Q2 2025 Molina Healthcare Inc Earnings Call

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Jeff <unk>: I would now like to turn the conference over to Jeff <unk>, Vice President of Investor Relations. Please go ahead.

Mark Keim: Our debt to cap ratio is about 43%. We continue to have ample cash and access to capital to fuel our growth initiative. Dazing Claims payable at the end of the quarter was $43. significantly lower than prior quarters driven by several items. Recall, the DCP calculation compares the fee-for-service components of our IV&R balance to the average daily medical claims expense. By quarter-end, larger-than-normal cash payments significantly reduce the IB&R balances driven by faster processing and adjudication of claims, as well as several large, discrete cash settlements of age liabilities. Normalizing for these items, our DCP is more in line with historical averages.

Jeff <unk>: And welcome to Molina healthcare second quarter 2025 earnings call. Joining me today are Molina, as president and CEO, Joseph <unk>, and our CFO Mark <unk>.

Jeff <unk>: A press release announcing our second quarter 2025 earnings was distributed after the market closed yesterday and is available on our Investor Relations website.

Jeff <unk>: Shortly after the conclusion of this call a replay will be available for 30 days.

Jeff <unk>: To access the replay are in the earnings release.

Jeff <unk>: For those of you who listen to the rebroadcast of this presentation. We remind you that all of the remarks are made as of today Thursday July 24th 2025 and have not been updated subsequent to the initial earnings call.

Good day and welcome to the Molina. Healthcare second quarter 2025 earnings conference call. All participants will be in. Listen, only mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by zero.

Mark Keim: As some of these items are sustaining, we guide to lower DCPs in the mid-40s in future periods. We remain confident in the strength of our actuarial process and our reserve position.

Jeff <unk>: On this call we will refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures can be found in the second quarter 2025 earnings release.

After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then 1 on your telephone keypad to withdraw your question. Please press star then to please note this event is being recorded.

I would now like to turn the conference over to Jeff gier, Vice President of investor relations. Please go ahead.

Mark Keim: Next, a few comments on our 2025 guidance. We continue to expect full-year premium revenue to be approximately $42 billion. Our Adjusted Earnings Guidance is no less than $19 per share. Within our guidance, the full-year consolidated MCR increases to 90.2. up 140 basis points from our initial guidance at 2450. As Joe mentioned, the higher MCR is disproportionately driven by marketplace. Marketplace is just 10% of our premium revenue, yet accounts for almost half of the consolidated increase at MCR. In Medicaid, we are raising the full-year MCR guidance from 89.9 to 90.9, as trend is now expected to exceed rate.

Jeff <unk>: During the call, we will be making certain forward looking statements, including but not limited to statements regarding our 2025 guidance in 2025 guidance elements, the medical cost trend and our projected MCR.

Jeff Gier: Good morning and welcome to Molina healthcare's second quarter 2025 earnings call.

Speaker Change: Joining me today are Molina's president and CEO. Joseph breki and our CFO Mark Kine.

Jeff <unk>: Medicaid rate adjustments and update our 2026 marketplace pricing and rate filings are RFP awards, and our M&A activity Red.

Speaker Change: A press release announcing our second quarter 2025 earnings was distributed after the market closed yesterday and is available on our investor relations website.

Jeff <unk>: Revenue growth related to Rfps and M&A activity. The recently enacted big beautiful Bill and expected Medicaid Medicare and marketplace program changes and the estimated amount of embedded earnings power.

Is the number is to assess the replay are in the earnings release.

Jeff <unk>: Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties.

Speaker Change: For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, July 24th, 2025 and have not been updated subsequent to the initial learnings call.

Jeff <unk>: And that could cause our actual results to differ materially from our current expectations.

Mark Keim: With the observed trend in Q2 and our expectations for higher trend over the rest of the year, we are updating our full year-over-year trend outlook from 5% to 6%. Updated rates in several states increase our full year-over-year rate only modestly from 5% to a little higher than 5%. We have several known on-cycle rates, time for Q3 and Q4, recognizing higher experience trends. We continue to see a willingness from states to discuss off-cycle and retro rate adjustments as data develops. but we do not include speculative off-cycle rate updates in our guidance. In the second half of the year, ongoing medical cost pressure will exceed known rate updates.

Jeff <unk>: We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q, and form 8-K filings with the SEC.

Speaker Change: On this call, we will refer to certain non-gaap measures. A Reconciliation of these measures with the most directly comparable. Gaap measures can be found in the second quarter 2025 earnings release.

Jeff <unk>: After the completion of our prepared remarks, we will open the call to take your questions.

Speaker Change: I will now turn the call over to our Chief Executive Officer, Joseph Rescue Joe.

Speaker Change: During the call, we will be making certain forward-looking statements including but not limited to statements regarding our 2025 guidance and 2025 guidance elements, the medical cost Trend and our projected mcrs, Medicaid rate, adjustments and updates.

Speaker Change: Thank you, Jeff and good morning.

Speaker Change: Today, I will discuss several topics our reported financial results for the second quarter.

Speaker Change: An update on our full year 2025 guidance.

Speaker Change: Our growth initiatives and strategy for sustained profitable growth.

Speaker Change: And some commentary on the potential impacts of the recently passed budget Bill.

Our 2026 Marketplace pricing and rate, filings our RFP Awards and our m&a. Activity Revenue growth related to rfps and m&a activity. The recently enacted, big beautiful Bill and expected Medicaid Medicare and Marketplace program changes and the estimated amount of our embedded earnings power.

Speaker Change: Let me start with our second quarter performance, which greatly informs our discussion on 2025 guidance.

Mark Keim: As such, we expect our Medicaid MCR of 90.8 in the first half to increase to 91 in the second half of the year. Even at these MCR guidance levels, higher than our long-term target range, our Medicaid segment four-year pre-tax guidance margin is approximately three and a half percent, demonstrating the underlying strength of this segment, even in this challenging operating environment. In Medicare, we are increasing our full-year MCR guidance from 89 to 90, reflecting higher utilization among our high-acuity duals membership. We expect our Medicare first half MCR of 89.2 to increase to 90.9 in the second half of the year, driven by our outlook on trends.

Speaker Change: Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties.

Speaker Change: Last night, we reported adjusted earnings per share of $5 48.

Speaker Change: That could cause our actual results to differ materially from our current expectations.

Speaker Change: On $10 9 billion of.

Speaker Change: Our premium revenue.

Speaker Change: Our 94% consolidated MCR reflects a very challenging medical cost trend environment, but moderated by our consistently effective medical cost management.

Speaker Change: We advise listeners to review the risk factors discussed in our form. 10K annual report filed with the SEC, as well as our risk factors listed in our form 10q and Form 8K filings with the SEC, after the completion of our prepared remarks, we will open the call to take your questions.

Speaker Change: We produced a three 3% adjusted pre tax margin.

Speaker Change: I will now turn the call over to our chief executive officer. Joseph breking.

Speaker Change: Joe.

Speaker Change: Thank you, Jeff and good morning.

Speaker Change: Year to date, our consolidated MCR is 89, 8% and our adjusted pre tax margin is three 6%.

Today, I will discuss several topics.

Speaker Change: Our reporting Financial results for the second quarter.

Speaker Change: An update on our full year 2025 guidance.

Speaker Change: In Medicaid the business produced an MCR of 91, 3%, which is above our long term target range.

Speaker Change: Our growth initiatives and strategy for sustaining profitable growth.

Mark Keim: normal medical cost seasonality, and the new inpatient facility fee schedule in the fourth quarter. The Medicare segment full-year pre-tax guidance margin is approximately 1.5%. Looking forward to 2026, we believe the final rate notice and our product designs, which we filed in May, captured this higher 2025 jumping off point for our 2026 business. In Marketplace, we are increasing our full-year MCR guidance from 80 to 85. The full year of Marketplace MCR now includes approximately 200 basis points attributable to the combination of prior year member reconciliation. and the new store impact of Connecticare. Excluding these items, the normalized full-year marketplace MCR is approximately 83.

Speaker Change: We continue to experienced medical cost pressure in behavioral pharmacy, and inpatient and outpatient care.

Bill: And some commentary on the potential impacts of the recently passed budget. Bill.

Speaker Change: Let me expand on what we're seeing in our Medicaid business.

Bill: Let me start with our second quarter performance, which greatly informs our discussion on 2025 guidance.

Speaker Change: Behavioral health costs have increased nationally.

Speaker Change: Collecting both supply side and demand side drivers and imposed limitations on utilization management in certain states.

Bill: Last night, we reported adjusted earnings per share of 5.48 on 10.9 billion dollars of Premium Revenue.

Speaker Change: High cost drugs remain a source of pressure driven by higher script volumes and the introduction of a variety of expensive therapies beyond <unk> for conditions, such as cancer and HIV.

