Q4 2022 Molina Healthcare Inc Earnings Call
Okay.
Good morning, and welcome to Molina Healthcare's fourth quarter 2022 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your <unk>.
I'll phone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Joe Karbowski Senior Vice President Molina healthcare.
Please go ahead.
Good morning, and welcome to Molina Healthcare's fourth quarter 2022 earnings call.
Joining me today are Molina, as president and CEO , Joseph <unk>, and our CFO Mark <unk>.
A press release announcing our fourth 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 of you who listen to the rebroadcast of this presentation. We remind you that the remarks made are as of today Thursday February nine 2023. It has 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 and 2023 can be found in our fourth quarter 2022 press release.
During our call, we will be making certain forward looking statements, including but not limited to statements regarding our 2023 guidance our projected 2024 outlook at revenue.
Our recent RFP award recent and future RFP submission, including dose, the Indiana, New Mexico, and Florida, our acquisition and M&A activity Medicaid Redetermination, our long term growth strategy and our embedded.
Margin.
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 filed with the SEC as well as the risk factors listed in our Form 10-Q, and form 8-K filed 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 Joseph <unk>.
Joe.
Thank you Joe and good morning.
Today, we will provide updates on several topics or.
Our financial results for the fourth quarter and full year 2022.
Our initial 2023 revenue and earnings guidance.
Our growth initiatives and our strategy for sustaining profitable growth.
And our outlook on premium revenue for 2024, given our new business successes in 2022.
Yeah.
Let me start with fourth quarter highlights.
Last night, we reported fourth quarter adjusted earnings per diluted share of $4 <unk> cancer.
Representing 42% growth year over year.
Our fourth quarter 88, 3% consolidated medical care ratio.
Seven 5% adjusted G&A ratio.
And three 9% adjusted pre tax margin demonstrate continued strong operating performance.
The fourth quarter completes another strong year of operating and financial performance.
For the full year, we grew premium revenue by 15% to approximately $31 billion.
And grew adjusted earnings per share by 32% to $17 92.
Our full year adjusted pre tax margin of four 4%.
Squarely in line with our long term targets.
Medicaid our flagship business, representing approximately 80% of enterprise revenue continues to produce very strong and predictable operating results and cash flows.
For the year, we grew membership by approximately 10% and premium revenue by 21% driven by the inception of our Nevada Medicaid contract recently closed acquisitions.
And organic growth.
The rate environment is stable.
We are executing on the fundamentals of medical cost management.
The full year reported MCR of 88% is at the low end of our long term target range and consistent with pre pandemic levels.
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 demonstrate strong operating performance.
For the year, we grew membership by 10% and premium revenue by 13%.
Membership growth was driven primarily by our low income MAA PD products, which more than doubled in 2022.
The full year reported MCR of 88, 5% was modestly above our long term target range, but includes approximately 300 basis points of pressure from Covid related care.
In marketplace, the smallest of our three lines of business, we repositioned the business both in terms of its size in the portfolio and metallic mix.
On a pure period basis, the business performed at roughly breakeven.
While the financial performance did not meet our initial expectations for the year. We believe we have positioned our marketplace business to achieve target margins in 2023.
Turning now to the execution of our growth strategy for the year.
Our successes in 2022, where many.
On the M&A front, we closed on the acquisition of Cigna's, Texas Medicaid business at the beginning of the year.
The <unk> acquisition at the beginning of the fourth quarter.
In July we announced the my choice, Wisconsin acquisition further adding to our market leading <unk> franchise.
Our performance on Medicaid Rfps in the year was exceptional.
We renewed our contract in Mississippi.
Double the size of our California contract for 2024, and 102 new contracts first.
First in Iowa, and then Nebraska for a 100% win rate on RFP responses submitted.
In total we project that these RFP wins for the year, we will add four $4 billion and run rate premium revenue.
In summary, our full year 2022 enterprise results continue to demonstrate our ability to produce excellent margins, while expanding our franchise by growing premium revenue.
Turning now to our 2023 guidance.
You can easily see the results of the repeatable earnings pattern, we have created.
We build new store contract backlog and harvest the earnings as the contracts and acquisitions mature.
Meanwhile, we continue to focus on the operating fundamentals and drive operational improvements.
Which allows us to grow the core business at attractive margins.
With regard to our 2023 guidance.
We project 2023 premium revenue of $32 billion.
Representing a 19% compound annual growth rate since our pivot to growth in 2019.
The 2022 earnings per share of $17 92.
Sure as a solid high margin earnings jump off point.
We expect that one dollar per share of prior embedded earnings will emerge into 2023 earnings.
We expect to produce $1 50 per share of core growth and operational improvements.
We expect all of these elements will combine to produce 2023 core earnings per share of at least $20 40.
Offset by 65 per share of one time contract implementation costs, which results in our 2023 adjusted earnings per share guidance of at least $19.75.
The operating improvement supporting the margins in our guidance are durable.
The various elements, which could impact earnings Covid flu RSV any margin impacts from Redetermination had been considered informing our guidance.
The metrics implied by guidance are squarely in line with our long term target ranges as our guidance produces a four 7% pre tax margin.
