net investment income of approximately <unk> 10 per share in the fourth quarter driven by the recent rise in interest rates.
Partially offsetting these items is approximately <unk> 15 per share of expected higher G&A, driven by fourth quarter marketing and open enrollment activities as well as the recent new contract wins.
Turning now to our earnings outlook for 2023.
Based on the expected timing of the known revenue building blocks. Our initial outlook for 2023 premium revenue is approximately $31 5 billion.
We are increasing our 2023 core EPS outlook the earnings before the onetime nonrecurring implementation costs to at least $20 25 sets were.
Our 14% growth compared to our updated 2022 guidance.
Our earnings growth outlook reflects several drivers.
First we expect a portion of our 2022 embedded earnings to emerge in 2023.
Second the attractive growth in our current footprint and the associated margin, partially offset by potential pharmacy carve outs will yield incremental earnings in 2023.
Third.
Third a combination of new operating catalysts should enhance our 2023 earnings growth, including our recently renegotiated PVM contract are expected real estate reduction.
And finally, we expect higher interest rates to translate into correspondingly higher net investment income.
Recognizing the onetime nonrecurring implementation cost of <unk> 75 per share on our new contract wins in California, Iowa, and Nebraska yields our updated outlook of at least $19 50 per share for 2023.
Our evolving outlook for 2023 will be informed by our performance in the fourth quarter of 2022 as well as the enrollment season for Medicare and marketplace and the ongoing execution of our strategic initiatives.
As Joe mentioned, our 2023 embedded earnings power at nearly $6 per share.
<unk> made up of the following components.
We start with our previously reported 2022 embedded earnings of $3 per share.
We add at least $3 per share of earnings from our recent new contract wins.
We decreased it by a dollar that is now in our 2023 outlook and finally, we add the implementation costs for new contracts of <unk> 75 per share to recognize the onetime nature of it platforms program enhancements and several months of staff ramp up.
Now some additional color on the premium revenue outlook for 2024.
The following building blocks provide a path from our expected 2022 premium revenue of approximately $35 billion to $31 5 billion in 2023.
And to ultimately at least $37 billion of projected revenue for 2024.
First we expect approximately $5 8 billion of premium revenue from our three recently announced Medicaid contract wins.
This projection includes a conservative estimate of the impact from re determinations and is composed of $3 6 billion in California.
One 6 billion in Iowa, and $600 million in Nebraska.
Based on contract inception dates we expect a portion of our premium revenue to emerge in 2023, while we expect the premium revenue from California in Nebraska to be realized in 2024.
Second we expect organic growth in our current footprint of $1 7 billion consistent with underlying growth in rates and membership.
Third the incremental premium revenue for the full year impact of AGL and the my choice, Wisconsin acquisitions is expected to be approximately $1 4 billion, most of which will emerge in 2023.
Partially offsetting these growth drivers are two regulatory impacts.
Approximately $1 6 billion for the impact of Redetermination, which we expect to emerge evenly between 2023 and 2024 based on the latest outlook for the end of the Phe in January .
And approximately $700 million of pharmacy carve outs, most of which will emerge in 2023.
Of course continued execution of our strategic initiatives creates upside to this revenue outlook.
This concludes our prepared remarks, operator, we're now ready to take questions.
Thank you we will now begin the question and answer session to ask a question in My Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pickup your handset before pressing the keys to withdraw your question. Please press Star then two today's first question comes from Josh Raskin of Nephron Research. Please go ahead.
Thanks, Good morning.
Question want to stay on L. A county on the win there and maybe you could speak to the preparations for.
But that contract implementation I'm, specifically interested in network development and provider contracting and then infrastructure build out and I am curious if there is a potential deal with the incumbent to help accelerate that readiness or do you think you guys can do it on your own.
Josh This is Joe.
First I would answer to your second question first.
All that is to be determined as you know in past contract wins, both here and in the industry that is certainly a possibility, but I'll leave that to further further discussion on the preparation we've been in California for 40 years, we know Sacramento and San Diego very well, our membership is likely to double there.
We will scale up.
And so we don't see much of a big and heavy lift for Sacramento and San Diego Bear in mind, we are in La County, where a subcontractor to the current commercial plans, we know that providers, we know the landscape.