Bill: Our 90.4% Consolidated, MCR reflects a very challenging medical cost Trend environment, but moderated by our consistently effective medical cost management.

Bill: We produced a 3.3%. Adjusted pre-tax margin.

Speaker Change: Higher inpatient utilization in the quarter was driven by a higher volume of admissions for complex health episodes.

Bill: Year to date. Our Consolidated. MCR is 89.8%. And our adjusted pre-tax margin is 3.6%.

Speaker Change: Many of which originated from increased ER visits.

Mark Keim: We expect the normalized Marketplace MCR of 80 in the first half of the year to increase to approximately 86 in the second half of the year, reflecting higher observed trends and normal seasonal patterns for Marketplace. While we are disappointed with these results for Marketplace, I will note that, even with an expected full-year reported MOR of approximately 85. we would achieve low single-digit pre-tax margins in this business. The marketplace segment full year pre-tax guidance margin is approximately 1% or 3% normalized for the items I have detailed. We believe we can capture this trend pressure in our 2026 marketplace pricing with additional conservative assumptions included for the expiration of enhanced subsidies.

Speaker Change: And the increase in outpatient utilization in the quarter was driven by primary care visits and preventive screenings.

Bill: In Medicaid, the business produced an MCR of 91.3% which is above our long-term target range.

Speaker Change: Many of which led to subsequent treatment and specialist settings.

Bill: We continue to experience medical cost pressure and Behavioral.

Bill: Pharmacy and inpatient and Outpatient Care.

Speaker Change: This is the fourth consecutive quarter, we have observed some combination of these trends.

Bill: Let me expand on what we are seeing in our Medicaid business.

Speaker Change: The magnitude and persistence of these medical cost increases are unprecedented.

Speaker Change: To briefly recap how these trends have emerged over time.

Speaker Change: Okay.

Bill: Behavioral Health costs have increased nationally reflecting, both supply side and demand side drivers and imposed limitations on utilization Management in certain States.

Speaker Change: Starting in the third quarter of 2024, while an increasing trend emerged from the end of the Redetermination process.

Speaker Change: Rates and Molina as risk corridor positions at the time were sufficient to offset that increasing trend.

Bill: High-cost drugs. Remain a source of pressure driven by higher script volumes and the introduction of a variety of expensive, therapies Beyond glp ones for conditions such as cancer and HIV.

Speaker Change: By the fourth quarter of 2020 for the increasing medical cost trend move beyond the 2024 mid year rate updates and corridors had largely become depleted.

Mark Keim: new program integrity policies, and the related potential acuity shift in the market risk pool. Given our relatively low exposure to marketplace at just 10% of our current portfolio revenue mix. we can remain focused on producing mid-single-digit pre-tax margin. We will prioritize margin and let membership fall where it may.

Bill: Higher inpatient utilization in the quarter was driven by a higher volume of admissions for complex Health episodes.

Bill: Many of which originated from increased ER visits.

Speaker Change: Moving into the first quarter of 2025, the January 1st rate cycle captured much of the continued trend pressure.

Bill: And the increase in outpatient utilization in the quarter was driven by Primary Care visits and preventive screenings.

Speaker Change: And now in the second quarter of 2025, we experienced yet another increase in trend, which moved beyond the rate updates received in the first quarter.

Bill: Many of which led to subsequent treatment in specialist settings.

Mark Keim: We now expect the full-year G&A ratio to be approximately 6.6. better than previously guided by 30 basis points, reflecting the very low second quarter expense and continued efficiencies in our operation. Our full year EPS guidance is now expected to be no less than $19 per share, lower than our first quarter guidance by $5.50. Guidance now includes $8 for our updated full-year MCR outlook, partially offset by $2.50 from the improved G&A ratio, and slightly higher investment income, given the fewer Fed rate cuts now expected. Our consolidated guidance pre-tax margin is expected to be approximately 3.1 despite the significant dislocation of rates and trends.

Speaker Change: And risk corridor protection at this point is very limited and isolated.

Bill: This is the fourth consecutive quarter. We have observed, some combination of these trends.

Bill: The magnitude and Persistence of these medical cost increases are unprecedented.

Speaker Change: We are confident our cost control protocols and procedures continued to be affected, albeit applied to much higher intake volumes.

Bill: To briefly recap how these Trends have emerged over time.

Speaker Change: Cost data indicates a higher prevalence of allowable and appropriate diagnosis and medical procedures.

Bill: Starting in the third quarter of 2024 while an increasing Trend emerged from the end of the redetermination process.

Speaker Change: In Medicare, we reported a second quarter MCR of 90%.

Bill: Rates and Molina's risk Corridor positions at the time, were sufficient to offset that increasing trend.

Speaker Change: Which is above our long term target range as utilization was higher in the more acute populations, particularly for long term services and supports and high cost drugs.

Bill: Year rate updates and corridors had largely become depleted.

Speaker Change: And marketplace, the second quarter MCR of 85, 4% with much higher than expected, including the new store MCR related to Connecticut.

Bill: Moving into the first quarter of 2025 the January 1st Rate cycle captured much of the continued Trend pressure.

Mark Keim: with 55% of our revenue renewing on January 1st of next year. Our race cycle is well-timed for 2026.

Speaker Change: We continued to experience much higher utilization relative to risk adjustment revenue for.

Bill: And now in the second quarter of 2025, we experienced yet another increase in Trend which moved beyond the rate updates received in the first quarter.

Operator: This concludes our prepared remarks. Operator, we are now ready to take questions.

Speaker Change: The router, which has now been validated by external sources.

Bill: And risk Corridor protection. At this point is very limited and isolated.

Speaker Change: Our adjusted G&A ratio at six 1% reflects lower incentive compensation as a result of our revised view of performance as well as continued productivity enhancements.

Operator: 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're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up.

Bill: We are confident our cost control, protocols and procedures continue to be effective. Albeit applied to much higher intake volumes,

Speaker Change: Turning now to our 2025 guidance.

Cost data indicates a higher prevalence of allowable and appropriate, diagnosis, and medical procedures.

Speaker Change: Full year 2025 premium revenue guidance remains unchanged at approximately 42 billion.

Bill: In Medicare, we reported a second quarter, MCR of 90%.

Speaker Change: Our full year 2025 adjusted earnings per share guidance is now expected to be no less than $19 per share a floor. If you will which is $5 50 below our initial guidance of $24 50.

Operator: At this time, we will pause momentarily to assemble our roster.

Andrew Mok: The first question comes from Andrew Mok from Barclays. Please go ahead. Hi, good morning. You noted that the back half Medicaid MLR is higher than the first half, but it looks like there's some modest improvement from the 2Q MLR.

Which is above our long-term target range as utilization was higher in the more acute populations particularly for long-term services and supports and high-cost drugs.

Speaker Change: And $3 lower than the midpoint, but was recently communicated on July 7th.

Mark Keim: How do you get confidence that Medicaid margins will improve from here when the spot rate for reimbursement seems to be inadequate in an inflationary trend environment and newer redeterminations and integrity measures look like they may impact both membership and risk pool on a go-forward basis? Thanks. Yeah, good morning, Andrew. It's Mark. In the first half, we reported a 90.8 And my guidance implies a 91 for the second half of the year. Essentially what we have is trend slightly outstripping the rates that we know about, which is why we have a little upward pressure on that.

Bill: In Marketplace, the second quarter, MCR of 85.4% was much higher than expected including the new store. MCR related to kinetic are

Speaker Change: Providing some color.

Speaker Change: This further revision results from new information gained in our June close process and implications for trend assumptions for the second half of the year, particularly related to marketplace.

Bill: We continue to experience much higher utilization, relative to risk adjustment Revenue.

Bill: The latter which has now been validated by external sources.

Speaker Change: We use this most recent experience data to forecast the balance of the year, which resulted in a more conservative view.

Our adjusted GNA ratio at 6.1%, reflects lower incentive compensation, as a result of our revised view of performance as well as continued productivity. Enhancements,

Speaker Change: And a view within a wider range of probable outcomes than is normal for this point in the year.

Bill: Turning now to our 2025 guidance.

Speaker Change: This revised guidance of a $19 floor produces a consolidated MCR and pre tax margin of 92% and three 1% respectively.

Bill: Full year. 2025 premium Revenue guidance remains unchanged at a proximately 42 billion.

Mark Keim: Now the good news is our previous guidance already had a bunch of rate manifesting in Q3 and Q4. We didn't get much more. I originally thought second half would be better than this. So we are factoring in that observed trend. You know on the other issue you mentioned, there's the news flying around about the duplicative members in Marketplace and or Medicaid. If you look, I think they're saying it's about 2.8% of the combined Medicaid and Marketplace pool, which we think there's a lot of errors in the numbers and I think it's also gonna take a long time to play out.