With a growth rate of 14% in core earnings and 10% on a reported adjusted basis. This is an attractive growth profile and a model that is repeatable.
In addition to the growth within our guidance, we continue to build an earnings base for the future in the form of our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023.
The new store component of our embedded earnings defined as earnings from achieving target margins on acquisition and new Medicaid contract wins.
It is now at least $4 per share.
The ongoing net effect of Covid, which at this point is the continuing earnings impact from the three remaining risk corridors.
$2 per share of additional upside to this figure.
This latent earnings growth estimate does not take into consideration any future organic growth our future strategic initiatives.
Turning now to our growth strategy.
We have taken major strides toward our $42 billion 2025 premium golf.
At this early stage, we already have a clear line of sight to $35 5 billion.
In 2024.
The key to our strategy is balance.
A stellar record of new contract wins, Kentucky, Nevada, now filling into the middle part of the country.
The doubling of the size of our California business, including significant expansion in Los Angeles County.
Preserving and securing all of our incumbent state contracts.
And no large re procurements in the near term.
Continuing to build the M&A pipeline.
This aspect of our strategy has already produced seven transactions for $10 billion in revenue.
Not to mention organic growth one member at a time by focusing on greater member attraction and retention.
And overcoming the regulatory headwinds, a redetermination and pharmacy carve outs.
With that as the backdrop I will now provide an update on some specific in flight opportunities related to our long term growth strategy.
At the end of January the Texas Health and Human Services Commission posted a notice on its web site, indicating that it was issuing a notice of intent to award our Texas Health plan a contract for all of our existing eight service areas in the state.
We expect to be able to provide more of an update once these contracts had been finalized and signed.
Our RFP response for the Indiana L. TSS program has been submitted it is pending evaluation and subsequent award announcement.
In new Mexico, the state announced it has terminated the RFP that was in process and according to their press release intends to issue an expedited re procurement as soon as possible.
We have many other new state business development initiatives, well underway, including the potential for expanding to our former nearly statewide footprint in Florida.
Our growing Medicaid footprint still only represents half of the 41 states with managed Medicaid.
With multiple new state RFP opportunities over the coming years and our demonstrated capabilities.
Reference ability and track record, we remain confident in our ability to win additional new state contracts.
Our acquisition pipeline remains replete with actionable opportunities.
While the timing of transactions remains difficult to predict.
The strength of our pipeline and our track record of success gives us confidence in our ability to drive further growth from this important element of our growth strategy.
In summary, we are very pleased with our business performance and the progress made in 2022 and our growth strategy.
Which has created a solid and growing financial profile.
At least $20 40 core earnings per share.
$19 75 per share of adjusted earnings in 2023.
Current new store embedded earnings power of at least $4 per share with an additional $2 of upside if and when the few remaining COVID-19 era corridors are eliminated.
And $35 5 billion of.
Of identified premium revenue in 2024 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.
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.
<unk>.
Thanks, Joe and good morning, everyone.
Today, I will discuss some additional details on our fourth quarter and full year performance, our strong balance sheet and our 2023 guidance.
Beginning with our fourth quarter and full year results, our consolidated MCR for the fourth quarter was 88, 3%, reflecting continued strong medical cost management.
For the quarter flu RSV and Covid related medical costs in total were largely in line with our expectations, but the impact varied by line of business with Medicare being disproportionately impacted.
Our full year consolidated MCR was 88%.
This result was consistent with our expectations and was driven by the continued strong performance of our flagship Medicaid business.
In Medicaid our fourth quarter reported MCR was 87, 3%.
This strong performance was driven by effective medical cost management and favorable retroactive premiums.
The net effect of Covid in the quarter with a modest 30 basis points within our reported MCR.
Our full year Medicaid MCR of 88% was at the low end of our long term target range.
And consistent with pre pandemic levels.
In Medicare our fourth quarter reported MCR of 91, 8% was driven by higher Covid flu and the mix effect of our significant growth in Ma PD.
During the quarter the net effect of Covid was 300 basis points within our reported MCR.
Our full year Medicare MCR was 88, 5%.
Modestly above our long term targeted range and with similarly, burdened by 300 basis points of net effect of Covid.
In marketplace, our reported fourth quarter MCR was 93, 8%.
The MCR was impacted by normal seasonality and increased utilization and a handful of markets.
The net effect of Covid was approximately 50 basis points within our reported MCR.
In the quarter. We also settled some provider balances dating to prior years, which disproportionately impacted our marketplace MCR by approximately 300 basis points.
Our full year marketplace MCR of 87, 2% exceeded our long term target range and includes approximately 120 basis points of net effect of Covid as well as approximately 130 basis points from the impact of a 2021 risk adjustment true up recorded in the second quarter.
Additional drivers of our strong fourth quarter and full year results include.
A seven 5% fourth quarter adjusted G&A ratio, which was in line with expected seasonal expenditures related to open enrollment and spending on community and charitable activities.
Our full year adjusted G&A ratio improved year over year to seven 1% as we remain focused on delivering fixed cost leverage as we grow even while making the appropriate investments to sustain our growth.
Fourth quarter and full year results also feature higher net investment income as expected from our 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 our reserve position.
Days and claims payable at the end of the quarter was 47 about three days lower sequentially.