We're really confident that with 15 months to prepare we have the three things that you need to be ready on day. One we have the time, we have the money and we have the knowhow and we will be fully ready on $101 24 to handle the significant new membership in L. A county.
Perfect and then just at 75 cents. Then is that is that a charge that you guys expect to be taken or is that just additional cost borne through the P&L that youre calling out.
Well I think managerial Lee it's a charge I mean, it's it's cost it has to be incurred in advance of the revenue showing up but we have to take it through earnings.
Third of it is scaling the other two thirds of staff.
Take the variable cost of $1 6 billion of revenue.
And look at.
Having two to four months of that cost.
Paid for trained and ready to go in advance of the contract and you can see how easily it's going to cost $60 million pre tax and <unk> 75 a share.
Perfect. Thanks.
Thank you and our next question today comes from Justin Lake Wolfe Research. Please go ahead.
Thanks. Good morning, first off maybe you can walk us through the components of the $1 7 billion of organic growth.
Maybe just price and membership growth in longer three business lines.
Sure Justin I'll turn it over to Mark and he'll.
You'll be able to peel that back for sure. When we think about the $1 seven of organic growth that was a two year number.
Our build.
So thats looking over two years, just in we typically think of 3% to 4% organic growth on an annual basis.
Generally that's about half membership.
And about half right.
In a year, that's more or less we are in a lower rate environment, right now, which certainly matches trend, but you can do a little bit of math on our current book and work with those organic growth numbers you know the other thing that you'd want to stack on top of this as you think about that organic growth rate is you have to adjust for.
Some of the pass throughs that we have on our book right now we've got about $500 million of pass through revenue. This year. So of course, that's going to make a year over year comparison less than it might otherwise look because that's not a recurring item right.
Then the only other thing to think about an organic growth is as Joe mentioned, many times on marketplace. Our marketplace strategy is not to grow ambitiously, So I would not put a.
Meaningful growth rates or any growth rate necessarily on marketplace year over year, but I think if you add those things together you will get very close to the $1 seven number I talked about.
Great and then just lastly.
The.
The folks who didn't win in California are trying to get a stay from a judge on the Army Award and then go to court or is there anything that you could share with us on timing on when we might hear from that and how that might play out.
No. Jeff This is Joe we won't comment specifically on the protest process itself, but.
Yes.
With all three awards, we believe that the Rfps were thoughtfully designed and well executed by the various states and that our proposals were.
Actively judged on their merits.
We are very familiar with the protest processes in these various states and are actively engaged in well resource at <unk>.
And right now we're heads down preparing for day, one implementation, we're pretty confident that many of these protest processes will not be protracted and come to a culmination and an answer in due course very soon.
Great. Thanks.
Thank you and our next question today comes from Nathan Rich Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for the questions.
If I could ask a follow up on the new contract wins.
Could you talk about how the margins on that contract wrap ramp up in 2024 and beyond it looks like you're targeting about a 4% margin on that new business.
Can you talk about maybe what we should expect in 2024 versus the years beyond that.
First Nathan this is Joe your math is correct the $3 sort of implies a four.
<unk> four percentage point pre tax margin III.
<unk> points after tax.
And I will first thing I'll say before kicking into Mark is we generally do not impute fixed cost leverage on either our acquisitions or new contract wins. So that's a fully loaded margin fully burdened with all the fixed cost to run the business.
Obviously with $6 billion of incremental revenue growing our Medicaid book of business by 25% in a short span of time, we expect to get a significant amount of fixed cost leverage off these installations, but we kind of hold that back.
<unk> reported when we realize it and it'll either drop to the bottom line or potentially offset perhaps other pressures in the MLR Mark anything more on the on the margins on the new wins no. That's exactly right. Joe the 3% is fully loaded as we've said numerous times with fixed cost leverage we would ideally see.
A few bits go to the G&A ratio, but this is conservative and assumes maybe that you'd give a little bit back in rate, but nevertheless, a conservative view on outlook now part of your question might have been 24 ramp into 'twenty five run rate.
The 3% is a conservative view of run rate on the 24, how does that ramp up you know its interesting some markets if folks are new to Medicaid. They can come in hot in the 90% for the first couple of quarters other markets where people have been in Medicaid.