Speaker Change: Our full year guidance now includes 140 basis points of consolidated MCR pressure compared to our initial guidance of $24 50.

Bill: Our full year 2025 adjusted earnings per share. Guidance is now expected to be no less than $19 per share a floor. If you will, which is 5.50 cents below our initial guidance of $44.50.

Speaker Change: Which is disproportionately attributed to marketplace.

Bill: And $3 lower than the midpoint. But was recently communicated on July 7th

Speaker Change: Marketplace is 10% of our revenue and accounts for nearly half of this 140 basis point MCR revision.

Bill: Providing some color.

Speaker Change: We consider the $19 guidance to be a floor as we believe the cost trend could moderate from this conservative indication and produce earnings upside.

Mark Keim: I don't see that as being a meaningful membership headwind this year. So to me it's all about the relationship of rates and trend and we already had a lot of rates back in for us. This trend keeps coming and we're gonna model it like it is.

Bill: This further, revision results from new information gained in our June closed process and implications for Trend assumptions for the second half of the Year particularly related to Marketplace.

Speaker Change: A reminder, that 35 basis points of MCR in the second half equates to $1 of upside earnings per share potential.

Speaker Change: Now some color on the segments.

Bill: We use this most recent experience data, to forecast, the balance of the year, which resulted in a more conservative View, and a view, within a wider range of probable outcomes than is normal for this point in the year.

Speaker Change: In Medicaid our guidance assumes a full year MCR of 99%, which produces a pre tax margin of three 6%.

Mark Keim: Great, maybe just a follow-up on the ACA. As you look to refile the rates, is there a number you have in mind for the required premium increases next year to properly account for all the trend and risk pool issues across both 25 and 26 and reset to a normalized margin? Thanks. We're not going to disclose our rate filing state by state, but I will tell you the rate models very clearly. First, have to catch up with the underperformance this year to get it back to mid-single-digit target margins. Second, a healthy dose of medical cost trend.

Speaker Change: While this Medicaid MCR result is above the high end of our long term target range, we do evaluate it in the context of this unprecedented and challenging trend environment.

Bill: This revised guidance of a 19 dollar War, produces a Consolidated, MCR, and pre-tax margin of 90.2% and 3.1% respectively.

Speaker Change: We received on cycle rate adjustments and new off cycle rate updates in a few states that will benefit the second half of 2025.

Our full year guidance. Now includes 1, 140 basis points, of Consolidated, MCR pressure compared to our initial guidance at 24.50.

Bill: Which is disproportionately attributed to Marketplace.

Speaker Change: Then with approximately 55% of our Medicaid premium renewing on January one.

Bill: Marketplace is 10% of our revenue and accounts for nearly half of this 140 basis point MCR. Revision,

Mark Keim: Bear in mind, we've increased our assumption this year on medical cost trend year over year from 7% to 11%. You can rest assured we're putting a healthy dose of trend into rates. And then thirdly, the acuity shift that's going to occur next year due to the expiration of the APTCs. Again, modeled conservatively, a healthy dose of conservatism put into rates. But we're not going to go state by state, but we've captured all the elements that need to be captured. And we don't expect the business to grow next year. The market will shrink, and we're not looking to grow.

Speaker Change: Our rate cycle is well timed for early 2026.

Speaker Change: There is little question that most state programs are significantly underfunded as a result of medical cost inflection.

Bill: We consider that 19 guidelines to be a floor as we believe the cost Trend could moderate from this conservative indication and produce earnings upside.

Speaker Change: We have a very strong rate advocacy efforts working with our state partners to restore rates to appropriate levels.

Bill: A reminder that 35 basis points of MCR in the second half equates to $1 of upside earnings per share potential.

now, from color around the segments,

Speaker Change: States are listening and had been responsive.

Speaker Change: With that in mind, our own analysis validated by fact based external report.

Speaker Change: Has this operating with Medicaid MCR.

Bill: In Medicaid, our guidance assumes a full year MCR of 90.9% which produces a pre-tax margin of 3.6%.

Speaker Change: Two to 300 basis points lower than the broader market.

Mark Keim: We're looking to get back to mid-single-digit target margins, having rated up for all the elements that are going to impact next year. Great, thank you.

Speaker Change: When rates and trend reached equilibrium for the broader market, we should be back to operating within our long term target range.

While this Medicaid, MCR result is above the high end of our long-term target range. We do evaluate it in the context of this unprecedented and challenging Trend environment.

Speaker Change: In Medicare our full year guidance includes an MCR of 90% and a low single digit pre tax margin.

Josh Raskin: The next question comes from the line of Josh Raskin from Neffron Research. Please go ahead. Yeah, thanks.

Bill: We received on cycle rate adjustments and new off-cycle rate updates. In a few states that will benefit the second half of 2025.

Speaker Change: We continue to effectively manage the elevated utilization through our cost control protocols.

Mark Keim: Um, I guess the question on the marketplace would be in light of the trends developing even worse, just the last couple of weeks, how much adjustment to your market price marketplace pricing can actually be done at this point, you know, to the states and the Fed Exchange, they allow significant adjustments at this point. And maybe when's the last time you could submit pricing changes for 2020? Yeah.

Then with a proximately 55% of our Medicaid premium, renewing on January 1st.

Speaker Change: We consider this higher cost trend in our bids for 2026 and remain strategically focused on our dual eligible population.

Bill: Our rate cycle is well timed for early 2026.

Speaker Change: And.

Speaker Change: Place at this time in the cycle. The focus is not only on the second half of 2025, but also on the positions taken in rate filings for 2026.

Bill: There is little question that most State programs are significantly underfunded as a result of medical costs and collection.

Bill: We have very strong rate, advocacy efforts, working with our state, Partners to restore rates to appropriate levels.

Mark Keim: Hey, Josh. Good morning. Yes, the states are adding a lot of flexibility this year. In past years, it was pretty hard and fast when the deadlines are. This year, every state's a little bit different, but there's either new deadlines, even through August, or there's soft kind of rolling discussions about where we are. Now, some states also parse things a little bit differently. Can you change your trend assumption year to year just on core utilization? That might be harder than can you change your assumption for acuity shift as more data evolves. So it's a little bit about what components of pricing are changing.

Bill: States are listening and have been responsive.

Speaker Change: With respect to full year 2025, we expect to produce an MCR of 85% and a pre tax margin in the low single digits.

Bill: With that in mind, our own analysis validated by fact-based, external reports.

Speaker Change: This result includes the pressure from the prior year items, we recognized in the first half and the new store impact of Connecticut.

Bill: Right in the broader Market.

Speaker Change: We conservatively forecasted medical cost trend and our risk adjustment revenue.

Bill: When rates and Trends reach equilibrium for the broader Market, we should be back to operating within our long-term target range.

Speaker Change: The router, which has now been validated by external sources as it is clear that the market wide risk pool is higher acuity.

In Medicare, our full year guidance includes an MCR of 90% and a low single digit pre-tax margin.

Speaker Change: Medical cost trend relative to risk adjustment continues to produce a higher than expected MCR and we have considered this higher cost baseline and trend and our rate filings for 2026.

Bill: We continue to effectively manage the elevated utilization, through our cost control, protocols.

Mark Keim: States view the components differently on where the flexibility is, but that's an ongoing discussion. And you have to appreciate that states need to be a little bit accommodating here, because the last thing they want is folks to drop out. They need to be accommodating on pricing, because it's part of a sustaining market. Yeah, that makes sense.

Bill: We consider this higher cost Trend in our bid for 2026 and remains strategically focused on our dual eligibles population.

Speaker Change: More on that later as rates for 2026 will also be affected by the exploration of the enhanced subsidies and program integrity policies.

Speaker Change: Our small silver and stable approach to this line of business, where we target mid single digit margins, even at the expense of growth was deliberate and well considered.

In Marketplace. At this time in the cycle, the focus is not only on the second half of 2025, but also on the positions taken in rate filings for 2026.

Mark Keim: But I guess I'm just sort of thinking about your comments last quarter and the quarter before where you spoke about a more stable marketplace membership. You talked about higher retention this year. So I guess I'm just still struggling with what do you think is the root cause of this pickup and utilization and now I guess market-wide? It is market-wide and as demonstrated by the Wakely analysis that the risk pool has deteriorated by 8% year over year. The acuity of the entire marketplace risk pool is higher by 8% year over year, which means on a relative basis, risk adjustment is not going to keep up with the elevated trend.

Bill: With respect to full year 2025, we expect to produce an MCR of 85% and a pre-tax margin in the low single digits.

Speaker Change: This line of business has significant inherent volatility and are constantly shifting risk pool.

Speaker Change: We have limited this segment to just 10% of our portfolio and we always approach it cautiously.