The decline was driven by the increased mix of L. T. S. S claims, which settle more quickly resulting from the closing of the <unk> acquisition.
Well as an additional payment cycle in the quarter.
Our capital Foundation remains strong.
Debt at the end of the quarter was one eight times trailing 12 month EBITDA.
Our debt to total cap ratio was $44 nine.
On a net debt basis net of parent company cash these ratios fall to one five times and 47% 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%.
In the quarter, we harvested $268 million of subsidiary dividends and repurchased approximately 590000 of our shares.
Parent company cash at the end of the quarter was $375 million.
With substantial incremental debt capacity cash on hand, and strong cash flow to the parent we have ample dry powder to drive our organic and inorganic growth strategies.
2022 full year operating cash flow was lower compared to the prior year, primarily due to the cash settlement in 2022 of large prior year marketplace risk adjustment and Medicaid risk corridor payments.
Normalizing for the timing of these payments 2022 operating cash flow was $1 6 billion.
Turning now to our 2023 guidance beginning with membership.
In Medicaid, we expect organic growth the midyear inception of the Iowa contract and membership from our my choice, Wisconsin acquisition to be largely offset by the second quarter resumption of re determinations.
We expect this to result in 2023 year end membership of approximately $4 7 million members.
And Medicare based on our performance in the annual enrollment period, we expect to begin the year with 160000 members and continued to grow during the year ending 2023 with total membership of approximately 175000 members.
Our Medicare membership growth for 2023 is expected to be evenly split between our D SNP and a PD products.
And marketplace based on open enrollment, we expect to begin 2023 with approximately 290000 members, reflecting our pricing strategy to achieve target margins in this business for 2023.
Accounting for a limited SVP and normal levels of attrition through the year, we expect to end 2023 with approximately 230000 members.
We continue to treat any marketplace membership from Medicaid redetermination.
As upside to these projections.
Moving on to premium revenue.
Our 2023 premium revenue guidance is $32 billion, representing 4% growth from 2022.
Our revenue guidance is comprised of several items.
One $2 billion for the full year impact of H, well and expected revenue from the my choice, Wisconsin acquisition when closed.
A $1 billion of organic growth in Medicaid and Medicare.
And 900 million for the mid year inception of our new Iowa contract.
Several offsetting items include 600 million for the known pharmacy carve outs.
$500 million for the impact of the resumption of Redetermination beginning in April .
600 million for the lower marketplace membership and.
And $300 million in 2022 pass through revenue that we don't expect to recur in 2023.
Turning to earnings guidance.
We expect full year adjusted earnings to be at least $19 75 per share.
Our EPS guidance reflects the realization of approximately one dollar per share of 2022 embedded earnings consisting of the contribution from acquisitions and a portion of the net effect of Covid, partially offset by the impact of re determinations.
To this we add $1 50 for the underlying organic growth plus several operating levers, including a real estate reduction strategy. The full year effect of our PVM contract and net investment income Paul.
Partially offset by the negative impact of known pharmacy carve outs.
These drivers combined to deliver core earnings per share of at least $20 40.
Recognizing the onetime nonrecurring implementation cost in 2023 for our new contract wins that we now project to be 65 per share yields.
Yields are 2023 earnings per share guidance of at least $19 75.
Moving on to select P&L guidance metrics.
We expect our consolidated medical care ratio to be approximately 88% consistent with our 2022 results.
We expect our adjusted G&A ratio to fall slightly to 7%, even while absorbing the impact of the onetime nonrecurring implementation costs for our new contract wins.
This reflects disciplined cost management and fixed cost leverage from our revenue growth.
Excluding the new contract implementation costs, our adjusted G&A ratio would have improved year over year to six 8%.
The effective tax rate is expected to be 25, 3%.
Adjusted after tax margin is expected to be three 5% well within our long term target range.
Weighted average share count is expected to be $58 1 million shares.
And we expect our quarterly adjusted earnings per share profile to be fairly flat over the year with the first two quarters of the year at roughly $5 each.
As Joe mentioned, our 2023, new store embedded earnings power is at least $4 per share and is comprised of at least $3 50 from our three recent new contract wins.
<unk> 50 per share for AGL, and my choice, Wisconsin acquisitions, achieving full accretion.
We continue to carry approximately $2 for Covid era risk corridor.
Regarding additional potential upside to be at least $4 of new store growth embedded earnings.
I'll now turn the call over to Joe for some concluding remarks.
Joe.
Thanks Mark.
And looking back over the past five years.
Pause briefly to reflect on our company's accomplishments.
We have one 5 billion in new Medicaid awards over the period and defended all of our existing contracts.
We acquired $10 billion and profitable revenue.
In short we doubled the revenue base.
We have produced industry, leading margins in our core products, averaging 4% to 5% on a pre tax basis.
The top line growth and margin expansion a lot of us to grow earnings per share from a loss in 2017 to nearly $20 per share in 2023 guidance.
We've ascended to fortune 125 status and were promoted into the S&P 500.
We are a pure play government managed care franchise to grow and build upon.
We only take this retrospective journey to express our excitement enthusiasm and energy for the next five years.
There are so many more opportunities to continue to grow and expand our franchise.