And are quite used to the product and a normal utilization they'll come in more at the normal run rate so to be conservative I would say that the MLR there'll be a little bit hotter than we aspired to remember 88 to 89 is our longer term Medicaid outlook would they come in a little hotter than that in the first year, maybe but I wouldn't think too much and so.
Conservatively, we say it takes a year to get through our run rate there.
Great and if I could just ask a follow up.
You called out some continued pressure from COVID-19 in the quarter I think particularly on your Medicare business.
Have your expectations changed at all for Covid, and maybe flu as you think about the fourth quarter and then.
Into 'twenty three both on.
The Covid front as well as non covered utilization any changes there to your assumptions.
No I think our outlook for Covid remains the same it's going to cost us $2 50, a share and generally what's been happening is the direct cost of COVID-19 related care, which have been pretty modest quarter to quarter have been nearly.
Entirely offset by what we call COVID-19 related utilization suppression.
And therefore, the net corporate costs has been the amount of outperformance in our Medicaid contracts that goes into the risk sharing corridor.
So our outlook on that Hasnt really changed yes, we are expecting a normal flu season for 2002.
'twenty two into 'twenty three.
$40 million pluses, a normal flu season for us it went to nearly zero in the first flu season. After pandemic. It's now increased to about half the normal size at about $20 million and we expect it to go back to $40 million plus into next year fully baked into our forecast.
Thank you.
Thank you and our next question today comes from Stephen Baxter of Wells Fargo. Please go ahead.
Hey, Thanks for all the color and congrats on the Medicaid wins I think you guys mentioned in the prepared remarks, you know potentially this being a little bit of a lower rate environment of the Medicaid side I was hoping you could give us a sense of how youre thinking about the outlook for rates and sort of your guidance for the next couple of years.
And then separately I was hoping you could give us an update on the total amount of Medicaid premium return you expect to see in 2022, both for Covid era provisions and also for any preexisting provisions that were in the states. Thank you.
Steven I think.
Summary comment on the rate environment, it's continued to be stable and rational the traditional process of establishing a credible medical cost baseline trend off that baseline adjusting for changes in the acuity of the population and carbon and carve outs benefits has been tried and true and support.
This business well for decades, and that's the traditional process that is used as we indicated many months ago.
The risk sharing corridor that were introduced during the pandemic to capture softer utilization have generally subsided there are three remaining.
And we'll play it by ear in terms of whether those persist into the future or not so the rate environment is very stable very traditional process of establishing a cost baseline of trend off that baseline and I would say the overall rate environment is stable.
I had trouble hearing your second question, but I'll kick it to Mark I think he is yeah, just on the Medicaid revenue build.
I'll work off 2024, just for the full picture.
We talked about $5 8 billion from the three new states.
The acquisitions will add one four that's H well.
Which is about a half a billion dollars on top of this year.
And my choice, which will be the full 900 coming in for $900 million.
Other components of Medicaid revenue build redetermination across the two years I see revenue headwinds of one six and we mentioned in the prepared remarks that would be split between the two years pretty evenly. We expect then finally, we have we have mentioned to pharmacy.
Carve outs that will affect our Medicaid revenue for about $700 million across the two years.
Put your best assumption on the organic growth for Medicaid and I think that would give you the components of the Medicaid building blocks.
Thank you and our next question today comes from AJ Rice from Credit Suisse. Please go ahead.
Hi, everybody I know youre, saying that.
Particularly for next year on the marketplace Youre not assuming a lot of growth there any comment on where you think margins will go up and what your objective is there a longer term as well any updated thoughts.
Sure a J our outlook for the margins on the marketplace business.
Mid single digits on a pre tax basis.
We expect to be profitable on a pure period basis or eliminating the effects of the prior year risk adjustment true up which we experienced in the second quarter, we breakeven in this business at around 84%. So if we can operate.
From between 80, and 83% we think we can push the business to mid single digit pre tax margins and I mentioned two things.
The SVP membership that we are.
Tracking this year is far lower than the S&P membership we attracted last year, we're attracting 25 30000, a month last year and it's barely 25% to 30000, a quarter that S&P membership as we said last year that usually comes in with higher acuity. So thats in check and secondly, as a reminder, we put 13% to <unk>.