Bill: This results includes the pressure from the prior year items, we recognize in the first half and the new store impact of Connecticut.

we conservatively forecasted medical cost Trend, and our risk adjustment Revenue,

Speaker Change: In summary, with respect to our full year guidance, we provided with full confidence quantification and detail in this season of great uncertainty.

Bill: The router which has now been validated by external sources as it is clear that the market-wide risk pool is higher acuity.

Speaker Change: Turning now to our growth initiatives.

Mark Keim: As I said, we've increased our trend assumption from 7% that went into pricing to 11% in our forecast. And as I said, all we can do is put a healthy dose of trend into next year's rates, catch-up adjustment, acuity adjustment, and we feel confident that we'll get back to mid-single-digit margins at the expense of growth. But there's no other explanation except that the marketplace risk pool nationally is higher acuity. Wakely's estimate, 8% higher this year than last year.

Speaker Change: We remain on track to achieving our premium revenue target of $46 billion in 2026.

Bill: Medical cost Trend relative to risk adjustment continues to produce a higher than expected MCR. And we have considered this higher cost Baseline and Trend in our rate filing for 2026.

Speaker Change: And with a modest estimate of future growth initiatives at least $52 billion for 2027.

Speaker Change: Our outlook considers growth in our current footprint and recent Medicaid and Medicare Duals RFP wins.

More on that later. As rates for 2026 will also be affected by the expiration of the enhanced subsidies and program Integrity policies.

Speaker Change: These wins should more than offset the marketplace headwind due to the expiration of enhanced subsidies.

Our small silver and stable approach to this line of business where we target mid single-digit, margins, even at the expense of growth.

Was deliberate and well-considered.

Speaker Change: This outlook is before considering any impacts of membership declined due to the budget Bill, which we continue to evaluate and size and believe the ultimate impact of which is likely to manifest beyond 2028.

Mark Keim: Alright, perfect.

Bill: This line of business has significant inherent volatility in a constantly shifting risk pool.

Stephen Baxter: The next question comes from Stephen Baxter from Wells Fargo. Please go ahead. Hi, thanks. Just another couple on the exchanges.

Bill: we have limited this segment to just 10% of our portfolio and we always approach it cautiously

Mark Keim: I guess I know you're not going to give specific rate increases or requests by state, but I guess this big picture, how are you thinking about market-wide enrollment decline in 2026? Obviously, that's a key component of forecasting acuity correctly. And I guess is it fair to say that the acuity shift that you're putting into pricing is going to be multiples of the acuity shift we're seeing this year?

Speaker Change: With respect to M&A activity, our acquisition pipeline still contains many actionable opportunities.

Speaker Change: And we remain opportunistic in deploying capital to accretive acquisitions.

Bill: in summary with respect to our full year guidance. We provide it with full confidence quantification and Detail in this season of great uncertainty.

Bill: Turning now to our growth initiatives.

Speaker Change: This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options, creating more opportunities.

Mark Keim: And ultimately, if you do have states that don't let you take the rate increases that you want, how do you plan to respond? Thanks. Mark? Yeah. So, a couple of things.

Speaker Change: Our embedded earnings which accounts for the estimated accretion related to new contract wins and recent acquisitions remains at $8 65 per share.

Bill: We remain on track to achieving our premium Revenue Target of 46 billion in 2026 and with a modest estimate of future growth initiatives. At least 52 billion for 2027

Mark Keim: We're hesitant to talk about specific acuity adjustments or member shifts just because this is a competitive market, and you can imagine that that's something everyone needs to do independently. The other thing, though, is it varies so much by state. There are national averages for trend, for acuity shift from the subsidies, from acuity shift from program integrity. But the dynamics state by state are so different. One of the things you have to look at is some of these states didn't grow their marketplace meaningfully from pre-pandemic, so they're not in a different place. But it also really matters, what is the distribution of metallic cohorts?

Bill: Our Outlook considers growth in our current footprint and recent Medicaid and Medicare duals RFP wins.

Speaker Change: For all of these reasons, we remain confident in our long term growth targets.

Bill: These wins. Should more than offset the marketplace headwind due to the expiration of enhanced subsidies.

Speaker Change: Turning now to the political and legislative landscape and the related long term outlook for our businesses.

Speaker Change: In Medicaid, we believe changes to the Medicaid program related to the recently passed budget Bill will be modest and gradual.

Bill: This Outlook is before, considering any impacts of membership to clients due to the budget bill, which we continue to evaluate in size and believe, the ultimate impact of, which is likely to manifest Beyond 2028.

Speaker Change: We evaluated impacts in two broad categories.

Speaker Change: Direct and indirect.

Speaker Change: By direct impact, we mean any impacts specific to our actual membership and the potential for a related risk pool acuity shift.

Bill: With respect to m&a, activity our acquisition pipeline, still contains many actionable opportunities.

Bill: And we remain opportunistic in deploying Capital to a creative acquisitions.

Speaker Change: Note that for the expansion population work requirements commence in 2027 or later by approval.

Mark Keim: What is the distribution of federal poverty level cohorts? And then finally, what states expanded, which ones didn't? All those things mean that some states will have very material declines in marketplace. Other ones will be quite subtle because things aren't that meaningfully different under the new rules.

Speaker Change: Biannual reader applications also commenced in 2027 or later by approval as well.

Bill: This current challenging operating environment has been a catalyst for many smaller and less Diverse Health Plans to consider their strategic options, creating more opportunities.

Speaker Change: We continue to estimate that the ultimate impact will be in the range of 15% to 20% on the $1 3 million members in our expansion population as.

Mark Keim: So, look, we have to go about this and price state by state very specifically. In some cases, the numbers are big, and in some cases, not so much. And related to the acuity shift, which is the wild card for next year, it'll be interesting to see how all the market participants react to that. We have very intricate models trying to assess what the elasticity of demand is around the dollar differential in price, looking at whether we're number one, two, three, or four in that market and where the competitors were last year. Is a bronze product available on that?

Bill: Our embedded earnings, which accounts for the estimated accretion related, to new contract wins and recent acquisitions remains at 8.65 cents per share.

Speaker Change: As many of these members will automatically qualify as a result of exclusions.

Bill: For all of these reasons, we remain confident in our long-term growth targets.

Speaker Change: And two thirds already work in some capacity.

Bill: turning now to the political and legislative landscape and the related long-term outlook for our businesses

By indirect impacts of the program, we are referring to funding reductions not expressly linked to certain populations.

Bill: In Medicaid, We Believe changes to the Medicaid Program related to the recently passed budget. Bill will be modest and gradual

Speaker Change: For instance, it is more difficult to predict how states will react to the reductions in federal funding, resulting from limitations on directed payments and provider taxes.

Bill: We evaluate its impacts in 2, broad categories.

Bill: Direct and indirect.

Speaker Change: States could limit eligibility reduced benefits or keep their programs attacked by funding it with additional state revenues.

Mark Keim: So a lot of factors go into it. As I said, all you can do is lean on the assumptions, approach it conservatively when it comes to the acuity adjustment. The, the, our state based partners are absolutely willing to give us a second pass rate filing to use the latest information which should mitigate any mispricing risk.

Bill: By direct impact. We mean, any impact specific to our actual membership and the potential for a related risk pool, Acuity shift

Speaker Change: We anticipate that whatever estate elects to do we'll follow prevailing state specific political tendencies.

Bill: Note that for the expansion population, work requirements commenced in 2027 or later by approval.

Speaker Change: We believe these changes will be implemented over the course of the two year period of 2027, and 2028 and possibly into 2029, and therefore allow the market time to react appropriately so any impact would be gradual and not abrupt.

Bill: By annual reverification also comments in 2027 or later by approval as well.

Justin Lake: The next question comes from Justin Lake from Wolf Research. Please go ahead. Thanks, good morning. First question is around, you know, run rate earnings. It looks like their back half is around $750. I think you've talked about and even seen historically about even split, give or take, of first half to second half, so you look like you're one rating at about $15 a share in the back half of the year. Curious if, you know, that's a reasonable way to think about it in your mind, and if so, how does that bias us to think about your ability to grow earnings year-over-year into the into 2022?

Speaker Change: Finally in marketplace. We continue to expect the enhanced subsidies will not be extended beyond this year.

Bill: Ity.

Speaker Change: External sources estimate a significant industry impact to 2026 enrollment.

Bill: By indirect impacts of the program, we are referring to funding reductions. Not expressly linked to certain populations.

Speaker Change: In addition to taking a conservative view of the current medical cost baseline and forward trend. We are attempting to conservatively capture the potential related acuity shift in the risk pool, and our 2026 rate filings.

Bill: For instance, it is more difficult to predict how States will react to the reductions in federal funding resulting from limitations on directed payments and provider taxes.

Speaker Change: Most of our states have confirmed that they will allow market participants a second pass rate filing which will give us a last look based on the most current information available thus mitigating any mispricing risk.