As we say here at the company.
Reaching milestones is not a cause for celebration, but a cause for consternation.
As reaching one merely marks the point in time to set new aspirational goals.
We plan to share our view of the next five years with you at an Investor Day later this year.
This concludes our prepared remarks, operator, we are now ready to take questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speaker phone please pick up your handset before pressing the keys.
Any time Youre question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Josh Raskin with Nephron Research. Please go ahead.
Hi, Thanks, good morning.
So the guidance for the 2023 MLR is overall flat I assume it would be fair.
So we expect the marketplace MLR to be down meaningfully, but even just based on size, probably not a meaningful contributor would it be fair to assume that the Medicaid MLR embedded in there is actually up and maybe you could help quantify some of those absolute changes by segment and maybe specifically have reject terminations are impacting your view of the med.
Kate MLR.
Sure Josh.
That is correct, we are going to produce a consolidated medical care ratio of 88% in each of 2022 and our guidance for 2023, we get there in a slightly different way year over year, obviously with our repositioning of the marketplace business, we're projecting that with pricing.
Actions with the small silver and stay at that strategy, we will bring that MCR down within the long term range at the high end of the long term range of 70 to 80.
Medicare slightly underperformed, our long term target for the year because of 300 basis points of pressure, we now project that Medicare will come into.
Into its long term target range, perhaps in the middle of that range and yes, because we have been outperforming our long term guidance range and Medicaid 80% of our revenue we are forecasting a reversion to the mean.
Considering all the impacts of flu RSV COVID-19 any potential.
Nuanced reaction to Redetermination process.
Puts us in the middle of the range at 88, five our long term range being 88% 89, so thats the line of business.
The tape for our MCR projection into 2023.
That's right Joe George its Mark.
Total guidance at 88% MLR as Joe mentioned each of the segments I've got pretty much right in the middle of long term guidance.
So think of marketplace.
79 to 80.
Medicare advantage 87 five.
And Medicaid call it 88 five.
For weightings pretty similar to what we had this year, probably about 5% marketplace, which is a little bit smaller at the portfolio.
13% Medicare advantage about 82% and Medicaid. So you round all of that out the only other thing I'd say is we finished full year Medicaid in 2022 at an 88.
We're obviously in our guidance staying at 88 five roughly for Medicaid.
Additional 50 basis points for new stores, who knows the redetermination or just general conservativism, but that's how I'm thinking about the MLR there.
Okay. So no specific explicit redetermination, but sort of capturing it in that 50 basis points.
General conservatism, that's the way to think about it Josh.
Perfect. Thanks.
The next question comes from a J Rice with credit Suisse. Please go ahead.
Hi, Thanks, Hi, everybody.
Maybe I'll just I know it's.
A smaller portion, but on the public exchanges or marketplace.
Your decline in enrollment I know you've been talking about for a while but for 'twenty three you would price for margin.
You surprise was that decline enrollment.
Consistent with what you thought.
It seems like as we hear from your peers and everyone. There's quite a divergence in and what people are seeing any comment you can make on what you saw in benefits as this market become very sensitive to slight changes because some people are showing huge growth others are not and.
And I'm just trying to put that in perspective, and then you're saying you do not have any assumption that you'll pick up lives on the public exchanges as re determinations play out can you give us a sense of what that might look like possibly even if you're not baking into guidance and do you have any view I know theres been a lot of discussion about.
How those re determined lives when they come on the public exchanges might affect the risk pool I'm.
I'm, assuming that net net because you don't have anything in there you think it would be a positive for you even if maybe they're a little sicker than your average person on the exchanges today, but anyway, just flushing out some of the public exchange commentary.
Sure a J b membership results starting the year with 290000 members, finishing the year with 230000 members.
Will aggregate to about $1 billion, six and premiums for the year and that was fully in line with our expectations.
With respect to our pricing strategy, but we're allocators of capital.
And this business has shown that due to the instability of the risk pool by the introduction of the special enrollment period and other factors.
It does have some inherent volatility.
There also have been some irrational pricing over the past couple of years.
Pushing the pause button and going silver stable.
And small was exactly the right approach and the business for 2023 has landed.
In a good place for us to achieve our mid single digit margin target.
If we conclude that the risk pool has stabilized due to the lack of government movement of the risk pools.
Pricing is rational we.
Likely would conclude to allocate more capital to this line of business and grow it again.
Mark anything to add Yeah, Hey, Jay good morning.
As Joe mentioned, starting up with 290000 members going down I think the 230000 by the end of the year really exactly what we expected we put 9% rate into the market. This year. If you look at the mix of what we got in the pricing we put into the market so with 9% not surprised.
Would that result at all now you asked about the MLR.
To the extent, we pick up folks from Redetermination Im expecting the MLR is coming over to be quite consistent with our underwriting range.
Those those folks will not be new to health insurance are they will not be coming in with pent up demand, so I'm expecting a pretty stable pool that they come over.
Okay, that's great. Thanks, a lot.
The next question comes from Justin Lake with Wolfe Research. Please go ahead.
Thanks, Good morning, a couple of questions on the numbers side first.
Medicaid membership can you can you give us the.