Key points of rate into the market.
We've looked at our competitive positioning and looking at where our product now stands against the competitors and we're pretty confident that we've maintained our competitive position and many of our larger markets and have no reason to expect that our membership will meaningfully increase or decrease as a result of our competitive positioning.
Okay, and then I know in your prepared remarks you.
Talked a little bit about regasification impact being spread over 'twenty, three and 'twenty four any updated thoughts about looking at it today. Obviously, we did have three month delay on the Pag and I don't think you guys have talked.
Any updated thoughts about how much will be 23 versus <unk> 24, and where you ultimately land and then I don't think you've talked much about recapture.
With your marketplace offering do you think youll recapture.
Any of the lost lives.
And the second point, our Redetermination forecast on how much revenue are we will likely moves as a result of people becoming ineligible does not include a recapture on marketplace. We're holding that as upside it's very hard to forecast who is going to be eligible for highly subsidized marketplace.
We believe many of them will we have operational protocols in place to warm transfer in eligible Medicaid members over to our marketplace business. So it remains upside to our forecast I'll turn it to Mark to give you how the how.
Although revenue emerges over two year period, yes, just as a reminder, the most recent extension was October mid October to mid January we expect that the earliest states would start to re determined then a month later in February and expect them to do it in a straight line basis more or less.
Across the year.
CMS has required states to be done in one year, whether they can do that or not remains to be seen but let's assume that they get they get there across 12 months.
We're currently carrying roughly 750000 members.
Since the start of the pandemic our assumption a J is that at the end of the year, we will have retained 50% of them and lost only 50% to redetermination.
I model it <unk> across the book of about 375 on these but when I do the math. The total revenue loss would be $1 6 billion, but remember that's spread across two years, while the membership comes down this year. The revenue is half of this year and half next year. If you look at the member month.
So call. It eight this year eight next year factor that into your revenue models and of course the.
Member months will support all of that.
Okay, great. Thanks, so much.
Thank you and our next question today comes from Kevin Fischbeck Bank of America. Please go ahead.
Great. Thanks, I just wanted to make sure I understood. This.
$6 in earnings power.
Fully so I guess.
First you guys said I believe that you started with the $3 that you have this year at $3 from the new business that makes sense, but then you said you took.
The dollar out of the existing $3 and added back to 75. So I just wonder what that dollar that you are taking out is from is it from the COVID-19 bucket for the deal bucket, how should we think about that and then I guess, we're applying this too.
The $6 to the 19 fifties on to make sure we have the right base to think about what the earnings power.
Kevin I'll turn it to Mark the 75 charge actually creates a little bit of complex accounting complexity here, but its either five.
<unk> per share or $5 75, depending on whether your pro forming the $19 50 or the 2025.
So.
We're just under $6 per share at $5 75 have been better earnings.
<unk>.
Compared to the $19 50 of reporting earnings for next year, Marc Yes. So let me walk you through that.
Our last call, we talked about $3 of embedded earnings.
We're at six.
Currently.
Excuse me, we're going to put a dollar into our guidance for our outlook for next year, It's a combination of the acquisitions.
And the net effect of Covid I'm expecting about 50 cents to come off the net effect of Covid that we're currently carrying I am expecting to realize about a dollar of the acquisitions that are in our embedded earnings and then finally on Redetermination.
<unk> will go the other way.
My embedded earnings I'm carrying a dollar negative dollar on our Redetermination is 50% of that is going to go into our outlook for next year. So you add that up that's the dollar.
And then finally, where.
We're recognizing the 75 <unk> of onetime costs.
So that gets you to $5 75.
Six.
A dollar for what we're putting into our outlook increase it for 75 for the implementation cost that gets you to $5 75.
And to be very clear that $5 75.
Is off the 19, 50% of adjusted earnings outlook.
The other thing.
The other thing I would say about embedded earnings just to put a point on it I just want to make sure we don't get.
Two caught in what are called false precision here are embedded earnings concept given the historic nature of the pandemic and then the incredible growth we've had due to acquisitions and new contract wins is to give our investor base, a view of the future earnings power of the business, whether it's 5% or $5 75 or so.
Six it's.