Bill: States could limit eligibility reduce benefits or keep their programs intact by funding it with additional State revenues.

We anticipate that whatever a state elects to do will follow prevailing State, specific political tendencies

Mark Keim: Well, I think that is the run rate math. Bear in mind that over half our Medicaid revenue has a 1-1 renewal cycle. We're advocating very hard for adequate rates for 1-1. making sure our state partners use the most reasonable and recent baseline. We're advocating for July of 24 to July 25 as the baseline. which is really important. Takes a lot of risk out of what you, the jumping off point that you trend off of. So we're optimistic about the one-one rate cycle for 20. Of course, we have a third of embedded earnings that are going to emerge in 2026, including the $1 of implementation cost that just disappears, but too early to make a call in 2026.

Speaker Change: Regardless, our strategy of keeping this business small stable and oriented towards silver tiered products has served us well.

Speaker Change: In summary, we are disappointed with our second quarter results and guidance revision even in the backdrop of this difficult environment of accelerating medical cost trend.

Bill: We believe these changes will be implemented over the course of the 2-year period of 2027 and 2028 and possibly into 2029 and therefore allow the market time to react appropriately. So any impact would be gradual and not abrupt.

Speaker Change: In Medicaid we're health plan participants are essentially right takers. We believe this dislocation between rates and trend is temporary and will normalize over time just as it has in the past years of the program.

Bill: Finally, in Marketplace, we continue to expect, the enhanced subsidies will not be extended Beyond this year.

Bill: External sources estimate, a significant industry impact to 2026 enrollment.

Speaker Change: And in a marketplace, where there has been significantly increased utilization relative to risk adjustment our rate filing process will address this incongruity and restore the product to target margins.

Bill: in addition to taking a conservative view of the current medical cost Baseline, and forward Trend, we are attempting to conservatively capture the potential related Acuity shifts in the risk pool in our 2026 rate violence,

Mark Keim: But that is the back half math, about $15 a share, but we feel good about the pricing cycle for Marketplace, feel pretty good about the rate cycle for 1-1-26 in Medicaid, and then, of course, we have embedded earnings, but far too early to make a call in 2026. We'll have to wait to the third or the fourth quarter to do that.

Speaker Change: I do step back and take stock.

Speaker Change: In doing so I am encouraged by a number of observations that deserved emphasis.

Speaker Change: Even in this broadly challenging environment.

Bill: Most of our states have confirmed that they will allow Market participants a second pass rate filing which will give us a last look based on the most current information available thus mitigating any mispricing risk.

Speaker Change: We have the confidence and clarity to provide a specific earnings per share guidance floor with upside potential.

Mark Keim: Mark, anything to add? Just that your math is good, roughly $7.50 in the second half, but you can't just double it for next year for all the reasons Joe mentioned. Again, the rate cycle is just critical for January 1st, and the industry needs these rates more than Molina does at the moment. The industry is very underfunded. We need money just to get back to target margins. So we should see a lot of progress on the rate cycle for January 1st. And then lastly, as Joe mentioned, we're carrying that $8.65 of embedded earnings. We had previously guided to seeing about a third of it next year.

Speaker Change: We.

Regardless, our strategy of keeping this business, small stable, and oriented towards silver. Tiered products has served us. Well,

Speaker Change: To grow premium this year at 9% and nine.

Speaker Change: 17% over the past few years.

Speaker Change: Our consolidated MCR outlook is 92% and an extended period of accelerating trend.

Bill: In summary, we are disappointed with our second quarter results and guidance revision. Even in the backdrop of this difficult, environment of accelerating medical cost trend.

When combined with our G&A efficiencies harvested over the past number of years, we are still projecting a full year three 1% pretax margin, which is just 90 basis points off of lower end of our long term range.

Bill: In Medicaid, where Health Plan, participants are essentially rate takers. We've believed this dislocation between rates and trend is temporary and will normalize over time just as it has in the past years of the program.

Speaker Change: And finally.

Speaker Change: With margins normalizing as we are heading towards 46 billion and.

Mark Keim: We'll update that as we see the rate cycle and everything else coming forward, but as Joe mentioned, if the guidance is a third of that for next year, a dollar of it's guaranteed. It's just the reversal of the implementation fees we carry this year. So too soon to give guidance for next year, but I think those are the building blocks and the setup for next year. The last comment I'll make on the back half is... when we closed out. The second quarter. It became obvious to us that quarterly trend in Medicaid had again accelerated. Trended in first quarter, off the fourth it was 1.2%.

Speaker Change: $52 billion of premium revenue in 2026, and 2027, we are very well positioned to reestablish our profitable growth trajectory.

Bill: And in marketplace where there has been significantly increased utilization relative to risk adjustment. Our rate filing process will address this income ritty and restore the product to Target margins.

Bill: I do step back and take stock.

Bill: in doing so, I am encouraged by a number of observations that deserve emphasis

Speaker Change: At Molina, we powered through short term industry wide challenges and strive to deliver superior sector performance.

Bill: even in this broadly challenging environment.

Speaker Change: We have built a durable government sponsored health care franchise.

Bill: We have the confidence and Clarity to provide a specific earnings per share guidance floor with upside potential.

Speaker Change: This franchise has been designed to deliver results with the same consistency and commitment to operating excellence that has been our hallmark.

Bill: We continue to grow premium this year at 9% and 19% over the past few years.

Mark: With that I will turn the call over to Mark for some additional color on the financials.

Mark Keim: That's just the quarterly. When we closed out June it was 1.6. just a quarterly We, of course, you have a decision to make. How conservative do you wanna be for the back half? We repeated that 1.6% Medicaid trend in each of Q3 and Q4. So whether it proves to be conservative or not, or enough, remains to be seen. But we used the last data point, which is the highest quarterly trend we've observed in the last four. projected at four. Thanks.

Bill: Our Consolidated MCR Outlook is 90.2% in an extended period of accelerating trend.

Speaker Change: Mark.

Mark: Thanks, Joe and good morning, everyone.

Mark: Today I'll discuss additional details of our second quarter performance, the balance sheet and our 2025 guidance.

Bill: When combined with our GNA efficiencies harvested, over the past number of years, we are still projecting a full year. 3.1% pre-tax margin, which is just 90 basis points off the lower end of our long-term range.

Mark: Beginning with our second quarter results.

Bill: and finally,

Mark: For the quarter, we reported approximately $11 billion in total revenue and $10 9 billion of premium revenue with adjusted EPS of $5 48.

Mark: Our second quarter consolidated MCR was 94, reflecting a very challenging medical cost trend environment for each of our segments, but moderated by our consistently effective medical cost management.

Mark Keim: And then just a couple quick numbers questions. First, the SG&A benefit for the year from lower comp, executive comp, that, you know, probably comes back next year. If it's possible to put a number on that, that'd be helpful. And if I missed it, I apologize. But I heard Steve ask what you think the exchange is declined by next year in terms of membership. I didn't hear an answer there. Thanks. So a couple of things there. Our original G&A guidance was 6.9, way back at the beginning of the year. We're currently guiding to 6.6. And a meaningful part of that is the one-timer, the management compensation that came out in the second quarter.

Bill: With margins. Normalizing, as we are heading towards 46 billion and 52 billion dollars of Premium Revenue in 2026 and 2027. We are very well positioned to reestablish our profitable growth trajectory.

At Molina, we power through short-term, industry-wide challenges and strive to deliver Superior sector performance.

Mark: And Medicaid are second quarter MCR was 91 three.

We have built a durable government sponsored Healthcare franchise.

Mark: Higher than our expectations.

Mark: We continue to experienced medical cost pressure in behavioral pharmacy, and the inpatient and outpatient care settings that Joe summarized.

Bill: This franchise has been designed to deliver results with the same consistency and commitment to operating Excellence that has been our Hallmark.

Mark: The combination of these trends exceeded rate updates received in the first half of the year.

Mark: With that, I will turn the call over to mark for some additional color on the financials mark.

Thanks Joe and good morning everyone.

Mark: In Medicare our second quarter MCR was 90.

Mark: Today I'll discuss additional details of our second quarter performance. The balance sheet and our 2025 guidance.

Mark Keim: Now, if you're going to, how do I think about the setup for next year? Yeah, that management compensation piece comes back next year as potentially a G&A headwind. The good news is it's offset by that implementation cost that's in our G&A that go away for next year, right? So those two offset, which if I were modeling a G&A number for next year, it would be a little better than 6.9, call it 6.8, and we'll see how that evolves, but I think that's the zip code.

Mark: So higher than our expectations.

Mark: We experienced higher utilization among our high acuity duals populations, particularly for <unk> and high cost pharmacy drugs.

Mark: Beginning with our second quarter results.

Mark: We remain confident in our cost controls.