The membership I know, it's going to be flat you talked about some new growths of acquisitions offsetting redetermination can you give us those numbers in terms of what youre expecting there for each of those buckets and then how should we think about redetermination from 23% to 2024.
And then on the on the reserves I've heard you talk about DCP I saw on the release that.
You mentioned, a bunch of payments in the quarter. It did go back and take a look at fourth quarter paid versus fourth quarter kind of reserved or medical costs.
Last year to this year and it didn't look like there was a significant change in paid claims as a percentage of total.
Fourth quarter this year versus last year. So hoping you could just flush that out a little bit in terms of what you were seeing that.
Great. So a bunch there Justin let me start with Medicaid.
We ended 2022 with about $4 7 million members as.
As Joe mentioned earlier I expect to conclude 2023 with about the same.
We'll go in there the moving pieces is redetermination.
The nation, probably around 300000 or more coming off but replaced by a number of good guys.
For example, the Iowa acquisition about 200000 members the my choice acquisition.
About 40000 members, California fee for service coming in.
Bunch of offsets there so pretty much flat over the year from a membership perspective.
On the.
The.
DCP youre talking about and the.
Payments related to medical expenses in general when I look at DCP and I look at it our reserving or purchase the same.
At the same actuarial leadership, our same approach to development and our triangles. The same external audit review, so I feel very confident about our process.
What has changed is in the fourth quarter, we added age well.
Which brought in the <unk> membership that membership adjudicate the whole lot faster and pays a whole lot faster. We also had the extra payment cycle. So when I look at the fourth quarter, we actually paid more.
Then what are recorded in medical expense, so thats driving a bunch of that DCP declined from $50 to 47%.
Hope that helps.
Great. Thanks for the color.
The next question comes from Colin So Nick with J P. Morgan.
Please go ahead.
Hey, good morning.
Just a quick follow up it sounded like you said if the marketplace was stable you can look to grow it again next year and it just sounds a little different than some of your previous comments, where you said you have the membership float up and down year to year I just want to understand that in the context of your overall strategy is the growth outlook for marketplace to just based on your evaluation of the market this year.
And that's something that you'll look to reevaluate next year or are you, saying you kind of want to grow marketplace going forward.
No in that line of business, we are going to look at the stability of the risk pool.
Chasing a moving target with respect to the government rules around who is eligible how many people were eligible when they become eligible has thrown in the past couple of years that risk pool into what we consider to be a period of instability if that should stabilize and now we are convinced that the pricing that's put into the market by us.
From the competitors is rational I have always said, we could put this business back into the growth category allocate more capital to grow it but grow it in a very responsible and measured way. So I'm not sure we're seeing anything new but right now keep a small silver and stable until we conclude that.
We should allocate more capital to it and grow it in a very measured and responsible way.
And that's been our strategy all along.
Got it.
Youre not forecasting growth.
On the marketplace and Redetermination, but just curious if you have a sense for what the recapture rate was pre COVID-19. So when someone got re determined in Medicaid how long do they typically go uninsured before they've got coverage elsewhere.
I guess, how often we're able to recapture some of those numbers in a molina marketplace product.
The way I would answer that is one of the reasons, we haven't forecasted the capture is because the data around how it worked in the past is pretty imprecise I mean, we can create all the models.
With various scenarios, we decided not to forecast it we have operational protocols in place with member outreach in the states that allow that to text phone email to help members reestablish eligibility.
And if determined that they are eligible for Medicaid, but eligible for highly subsidized marketplace product. We will then warm transfer them over to our distribution channels for marketplace and capture them in that manner, but because this is unchartered waters.
Never been done before we chose not to create a modeling forecasted are considered as upside to our membership growth.
Alright, great. Thanks.
The next question comes from Scott Fidel with.
<unk>.
Please go ahead.
Alright. Thanks, Good morning, I guess I'll use my question was just to try to fill out a couple of the other modeling elements for 2023.
Interested if you could give us your thoughts on operating cash flow and then also investment income and interest expense for 2023.
Yeah.
Sure Scott, it's Mark so when I think about operating cash flow I focus on cash flow at the parent.
Because thats what <unk> my firepower.
I expect to take pretty meaningful dividends.
I've got a few acquisitions to pay for this year.
And I've got some growth organically that I need to fund so all told at the parent I expect to have.
More than half of $1 billion by the end of the year.
Interest expense you can model going forward you know my bonds.
My rates on interest income.
That's a wildcard right, we're all guessing on that.
Finishing 2022 with about seven 5 billion of cash and investments I expect across 2023 to end the year with about $7 billion of cash and investments, including everything at the subs now the wildcard here is what kind of an interest rate to put on that right.
We've had one fed raise already this year.
If you look at the fed fund's future rates, we've got maybe one more raise coming and maybe one or two decline back half of the year. So how do I think about that across the year not quite sure I think you could model any place between mid and high twos on a yield basis and come out with a pretty credible interest forecast there.
Okay. Thanks, and just one quick follow up question.
Just on the M&A side, how you are thinking about.
The pipeline and sort of the pacing of engagement in 2023, obviously, you've got some significant installations of new business in flight. So interested in how youre thinking about layering in M&A as well thanks.
Yes, Scott even with the significant backlog of both integrations on in flight acquisitions, and new contract implementations in our new wins.