It is sitting on top of $19 50, or 2020, $20 25 of earnings per share of 2023 and should give you a pretty good leading indicator of where the business is headed now I would further say on embedded earnings better earnings.
<unk> is really only theoretical unless you have a history and a track record of harvesting it and when you look at our earnings per share a track record of going from $13 per share to <unk> 17 in out of 'twenty.
This is not theory. This is actual embedded earnings due to timing, which is yet to be harvested and we have every full intention of point that through Joe I'd, just put a point on that a year ago, we had more than $6 of embedded earnings and four of that went into current year performance. So it's quickly converting into real earnings.
That's really helpful and I guess as far as the Redetermination dynamic we're still talking about a revenue dynamic you guys still feel pretty comfortable that there shouldnt be.
Any any margin implications from Redetermination and I know you shared some of that in the past is there anything that you.
We would point out too is kind of giving you confidence that there won't be a margin implication from a risk pool dynamic.
We continued we continue to look at the data.
And we see we do see increased duration across our products.
Not as much as you might think because the dis enrollment rate is still pretty high.
Non utilizing members are off but only up modestly.
And longer duration members do have more favorable MLR.
It really doesn't affect the abd population because they are chronic that's a third of the revenue and so if we do have any pressure will likely to see it in the expansion population, but we expect it to be minimum Mark no that's exactly right.
I studied this across the second and third quarters quite in depth.
On members that are with us for longer than one year of course they are up.
But as Joe mentioned that not up as much as you might think because the dis enrollment rate is actually quite meaningful still it's not like no. One leaves, we still have meaningful dis enrollment rates.
So when we look at is the members with no claims.
It's up a little but not that much.
Some folks have also looked at the members in the zero to 25% MLR range, that's up kind of like the no claims cohort, but not that much.
When we then model through what the impacts are as Joe mentioned Abd really hasnt changed that's a very stable group of folks.
It's really in the expansion population that we expect to see some impact, but that's 30% of our revenues on a weighted average basis im not seeing a meaningful impact here.
Yes.
Can I just follow up on that.
The point about zero utilize theirs.
I guess it doesn't take much of as you're increasing your lenders to have an increase on our impact on MLR like if you had 90% MLR and then the following year 50 basis points more people at zero reserve utilizes wouldn't that take your MLR down by 50 basis points and take care of.
Medicaid earnings up by over 10% like when you say, there's just not a big Delta.
Delta in your utilize or like what are we talking with them about 10 basis points. So we're talking about 100 basis points.
And when you say Mike.
That's the expansion or do you mean by overall across the entire book of business.
In expansion.
It's fairly slight but the other thing is.
What are they changing too if zero utilize there's now if they go to 90% to your point, that's a big impact.
But if theyre going to anything in between obviously the weighted average impact not so much and again more to the point, if it's mostly an expansion which is 30% of our book the impact gets greatly diluted.
And of course, the underlying assumption is that even if those low utilizes the percentage did change the underlying assumption that is being made is those are the ones that are going to leave and theres really no evidence. We always have zero utilizes we are we have always have low MLR members and there just is no statistically relevant data.
That suggests that that's going to put pressure on the MLR.
Alright, thank you.
Thank you. Thank you and our next question today comes from Steven Valiquette with Barclays. Please go ahead.
Great.
Good morning, So just regarding the L. A county Medicaid contract Award.
I mean every state is a little bit different in how they handle the outcome.
Successful appeal under that scenario. So I guess my question really is just around the scenario analysis just to confirm that one way or the other I guess is the scenario that you're new award in L. A county could be.
100% completely reversed by a successful appeal by the incumbent.
The other scenario doesn't leanest stay in place as a new plan sponsor no matter, what and the comment would just be added back in as an additional plan sponsor over and above the existing rewards into sort of dilute. The membership you would gain otherwise just curious to get the thoughts on that also for the other state awards to if theres any just high level color on that as well. Thanks.
I'll answer the last part of your question first because there is an important data point that just emerged Tuesday and that is the.
The one protest in Nebraska was denied on Tuesday, Thats public information, so I'm not announcing anything that's private.
And whether that goes through an appeal process or other administrative.
Processes, I don't know, but that was.
That protest was denied on Tuesday with respect to your question I don't want to speculate.
I think it would be actually inappropriate for me to speculate what the state of.