For the quarter, we reported approximately 11 billion in total revenue and 10.9 billion of Premium Revenue with adjusted EPS a 548.

Mark: In marketplace, our second quarter reported MCR was 85 four <unk>.

Our second quarter Consolidated, MCR was 90.4.

Mark: Similar to first quarter. The MCR includes approximately 150 basis points of higher new store MCR in Connecticut, and 150 basis points per member reconciliation from previous years.

Mark: Reflecting a very challenging medical cost Trend environment for each of our segments, but moderated by our consistently effective medical cost management.

Mark Keim: Now, on marketplace membership, you know, we're not here to give projections on the market, and specifically not on our own member base. Some pundits out there have kicked around numbers of a roughly 30% decline. You can make an argument for why it's more, you can make an argument for why it's less. We need to take our own views internally. And why that's critical is linked to the membership decline is the acuity shift. So we're working through that right now, as you can imagine. And given that, given that it's only 10% of the portfolio, we have far more optionality and flexibility than many others in the market.

Mark: In Medicaid, our second quarter, MCR was 91.3.

Mark: Higher than our expectations.

Mark: Excluding these items the normalized MCR of approximately 82 four was higher than we expected.

Mark: Utilization among our renewing membership and new membership was elevated compared to previous guidance.

Mark: The combination of these Trends exceeded rate, updates received in the first half of the year.

Mark: While risk adjustment might normally offset higher observed trend.

Mark: Our market indicators clearly suggest that the overall market risk pool is also significantly elevated we.

Mark: In Medicare, our second quarter, MCR was 90.

Mark: Also higher than our expectations.

Mark: Reducing the value of the natural hedging effect of risk adjustment.

Mark: We experienced higher utilization among our high Acuity. Duals populations.

Mark: The initial weeklies just received in late June clearly confirm that national marketplace risk pools are trending higher.

Mark Keim: We'd like to keep it at 10. But if it becomes lower in order to get to mid single digit margins, that's the way it's going to be.

Mark: Particularly for ltss and high-cost Pharmacy. Drugs

Mark: We remain confident in our cost controls.

Mark: Yeah.

A.J. Rice: Great, thank you. The next question comes from A.J. Rice from UBS, please go ahead. think about second half of this year versus potentially first half of next year. I know you've got 55% of your rate or your book resets and rates. If I think about where you're at on margin for first half of this year versus and then second half, I assume when you came into the year, you assumed a step up in performance in the second half of this year. That doesn't seem like it's materialized. I'm trying to understand how much of a hole you have when you compare first half of this year against your jumping off point for first half next year.

Mark: Our adjusted G&A ratio for the quarter was $6 one.

In Marketplace, our second quarter, reported MCR with 805.4.

Mark: Significantly below normal levels, reflecting reduced incentive compensation tied to lower expected performance in our normal operating discipline.

Mark: Similar to first quarter, the MCR includes approximately 150 basis points of higher new store, MCR in Connecticut and 150 basis points for member reconciliation from previous years.

Mark: Turning to the balance sheet.

Mark: Our capital Foundation remains strong.

Mark: In the quarter, we harvested approximately $260 million of subsidiary dividends.

Mark: Excluding these items, the normalized MCR of approximately 82.4 with higher than we expected.

Mark: And our parent company cash balance was approximately $100 million at the end of the quarter.

Utilization among our renewing membership. And new membership was elevated compared to previous guidance.

Mark: Our operating cash flow for the first six months of 2025 with an outflow of $100 million due to the timing of government receivables and risk corridor settlement activity that offset the normal positive items.

While risk adjustment might normally offset higher, observed trends.

Mark: Our market indicators, clearly suggests that the overall Market risk pool is also a significantly elevated.

Mark Keim: Are you dependent on those rate updates to even get back to where you had in the first half of the year or would that be a step forward to getting to your target margins if you understand what I'm trying to ask? Yeah, I think I do, A.J. It's a matter of degree. So clearly, we're disappointed in our outlook for the second half of the year. Rates that should have been good enough to carry us through the year per expectations are now woefully short of how trend is emerging, which is why we have a significantly lower second half of the year than first.

Mark: Reducing the value of the natural hedging effect of risk adjustment.

Mark: Debt at the end of the quarter was reduced by approximately $200 million through cash flow at the parent and now stands at just one nine times trailing 12 month EBITDA.

the initial weeklys just received in late June, clearly confirmed that National Marketplace risk, pools are trending higher,

Mark: Our debt to cap ratio is about 43%, we continue to have ample cash and access to capital to fuel our growth initiatives.

Our adjusted GNA ratio for the quarter was 6.1.

Mark: Significantly below normal levels.

Mark: Days and claims payable at the end of the quarter was 43 <unk>.

Reflecting reduced incentive compensation tied to lower expected performance in our normal operating disciplines.

Mark: Significantly lower than prior quarters, driven by several items.

Mark: Turning to the balance sheet.

Mark: Recall, the DCP calculation compares to fee for service components of our IV in our balance to the average daily medical claims expense.

Mark: Our Capital Foundation remains strong.

Mark Keim: Now, for the setup of next year, as Joe mentioned, 55% of the revenue on January 1st, we clearly need the rate cycle to help us get back to our normal target margins. The question is, how much will we see and how does it manifest? I'm also somewhat encouraged that there will be some off cycles along the way that juice that 55% of revenue a little further, but we're just not going to project those for right now.

Mark: in the quarter, we harvested approximately 260 million of subsidiary, dividends

Mark: By quarter and larger than normal cash payments significantly reduced the <unk> balances driven by faster processing and adjudication of claims as well as several large discrete cash settlements of age liabilities.

Mark: And our parent company cash balance was approximately 100 million at the end of the quarter.

Mark: Our operating cash flow for the first 6 months of 2025, was an outflow of 100 million.

Mark: Normalizing for these items, our DCP is more in line with historical averages.

Due to the timing of government receivables and risk, corridors settlement activity that offset, the normal positive items.

Mark Keim: Does that help? Yeah, I think, I'm just trying to figure out, I don't think you're at target margins in the first half of the year. So just how much of a hole are you starting on the year to year comparison before you take into the rate updates or they move you forward, you just might not get to full target margins in the first half of 26. But they definitely move us forward. It's a matter to what degree we get them. If the industry is funded to where it needs to be, we'll be well back into the target margins, even paying into corridors again.

Mark: And some of these items are sustaining we guide to lower Dcp's in the mid Forty's in future periods.

Mark: Debt. At the end of the quarter was reduced by approximately 200 million through cash flow at the parent and now stands at just 1.9 times trailing 12-month Ava,

Mark: We remain confident in the strength of our actuarial process in our reserve position.

Mark: Our debt to cap ratio is about 43%.

Mark: Next a few comments on our 2025 guidance.

Mark: We continue to have ample cash and access to Capital to fuel our growth initiatives.

Mark: We continue to expect full year premium revenue to be approximately 42 billion.

Mark: Days. And claims payable, at the end of the quarter was 43.

Mark: Our adjusted earnings guidance is no less than $19 per share.

Mark: Significantly lower than prior, quarters driven by several items.

Mark: Within our guidance the full year consolidated MCR increases to 92.

Mark Keim: So it's just a matter of how quickly do states move back to what is actuarially appropriate.

Mark: Recall, the DCP calculation compares the fee for service components of our ibnr, balance to the average daily, medical claims expense.

Mark: Up 140 basis points from our initial guidance at $24 50.

Mark Keim: Okay.

A.J. Rice: Just the other thing I wanted to ask you about is I appreciate the comments about the budget bill. I think there's – and the 15 to 20 percent of the expansion population that could be at risk under the work rules. Any comments about how that might affect the underlying acuity or risk pool and whether we're going to be dealing with another Medicaid redetermination type of undocumented immigrants that are getting covered in some of the states? Some I know you have exposure to. How meaningful an issue is that if they eliminate federal funding for that Medicaid population?

Mark: As Joe mentioned, the higher MCR is disproportionately driven by marketplace.

Mark: Marketplace is just 10% of our premium revenue yet accounts for almost half of the consolidated increase in MCR.

Mark: by quarter, end, larger than normal cash payments, significantly reduced, the ibnr balances driven by faster processing and adjudication of claims, as well as several large, discrete cash, settlements of age liabilities

Mark: Normalizing for these items are DCP is more in line with historical averages.

In Medicaid we are raising the full year MCR guidance from $89 nine to <unk> 99, as trend is now expected to exceed rates.

As some of these items are sustaining, we guide to lower DCPS in the mid-40s in future periods.

Mark: With the observed trend in Q2, and our expectations for higher trend over the rest of the year, we are updating our full year over year trend outlook from 5% to 6%.

We remain confident in the strength of our Actuarial process and our reserved position.

Mark: Next, a few comments on our 2025 guidance.