We have continued to aggressively pursue the M&A pipeline and nothing is nothing has really changed with respect to the appetite.
Single state operators nonprofit plans to listen to the <unk> story I want to be part of this larger enterprise, where they continue they can continue to fulfill their local mission and have access to the broad and deep capabilities and financial resources that we bring so it's a great story and nothing has really changed.
There I would say given the size of the pipeline.
And the level of activity and the maturity of some of the opportunities we feel very confident in some announcements here in 2023.
Okay. Thank you.
The next question comes from Michael Hall, with Morgan Stanley .
Please go ahead.
Alright. Thank you I just wanted to touch on the marketplace again, and just ask about like what happened in 2002, so at the beginning of the year Youre expecting 79% MLR, but.
I think there is a large mezz.
Full year expectation for 84% and then this past quarter, even excluding the 300 bps.
Deadline passed provided balances ended up higher than expected now.
Now you're at 87% end of the year. So I thought pricing was more disciplined and you went through the.
Major recalibration of your metal peers could cover so I would've expected more MLR stability than what we saw could you walk us through about just like what happened with marketplace and why the large diverging from initial expectation.
Sure and as we said in our prepared remarks.
Even with the exclusion of the onetime items that COVID-19 related.
Items, the risk adjustment true up in the middle of the year.
And in the fourth quarter, the significant settlement of some prior year.
Provider balances, we did not meet our expectations in marketplace.
The continuing.
Our drag from that significant S&P membership that renewed into the current year are continued to drag on the MLR.
We now believe that the special enrollment period might produce this year three to 4000, a month, where it was producing 20% to 25000, a month and the height of the SCB gives the risk pool more stability and more price for it.
So we did not meet our expectations, even while ignoring the one time items, but this year, we feel that with the high single digit price increase low single digit trend.
<unk>.
Good visibility on our dual membership to make sure we get appropriate risk scores that were in good shape to hit mid single digit margins in 2023.
The next question comes from Stephen Baxter with Wells Fargo.
Please go ahead.
Yeah, Hi, Thanks, I wanted to follow up on the Medicaid MLR question I appreciate the color on your expectations.
How should we think about Medicaid MLR I know you probably don't want to.
Got it too close quarterly, but do you expect that generally operate around that 88, five level kind of consistently throughout the year or is there any slips that line that we should maybe be thinking about and then just to kind of put a bow on the question on DCP for the <unk> business can you just give us a sense of what the Dcp's would look like on a standalone basis, we can try to put that into <unk>.
Thanks, John .
I'll turn it to mark, but yes, given the mix of the business has changed and many of the dynamics of the businesses have changed the seasonal patterns of how NCR as emerge.
Has changed slightly over time, so I'll turn it to Mark to give you a view of our Medicaid might perform over the quarter, yes, I'm expecting pretty flat and if you look historically, we've run pretty pretty consistently on Medicaid certainly more so than Medicare and marketplace. So I think you can model that one pretty straight line.
On the age well will follow up with you offline I don't have a discrete number on that.
What it does to my weighted average, but we can follow up with that thank you.
The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.
Okay, great. Thanks for the questions.
You mentioned the $2 of per share of earnings power from the three remaining COVID-19 risk corridors.
The timeline to potentially realize these earnings and then just more generally on the stay rates. How do you think the process plays out for states potentially revisiting rates.
The redetermination occur and potential changes to the underlying risk pools take place. How do you think the states are going to approach that thank you.
Sure Nathan we actually consciously.
Separated the two major components of our embedded earnings because one of them is in our view entirely controllable harvesting the $4.
Earning our target margins on latent contracts and M&A is something we have a proven track record of doing we separate that from the $2 of lingering Covid era corridor, because eliminating damage outside our control.
They were put in place during COVID-19 their articulated as being related to Covid.
Our three remaining two that matter, Washington State of Washington, and Mississippi.
And we believe over time that will either be compressed or eliminated, but we don't control that.
With respect to rates I would say that.
States are customers and their actuaries are very at least aware of the potential for an acuity shift somewhat.
Due to the Redetermination process.
And the fact that they're aware of it.
And.
And if not we will certainly make them aware of we experience it.
Leads us to believe that if there is a significant shift in acuity somewhere in the book of business that the actuarial soundness principle will prevail and we'll be able to to have a productive conversation about that Nathan just to build on that a number of our states.
We're in 19 on Medicaid now a number of our states have told us if and when there is any impact from that redetermination. They are quite willing to reopen that to revisit it. So we feel good between that commitment in our advocacy efforts that the rates will move it they need to.
Thank you.
The next question comes from Greg Taylor with Cowen. Please go ahead.
Hey, good morning, guys. Most of my questions are answered just two quick ones one on the <unk>.
Exchange membership loss given by driven by repricing.
Is there any particular state you'd point out in your footprint or is that pretty evenly distributed that rate increase in the enrollment decline and then just secondly.
Because 99% of all the incoming investor angst about.
Molina is around redetermination risk and potential impact on margins et cetera, I just wondered if you could.
Share with us any additional work you've done on <unk>.
Hello utilize or zero utilize theirs.