California, The Medicaid Department and the administration would do during the protest process I think there are ranges of scenarios of outcomes. The one we're planning for is that our award.
Was it a well structured Berkeley design process. It was evaluated on its merits and we are heads down preparing for day, one implementation to make sure that members have access to services providers have their questions answered our staff is fully ramped up.
Uh huh.
That operational excellence has been our hallmark, so I think it would be.
Proper and perhaps even speculative for me to contemplate what the state might decide.
I think theres a range of options, but right now we think.
That we're going to be in business in L. A county on $1 24, and getting ready to do so.
Okay, alright, so it sounds like it's still TBD, Okay. That's helpful. Thanks.
Okay.
And our next question today comes from Scott Fidel of Stephens. Please go ahead.
Hi, Thanks.
Hoping maybe you could just do a quick diagnostic for US just when we look at the recent success that you just had in the Rfps and really was quite substantial when Joe I know that sort of fixing and accelerating the RFP capability has been a key strategy strategic priority rally since you came on board, but really just started.
Jim can you just really hit its stride more recently show if you had a picture or three things that you think of just resonated in particular.
With the states. These recent awards would be helpful to hear about that and then how transferable you think those are some of these big Rfps that are still ahead, not Florida and Texas.
Our new business development.
Capability, it's really an apparatus I mean, it's a <unk>.
Business unit and there is a playbook.
<unk> casualty go into stage two years in advance of an anticipation of an RFP developing the relationships with providers with community leaders and really getting an intense understanding of hot buttons at the state and what's particular of what their particular concerns are with respect to their Medicaid population and their Medicaid program.
Whether it's our government affairs Amgen, whether our community involvement engine our network developers.
And secondly, I would say that.
And our proposal writers, which we've proven that we can write high quality proposals that are easy to understand and Thats score really well, but I will tell you. The key to writing a great proposal is actually being able to stand behind it and actually perform in the reference ability of our national capabilities, social determinants of health managing high acuity populations.
Opioid use disorder substance abuse and other types of behavioral conditions.
Our ability to value based contract I mean, it's one thing to write well to innovation. It's another thing to be able to stand behind it with reference ability and as a pure play Medicaid player.
Our skills and capabilities are entirely referenced Apple are playing really well and seem to be winning.
And if I could just ask one separate follow up just back on the exchanges.
I know that you are really trying to manage the membership.
This exposure.
Relatively limited, but obviously 2023 is going to be a pretty unusual year with some of these really aggressive players like right now exiting the market, which is going to kind of put a lot of membership back sort of into the call show. How are you approaching that I mean, we did see that the landscape data yesterday that that 14% premium because you talked about and that you are premium.
Pretty conservative versus the market, but you probably can still end up right with adding a lot of membership potentially so.
Just interested in how you started thinking about that sort of incremental <unk> enrollment and then managing.
Sort of trying to keep the business still relatively low exposure. Thanks sure Scott and we did see that note and we bought it characterized our approach perfectly.
That we priced for margin and not to grow market share in this business.
With respect to the market exits that you've read about we've mapped our footprint too.
The companies that are exiting theres not a lot of overlap there.
There is CMS has sort of quote unquote assigned or at least suggested to various members that they move to a molina product, but it's measured in the thousands not tens of thousands we still don't know what the overlap is in Texas, we haven't seen the data yet, but all in all I would say that the market.
Exits should not have a meaningful impact on whatever our growth rate is going to be next year. The market exits exits should not have a meaningful impact and yes, youre absolutely right, we priced purposely to produce mid single digit pre tax margins, but the revenue fall where it may.
Okay. Thank you.
Thank you and our next question today comes from Calvin semi J P. Morgan. Please go ahead.
Hey, good morning.
Sort of related on the marketplace I know you talked about positioning thats, the top lamenting to Medicaid and not really looking to grow it but if you hold onto California.
Thank you get maybe a natural lift in that business, just having the overlapping Medicaid and marketplace products in that county.
Our U S. Calvin one of the things, we haven't talked about yet because right now job one is to scale up our operations in California to handle the Medicaid membership job, one, but yes la county in.
In particular.
<unk> has a very high.
Concentration of D SNP members.
And marketplace participants and while we have those products in California.