Mark: Updated rates in several states increase our full year over year rate only modestly from 5% to a little higher than 5%.

Mark: We continue to expect full year premium Revenue to be approximately 42 billion.

Joseph Zubretsky: First, with respect to the risk pool, we believe this will happen in a gradual manner. A state would be well-served not to have a shot loss that can't be dealt with either administratively or from an acuity perspective. We have looked at all of our cohorts by age, duration, geography, etc. for our expansion population, and the MCARS program.

Mark: Our adjusted earnings guidance is no less than 19 dollars per share.

Mark: We have several known on cycle rates time for Q3, and Q4, recognizing higher experienced trends.

Mark: Within our Guidance, the full year, Consolidated, MCR increases to 90.2.

Mark: We continue to see a willingness from states to discuss off cycle and retro rate adjustments and data develops.

Mark: Up 140, basis points from our initial guidance at 2450.

Mark: As Joe mentioned, the higher MCR is disproportionately driven by Marketplace.

Mark: But we do not include speculative off cycle rate updates in our guidance.

Speaker Change: Marketplace is just 10% of our premium Revenue.

Joseph Zubretsky: Thank you. The way it's skewed are not significant. Now you start with the premise that if people need insurance, they're gonna keep it, and people who leave don't need it. So there'll be a little bit of a shift there, but the skews by cohort are not so significant. And the fact that we believe it'll happen gradually gives us comfort that it can ease into the rate cycle without a seismic shift, the way the three-year pause on the redetermination process caused the risk pool to shift initially. And just so there's no confusion, AJ, the 15% to 20% we're talking about is of the expansion population, not the Medicaid book, so this is a dramatically lower impact and potential decline than the broader redebt that we experienced over the last couple of years.

Mark: In the second half of the year.

Speaker Change: Yet accounts for almost half of the Consolidated increase in MCR.

Mark: Ongoing medical cost pressure will exceed known rate updates.

Mark: As such we expect our Medicaid MCR of 98 in the first half to increase to 91 in the second half of the year.

Speaker Change: In Medicaid, we are raising the full year. MCR guidance from 89.9 to 90.9 as trend is now expected to exceed rates.

Mark: Even at these MCR guidance levels higher than our long term target range, our Medicaid segment full year pre tax guidance margin is approximately three 5%.

With the observed Trend in Q2 and our expectations for higher Trend over the rest of the year.

Speaker Change: We are updating our full year-over-year Trend Outlook from 5% to 6%.

Mark: <unk> the underlying strength of this segment even in this challenging operating environment.

Mark: In Medicare we are increasing our full year MCR guidance from 89% to <unk> 90, reflecting higher utilization among our high acuity duals membership.

Speaker Change: Updated rates in several States. Increase our full year-over-year rate only modestly from 5% to a little higher than 5%.

Speaker Change: Experience trends.

Mark: We expect our Medicare first half MCR of $89 two to increase to 99 in the second half of the year driven by our outlook on trends.

Joseph Zubretsky: On the second question about undocumented immigrants, we have about five states where they are in the program, but it's very, very minor. The one state where there's a significant number where we are a player is California. We are working to continue to figure out how they're going to handle that, cover them or not. Obviously, the FMAP match reduction, if they do decide to cover them, disappeared in the final budget bill, so that's not a factor, but the only state that's material to us, to the program, is California, and we're monitoring that closely, but no answers.

Speaker Change: We continue to see a willingness from states to discuss off cycle and retro rate adjustments as data develops.

Speaker Change: But we do not include speculative off-cycle rate updates in our guidance.

Mark: Normal medical cost seasonality in the new inpatient facility fee schedule in the fourth quarter.

Mark: The Medicare segment full year pre tax guidance margin is approximately one 5%.

In the second half of the Year, ongoing medical cost pressure will exceed known rate updates.

Mark: Looking forward to 2026, we believe the final rate notice and our product designs, which we filed in Meg captured this higher 2025 jumping off point for our 2026 bps.

Mark: In marketplace, we are increasing our full year MCR guidance from 80 to 85.

A.J. Rice: Thanks so much.

Speaker Change: Levels higher than our long-term target range. Our Medicaid segment full year pre-tax guidance margin is approximately 3 and a half percent

Kevin Fischbeck: The next question comes from Kevin Fischbeck from Bank of America, please go ahead. Great. Thanks. Just want to see if you guys have a better understanding of why trend is so elevated across all these products. I know you've already mentioned kind of the buckets that they're elevated in, but is there something driving that this year that would give you confidence or optimism that these trends will start to moderate in future years? It's just not clear to me why we're so persistently high, and therefore, it's hard to forecast how much margin improvement we should be forecasting.

Speaker Change: demonstrating the underlying strength of this segment even in this challenging operating environment.

Mark: The full year marketplace. MCR now includes approximately 200 basis points attributable to the combination of prior year member reconciliations and the new store impact of Connecticut.

Speaker Change: In Medicare, we are increasing our full year. MCR guidance from 89 to 90 reflecting higher utilization, among our high Acuity duels membership.

Mark: Excluding these items the normalized full year marketplace MCR is approximately 83.

Mark: We expect the normalized marketplace MCR of $80 million in the first half of the year to increase to approximately 86 in the second half of the year, reflecting higher observed trends and normal seasonal patterns for marketplace.

Speaker Change: We expect our Medicare first half MCR of 89.2 to increase to 90.9 in the second half of the Year, driven by our outlook on trends.

Speaker Change: Normal medical cost seasonality and the new inpatient facility fee schedule in the fourth quarter.

Joseph Zubretsky: Interesting question. You know, we have really we have our arms around the what I think the industry generally doesn't have their arms around the why. I mean, you go cost component by cost component for behavioral The prevalence of behavioral conditions is up, so the prevalence is higher. The stigma around getting services has begun to disappear in older populations that existed and younger populations doesn't. States have encouraged us to widen our networks. People did not go for services during the pandemic and now they are, so there's some pent-up demand. But I could go cost category by cost category, and you know, it's a supply and demand side equation.

The Medicare segment full year pre-tax guidance margin is approximately 1.5%.

Mark: While we are disappointed with these results for marketplace I will note that even with an expected full year reported MLR of approximately 85%.

Speaker Change: Looking forward to 2026. We believe the final rate notice and our product designs, which we filed in May,

Mark: We would achieve low single digit pre tax margins in this business.

Speaker Change: Captured this higher 2025 jumping off point for our 2026 bits.

Mark: The marketplace segment full year pre tax guidance margin is approximately 1% or 3% normalized for the items I have detailed.

Speaker Change: In Marketplace. We are increasing our full year. MCR guidance from 80 to 85.

Mark: We believe we can capture this trend pressure in our 2026 marketplace pricing with additional conservative assumptions included for the exploration of enhanced subsidies.

the full year Marketplace MCR now includes approximately 200 basis points attributable to the combination of Prior year member reconciliations

Speaker Change: and the new store impact of Connecticut.

Mark: New program integrity policies and the related potential acuity shift in the market risk pool.

Joseph Zubretsky: The supply side is finding, you know, interesting ways to code, to bundle codes, et cetera, using AI, et cetera. So there's a myriad of reasons why the demand is higher and the supply is more rich. But it's happening nationally and it's not just Medicaid, it's not just Medicare, it's in commercial populations, self-insured populations, it's across the board.

Speaker Change: Excluding these items. The normalized full year Marketplace. MCR is approximately 83

Mark: Given our relatively low exposure to marketplace and just 10% of our current portfolio revenue mix. We can remain focused on producing mid single digit pretax margins.

Speaker Change: We expect the normalized marketplace, MCR of 80 in the first half of the year.

Mark: We will prioritize margin and membership fall where it may.

Speaker Change: To increase to approximately 86 in the second, half of the Year, reflecting a higher, observed Trends and normal seasonal patterns for Marketplace.

Mark: We now expect the full year G&A ratio to be approximately $6 six.

Joseph Zubretsky: Okay, and then maybe it's just the second question would just be on timing because I think that You know, these rate cycles go through and they're still always on a lag. I mean, do you believe that, you know, when you get these rate updates, you'll be at in that target margin range next year? Does it take more rate cycles? It just seems like the risk pool is continuing to shift underneath everything and that you'll get the rate cycle to reflect last year's cost. But this year's cost will be high. This year's cost will still see, you know, risk pool shifts.

Mark: Better than previously guided by 30 basis points, reflecting the very low second quarter expense and continued efficiencies in our operations.

Speaker Change: While we are disappointed with these results for Marketplace. I will note that even with an expected full year reported of approximately 85.

Speaker Change: We would achieve low single digit pre-tax margins in this business.

Mark: Our full year EPS guidance is now expected to be no less than $19 per share lower than our first quarter guidance by $5 50.

Speaker Change: The marketplace segment. Full year pre-tax guidance margin is approximately 1%.