People populations, most likely to be re determined cetera, I know you've shared some of that before and just anything else you might.
Add to provide some comfort around your Medicaid MLR guide would be helpful. I think.
Gary I'll answer your second question first and then kick it to mark for more detail, but the analysis that we shared with you and investors is the same one because we're looking at all the data and there is so many theoretical arguments of why an acuity shift could happen we focus on the numbers and the data we look at members great.
And then one year duration less than one year duration, we look at the MLR.
For members with me.
Less than one year duration greater than one year duration, we look at.
Members with zero to 25% of ours, we look at the lapse rate of membership, which Hasnt gone to zero. There still is a dish enrollment rate that occurs in the Medicaid world. So we look at all of that data and it leads us to believe that while maybe somewhere there could be a slight acuity shift probably in the <unk>.
Spansion block not in the TANF book or the Abd book.
But manageable and will be easy to deal with particularly because of the states are aware of it and we believe we'll have a productive rate discussion if and when there is a shift in acuity.
That makes the rates Actuarially unsound Mark Yeah, we update this analysis every quarter and the conclusion is really not changing of Joe mentioned, a couple of data points, the folks with us more than one year versus less the <unk>.
And the zero to 25% MCR bucket.
Expansion, we're seeing a little bit of an increase but across the board is not much remember expansions just 30% of our total revenue.
The other data point that some folks have been talking about is coordination of benefits or duplication of benefits do we see any increase in that population once again, not really a little bit of expansion. So across the board if theres something here, maybe but it's really.
Minimal.
So again not expecting much of an impact here to the extent it plays out now I'd refer back to the previous question, where I think the states are quite amenable to revisiting it.
On your first question are we fairly even distributed on our marketplace, Yes, I don't see any real estate density any outliers of one state being disproportionately dense.
We've got a pretty good distribution across our 14 states here.
Yeah.
Thank you.
The next question comes from Steven Valiquette with Barclays. Please go ahead.
Great. Thanks. Good morning, So just a follow up question on the exchange business here you mentioned the shift from a bronze silver has been the right move the better margin profile demonstrates that so I know you've talked about this more of a year ago, but just remind US again why you know Brian has proven to be more tricky from your point of view.
Gotten better or worse currently versus a year ago, what would have to change within that just to give you comfort too.
We explore brands on a greater level.
Steven It's really an anomaly of the product design not anything that we design, but the wave product is priced from a.
And industry perspective.
One thing I can point to that is absolute fact is for the same member and bronze and silver with the same acuity level. The same services and therefore, the same hec's the risk score produces less revenue and bronze.
And it doesn't silver and there are other aspects of it and make it just slightly less attractive mark Yeah, I would say a couple of things just building on Joe's thoughts.
It's a lower actuarial value product.
Sometimes that attracts folks that don't think they're going to use the product but do.
The way the rules are set up the valence on a risk adjustment as a whole lot better on the gold and silver that it has on brands and finally just.
Lower revenue load.
It becomes slightly less attractive from a G&A perspective, as some of our other operating ratios you take those things altogether, it's more volatile and we just don't see the margins there.
Okay. Thanks.
The next question comes from George Hill with Deutsche Bank. Please go ahead.
Yes.
Mr Hill.
I'm not sure.
Trouble hearing you.
Alright.
The connection May have gone down we will go to the next questioner.
Who is Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks.
One quick clarification question the real question.
The $6 of embedded earnings it wasn't 100% clear to me does that is that in addition to the 65 coming back or is that is that 65 cents in the 350.
So the total of $6 is $4 of new store EPS.
$2 of net effect of Covid.
And Theres two other items in there that cancel each other out there as the implementation costs, which are a bad guy in the current year or 65 cents to go away next year right.
And then there's also the remaining hit on Redetermination unexpected get 2024, which is also 65.
So those two cancel each other out you're looking at for it too.
Okay, so that $6.
Current guidance does not on that too.
2040 earnings power number.
Correct, correct, Alright, Alright, and then.
I just wanted to go back one more time to the Redetermination because it isn't.
It's interesting because on the one hand, it sounds like you've thought about redetermination as a potential MLR pressure in your Medicaid MLR guidance.
Which is different I think than how you've talked about in the past, but then throughout the call you've kind of dismissed it as a potential.
Sure to MLR, so just trying to understand a little bit finer like.
Are you, saying you've put it in but you think it's at most 10 basis points or something like that something you've kind of been material or how.
How exactly are you thinking about.
And what exactly are you, including in this year's guidance and then I guess to.
To build on that.
It is a pressure this year would you expect that pressure to be higher or lower next year higher because more members are being re determined or lower because states have more time to.
Adjust rates thanks, Ken.
Kevin I will kick it to mark.
We are not and haven't.
All of the specific trend factors that go into an MCR forecast for the Medicaid business, but we have been outperforming even the low end of our range a range, which produces best in class industry margins.
And we just think it's not prudent to continue to forecast that will continue to outperform.
Outperform that range, so we call it a reversion to the mean.
We're forecasting an 88 five for the Medicaid business, which is right in the middle of the range.
Citing.
Medical cost pressures due to any of the.
Items like flu Colgate RSV, and then of course any pressure that might be experienced within an acuity shift.