Because of our small presence currently in L. A I wouldn't say that we have a large OE presence in those two products, but yes, we would quickly evaluate whether we would once we're comfortable we've got the day one readiness in place fully scaled and operating well in Medicaid, we would absolutely evaluate whether our Medicare.
Care product in our marketplace product would be <unk>, followed the same pattern, we followed across the country, we have to medicate flag come in with our ancillary products and build a robust robust and diversified product portfolio I would consider that upside to the growth case, but we have not included it in our current estimate.
And is that something that you think about it as maybe being a 2024 opportunity or is that more 2025, just given that there is the protest. It could go to court you have to submit your Medicare bids by Middle of next year does it what are you thinking on the timing.
Well right now we're planning that we will be implementing our Medicaid contract on $1 24, and that's that's what we're planning on.
Let's assume that happens I would say that we would not be.
We havent valuate this yet, but I think would be pretty quick and pretty early to then be filing two ancillary products. Six months later until we know that we've got the Medicaid population well serviced.
And and operating accurately so I would say just off the top of my head now that you've asked it would probably be more like a 25 filing from 2006 and not 24% to 25.
Alright, great. Thanks.
Thank you and our next question today comes from Dave Windley of Jefferies. Please go ahead.
Hi, Good morning, Thanks for taking my question, Joe I, just wanted to get your updated thoughts on M&A environment in terms of opportunities valuation expectations, but then also higher cost of capital environment.
Lot of organic scaling on your plate just just what's your what are your thoughts about continued M&A. Thanks.
I'm, sorry, David I couldn't hear the West and you of course are continuing to do what.
What are your thoughts about.
Continuing merger and Ocwen.
Acquisition activity for you. Thank you.
Yes.
Well with all the new contract wins, we didn't spend a lot of time. During this earnings reports talk about M&A.
But I will tell you the portfolio, but the pipeline continues to be very robust with the same type of bolt on tuck in acquisitions that have been our hallmark.
We're up to about $10 billion of revenue purchased we've only allocated capital.
Finally cost is about 22% of revenue, which includes regulatory capital and we've gotten every dollar of accretion we promised and more out of these acquisitions, because we turn our operational leaders and their playbook on these some of these underperforming properties and we get them to target margins rather quickly. So we have ample.
Capacity as Mark talked about in his prepared remarks ample debt capacity great cash flows.
We're in no way capital constrained to continue on the growth trajectory, we've had 18% 19% growth since our pivot to growth in 2019, we promised 13% to 15 at our Investor Day, we produced close to 20.
We can continue to grow at this rate either by acquisition or by organic or by new contract wins and continued to fund this growth from existing cash flow and debt capacity.
Just to put a point on that Dave.
Pipeline is robust.
At any given point.
We're relationship building, we are in discussions with numerous targets out there.
So I'm very encouraged by that on a capital perspective looking out over the next 18 months.
I feel very comfortable with our capital position.
Just organically, we can self fund.
Most of anything I see in the pipeline between the capital commitment I need for these these.
New procurement wins as well as the capital for some of the potential M&A I see ample organic cash flow and capital to support all of that without even going outside no I wouldn't say I would never go outside to raise more capital, but with everything I see over the next 18 months, we can self fund all of that growth.
And we're still looking at our M&A pipeline to see what else is there.
Feel pretty good about that outlook.
Great. Thank you I appreciate the answer.
And our next question today comes from Michael <unk> of Morgan Stanley . Please go ahead.
Thank you guys I appreciate the question and I appreciate all the new guidance update detail clearly a lot of embedded earnings.
I think about 'twenty three it looks like there is potential.
Potentially the more talent that could drive upside to your new guidance.
Jack from recapturing, we determined by exchange product that's not in your guide.
Sam the glitch fixed benefit potential benefit you exchange Medicaid bucket recession picked up maybe better net investment income on rising rates. So are any of these items is actually included in your new guide and I'm missing any other talent that could drive upside and on the headwinds aside from Redetermination, Florida rate cut pharmacy carve outs are there any large headwind.
That should be on our radar.
I think I'll take it and hand, it to Mark to give you the tailwind tape, but as we said when you're trying to bridge from the $17 75 of earnings per share guidance for this year.