Knowing that a significant acuity shift will probably be absorbed by retroactive rate increases so not going to parse it but that's why we were somewhat conservative in forecasting the middle of our long term Medicaid range, rather than continuing to forecast that we outperform it.
Right. So we finished last year at <unk> 88 for the year, our guidance anticipates, an 88, five and we don't attribute any specific basis points too.
Driver.
But in general a reversion to the mean.
Flu.
RSV number of different things, we could think about in there.
Don't forget we also have some new stores coming on Iowa, The acquisition of my choice, Wisconsin.
In general just a little bit of conservativism reversion to the mean not attributing any basis points, specifically to redetermination, but look we've all had the conversation enough. We're acknowledging that that's something that's potentially in there in a reversion to the mean now you also mentioned maybe what happens next year so to the.
Any of this starts to manifest it will largely be backend loaded in the year just given the way Redetermination is going to play out I think that gives us all of US a lot of time to anticipate it but just as much work with our state partners to make sure that rates in the concept of actuarial soundness anticipate the same thing.
Alright, thank you.
The next question comes from George Hill with Deutsche Bank. Please go ahead.
Alright, guys. It is working better this time around.
Yes, Thank you Sir yes.
Yes, we hear you.
Okay. Thank you guys, Joe and I think you've kind of just touched on this in the last answer but my question was around the 65 cents of implementation costs in 2023, I guess could you kind of break out the buckets that they are typically going to fall into.
This was just commented on but I assume no part of that repeats in 'twenty for that all goes away and there is no part of that cost structure that's durable.
Alright, I will answer the last part of your question first on the cost for obviously for Iowa, California, Nebraska, Yes, those wont spend should not repeat themselves, but as I said, many times and not tongue in cheek I hope in the future. We continue to have one time implementation cost of new contract wins.
Have a better a better spend in that.
There are technology implementations, which are fixed in nature and that of course, you need to hire the people that are going to service. These businesses in advance of the revenue stream, which is a major part of the 65 implementation cost Mark right I'll just build on that so if you think about the 65 since the way I think about it.
Third of it is.
Sort of a fixed component and about two thirds of it is staffing mostly highly variable right. We have to staff up ahead of day one membership. So that's the way to think about it it obviously.
It comes to US ahead of when we start booking revenue. So I wouldn't say that it goes away specifically what it does is it goes into the anticipated margin. Once we run these businesses, we've talked about $3 50.
Same store new store embedded earnings here that $3 50 centers of course after operating cost. The reason we have 65 centers, we're not booking revenue yet.
So 65.
One third of fixed two thirds variable that's the right way to think about it.
It goes away as a onetime item, but it becomes consumed into the run rate of the new contracts as a way to think about it.
That's helpful. Thank you.
Our last question comes from David Windley with Jefferies. Please go ahead.
Good morning, Thanks for taking my question I Hope you can hear me.
I have a few small ones.
In your discussion around the states willingness to revisit these rates is a redetermination progressions do you have a sense of the urgency around that meaning will they do that on on relatively short notice or will they want to have that discussion.
In the next rate cycle or after the majority of the Redetermination in their states has played out.
Okay.
We don't know that specifically all we know is that they are aware of the theoretical.
Profitability.
That there is an acuity shift in the book.
Uh huh.
Widely could result in prospective rate changes, but also retrospective rate changes.
And I don't have to be data driven so.
The point on timing the data has to mature.
The claims have to complete the data has to be analyzed and then reasonable people will get in a room and figure out whether a rate changes necessary. So I would look at it I don't know whether they're going to wait until the entire redetermination process is complete but it's got to be data driven and so the data has to complete and it has to be verifiable.
And and.
And actionable David it's Marc.
The fact that a number of these states have also led with this thought unprompted to me is encouraging that will be somewhat proactive here.
Okay that's interesting.
Question is.
Any thoughts on trends post COVID-19 and medical costs that are <unk>.
More durable and maybe distinction as to whether you're betting on that or not so I'm thinking about things like lower ER utilization in.
That type of thing.
No I think.
The medical trends, we've experienced late in the year seem to have fallen into a nice pattern of of lack of volatility in understanding what COVID-19 is actually costing sort of like on a run rate basis, it's almost evolved into a $40 million to $50 million monthly run rate.
And as long as it stays stable as long as we know where the COVID-19 infection rate is spiking. It certainly is the inpatient costs are certainly the more costly component and that certainly hits the Medicare book more than the Medicaid book.
We have pretty good line of sight into what.
What those services will cost us.
But late in the year.
It sort of settled into a nice pattern of $40 million to $50 million a month.
And then lastly, Joe I appreciate your comments on your it sounds like your M&A pipeline is still very robust.
The cost of capital change in the environment.
Impact cadence or appetite.
Has it impacted expected valuation on the seller side.
No not at all.
We obviously measure the returns against our weighted average cost of capital.
Obviously, we're earning more on the free cash now than we were before so there's less of a drag.
But no it hasn't caused any change in momentum in terms of the appetite for counterparties in the market do you want to speak to us and think about becoming part of them the way to enterprise.
Alright, that's all I had thank you.
This concludes our question and answer session and Molina Healthcare's fourth quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.
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