To the EBIT of $19 50 reported for next year or 2025 core.
The components are harvesting component of embedded earnings.
Organic growth, which we have a great track record of harvesting.
Significant operational catalysts that Mark mentioned during his prepared remarks, and then of course, we do expect a tailwind from interest rates given the short dated nature of our portfolio.
So mark why don't you take through the numbers great.
As Joe mentioned Youre, starting from $70 75, as I've mentioned about $1. It comes in from our embedded earnings.
It's a little bit off the net effect of Covid.
The M&A portion.
That's yet to be realized.
Then, it's a little bit of a headwind on redetermination in 'twenty three organic growth, we've talked about that which is just the recurring growth of rates and membership.
I mentioned in my prepared remarks, the operational catalysts.
TBM renegotiation in the upside on that the real estate rationalization, which I expect to address here at some point in the fourth quarter investment income definitely upside on that.
We manage an $8 billion portfolio today split between cash.
And longer term investments.
Who knows where short term rates are going but certainly on the cash portion of our net investment income is a very responsive to those rates. So I think some nice upside there all those things bridge you to the to the 2025.
Core number that Joe mentioned.
75 gets you back to the 1950.
Michael you addressed a bunch of the things that are potentially.
Still working through on the marketplace.
How will open enrollment work more importantly on a redetermination.
The cross sell opportunity as folks come off Medicaid maybe into marketplace. That's all upside we don't assume any of that in our outlook.
Certainly hit on the net investment income upside.
We continue to work through this rate environment.
We go into the new year, most of our rates arent known definitively we work through that as we go.
That's something we're thinking about every day, but as Joe mentioned those rates need to be tied to Trent.
That's an actuarial requirement so.
What's the where were trends and rates move that's one thing.
Still evolving in our outlook, but overall I think <unk> got the core components, there and you mentioned a number of the potential items on top of it.
Thank you guys just quick follow up on organic growth by major specifically on Medicare advantage, I think you'd mentioned last quarter, 7% revenue growth on both yield and membership if I'm not mistaken that.
That would imply roughly low single digit mid single digit growth, but based on the landscape.
Thank you you're targeting pretty strong footprint expansion doubling your counting footprint of non dual moving entirely to zero premium plans raising your maximum out of pocket.
Overall at first glance it looks like Youre offering has improved pretty significantly we've taken big steps in geographic expansion. So just curious your thoughts on membership growth next year have been improved.
Last quarter. Thank you.
I think from a footprint perspective counting the number of counties are can actually give a misleading answer because we're only probably about 50 or 60% of the Medicaid counties. However.
We're in counties that cover 90% of the population.
We're pretty well set.
<unk> and penetrated in the Medicaid counties, which is our strategy followed bring decent event, where you are concentrated and mitigate.
Our strategy is very simply is to grow at low teens rates.
It's a low income offering D. SNP, we have our demonstrations, which are basically auto assignment and you roll with the auto assignment algorithm of the federal government and then of course, we did launch.
What we call traditional Medicare Medicare advantage, but it is a low income strategy, we're not trying to compete with the big guys, who we're going after.
Affluent seniors we're targeting.
And we expect to grow as we said at our Investor day at low teens rates.
Service area expansion was largely for the 22 year for 'twenty three we're not seeing a meaningful service area expansion.
Product, which of course has a different growth characteristics being a closed block of business. So I know you know that dynamic, but it's important to think about the two components of growth separately.
And ladies and gentlemen, our final question today comes from Joseph France with loop capital markets. Please go ahead.
Thank you Joe I just wanted to follow up on Scott's first question and our response, which were both very helpful.
Under 100000 members.
We know the environment very well, but it's a very small relationship. It's only a couple of hundred million dollars in premium and I believe at latest count that I've seen is we're probably at around 70 75000 members in that book of business. So it gives us familiarity with the territory. Obviously, we have a big installation here with respect to head count and footprint. So.
So we know the area very very well, but that relationship.
While it gives us the familiarity that's going to help us.
It's financially very small.
So it really had no bearing on the RFP itself.
I couldnt comment, whether it did or not but I would suspect that thats correct.
Okay. Thank you very much Joe.
And ladies and gentlemen. This concludes today's question and answer session and today's conference call.
Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.