Speaker Change: Or 3% normalized for the items. I have to tell

Mark: Guidance now includes $8 for our updated full year MCR outlook, partially offset by $2 50 from the improved G&A ratio and slightly higher investment income given the fewer fed rate cuts now expected.

Speaker Change: We believe we can capture this trend pressure in our 2026 Marketplace pricing with additional conservative assumptions included for the expiration of enhanced subsidies.

Joseph Zubretsky: So, like, do you ever catch up?

Joseph Zubretsky: And then, I guess, separately, but similarly, on that embedded earnings power number, do you reaffirm the number, but do you still feel like you'll capture it in the same time period or is that time period stretching out a little bit because of these underlying risk pool shifts? Thanks. With respect to rates, the model that you've articulated is exactly the right model, which is why we are strongly advocating using a baseline period of July 24 to June 25 because that would capture a lot of the cost inflection that's already occurred. Trending off the most recent baseline that includes the inflection is the best position to be in and we're hoping states In recognizing that there's been a cost inflection.

Speaker Change: New program, Integrity policies and the related potential Acuity shift in the market risk pool.

Mark: Our consolidated guidance pre tax margin is expected to be approximately $3. One despite the significant dislocation of rates and trends.

Given our relatively low exposure to Marketplace at just 10% of our current portfolio, Revenue mix.

Speaker Change: We can remain focused on producing mid single digit pre-tax margins.

Mark: With 55% of our revenue renewing on January one of next year our.

Mark: Our recycle as well timed for 2026.

Speaker Change: We will prioritize margin and let membership fall where it may.

Mark: This concludes our prepared remarks, operator, we are now ready to take questions.

Speaker Change: We now expect the full year GNA ratio to be approximately 6.6

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

Better than previously Guided by 30 basis points, reflecting the very low second quarter expense and continued efficiencies in our operations.

Speaker Change: Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two.

Mark Keim: We'll use that as the baseline Then, of course, as he suggested, it's, OK, what's the most recent trend, and are you putting enough trend into the rates? Trend is typically 2%, 3%, maybe 4% in a bad year. In Medicaid, we're forecasting 6% this year, year over year, 1.6% per quarter. You're asking the right question. Will one one catch up with it completely? We're at 90 call it a 91% MCR, 200 basis points, 190 basis points above the top end of our range. So we need 200 basis points on top of trend in order to get back to our target margin.

Speaker Change: Our full year EPS guidance is now expected to be no less than $19 per share lower than our first quarter guidance by 550.

Speaker Change: In the interest of time, please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from Andrew Mok from Barclays. Please go ahead.

Speaker Change: Guidance now includes 8 dollars for our updated full year. MCR Outlook partially offset by 250 from the improved GNA ratio and slightly higher investment income given the fewer Fed rate Cuts. Now expected

Speaker Change: Hi, Good morning, you noted that the back half Medicaid MLR is higher than the first half, but it looks like there is some modest improvement from the <unk> MLR, how do you get confidence that Medicaid margins will improve from here when the spot rate for reimbursement seems to be inadequate and an inflationary trend environment and newer redetermination and integrity.

Speaker Change: our Consolidated guidance pre-tax margin is expected to be approximately 3.1, despite the significant dislocation of rates and trends,

Speaker Change: With 55% of our Revenue, renewing on January 1st of next year.

Speaker Change: Our rate cycle is well, timed for 2026.

Mark Keim: We think the broader market based on external analysis needs a lot more. So if we can get 200 basis points on top of an appropriate trend, it'll bring us back into target margin territory. Whether that happens on 1-1-26 or not remains.

Speaker Change: <unk> look like they may impact, both membership and risk pool on a go forward basis. Thanks.

This concludes our prepared remarks operator. We are now ready to take questions.

Mark: Yeah. Good morning, Andrew It's Mark in the first half we reported a 98.

We will now begin the question and answer session.

Mark: And my guidance implies a 91 for the second half of the year.

Mark Keim: Mark, anything to add? Kevin, on the embedded earnings question, yeah, 865 unchanged. 865, or embedded earnings, is always an ultimate run rate that we talk about. And the reason that in the near term it can be something less than the ultimate has historically been because we buy fixer uppers and it takes us a year or two to get them to target margin. In a situation like where we are right now, another reason that initial earnings is different than ultimate is obviously just where we are on industry trends and rates. So I don't think 865 changes because in the long term, these markets need to be appropriately funded.

Mark: Essentially what we have is trend slightly outstripping the rates that we know about.

Mark: Which is why we have a little upward pressure on that now the good news is our previous guidance already had a bunch of rate manifesting in Q3 and Q4, we didn't get much more I originally thought second half would be better than this so we are factoring in that observed trend you know on the other issue you mentioned there is.

Speaker Change: To ask a question, you may press start then 1 on your telephone keypad. If you're using a speaker-phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question please. Press start. Then 2 in the interest of time. Please leave me yourself to 1 question and 1 follow-up. At this time, we will post momentarily to assemble our roster.

Speaker Change: The first question comes from Andrew Mo from Barclays. Please go ahead.

Mark: The newest Glenn around about.

Mark: The duplicate duplicative members in marketplace indoor Medicaid.

Speaker Change: If you look I think they are saying, it's about two 8% of the combined Medicaid and marketplace pool, which we think theres a lot of errors in the numbers and I think it's also going to take a long time to play out I don't see that as being a meaningful membership headwind this year.

Ryan Langston: We'll have to wait till guidance for 2026 to let you know specifically how that affects what we realize next year out of the 865, but the principle stays the same and the ultimate's intact. All right, thanks.

Speaker Change: And integrity measures look like they may impact both membership and risk pool on a go forward basis. Thanks.

Speaker Change: So to me, it's all about the relationship of rates and trend and we already had a lot of rates back in for US This trend keeps coming and we're going to model. It like it is.

Mark Keim: The next question comes from the line of Ryan Langston from TD Cowen. Please go ahead. Good morning. On the exchange side, I believe in the past you've given us some commentary on what I might call a same store basis.

Speaker Change: Yeah, good morning Andrew. It's Mark. Um, in the first half. We reported a 90.8

Speaker Change: Great and maybe just a follow up on the ACI as you look to re file the rates is there a number you have in mind for the required premium increases next year to properly account for all the trend in risk pool issues across both $25 26, and reset to a normalized margin.

Mark Keim: Is there any way you can call out unit utilization for your same membership that you had in 2024 and this year versus the new members in 2025? And maybe just any differences between those two cohorts?

Speaker Change: And my guidance implies a 91 for the second half of the year. Um, essentially what we have is Trent slightly out, stripping, the rates that we know about

Speaker Change: We're not going to Andrew we're not going to disclose our rate filings state by state, but I will tell you. The right models very clearly first half to catch up with the underperformance this year to get it back to mid single digit target margins second.

Mark Keim: I'll kick it to Mark. I'll frame it for you. Interestingly enough, this year, whether a member came in through OEP or SEP, or whether they're, we call it the freshman class or the sophomore Everything ran higher than expected. Sometimes, and usually, there is a disparity. SEP members, given the free period of getting in when you need it, usually run hotter as the initial year and then settle down. But this year, whether a member came in through OEP, SEP, or whether they're in the freshman class, or the sophomore class, or beyond, we saw very little distinction in the performance of the member.

Speaker Change: Healthy dose of medical cost trend bear in mind, we've increased our assumption this year on medical cost trend year over year from 7% to 11% you can rest assured.

Speaker Change: We're putting a healthy dose of trend into rates and then thirdly the.

Speaker Change: The acuity shift thats going to occur next year due to the exploration of the Apt's fees again.

Speaker Change: Uh, which is why we have a little upward pressure on that. Now, the good news is our previous guidance already had a bunch of great manifesting in Q3 and Q4, we didn't get much more. I originally thought second half would be better than this. So we are factoring in that observed Trend. You know, on the other issue you mentioned there's um the news flying around about um the duplicate duplicative members in Marketplace and or Medicaid. Um if you look I think they're saying it's about 2.8% of the combined Medicaid and Marketplace pool, which we think there's a lot of errors in the numbers. And I think it's also going to take a long time to play out. I don't see that as being a meaningful membership headwind this year.

Speaker Change: Modeled conservatively, a healthy dose of conservatism put into rates, but we're not going to go state by state, but we've captured all the elements that need to be captured and we don't expect the business to grow next year the market will shrink and we're not looking to grow we're looking to get back to mid single digit target margins, having rated up for all of the elements that are going to.

Mark Keim: We do have a lot of members that have very low HCCs, which means you're not going to get risk adjustment. But that is typical for this line of business.

Speaker Change: Um, so to me, it's all about the relationship of rates and Trend. And we already had a lot of rate back in for us. This trend keeps coming and we're going to model it. Like it is

Mark Keim: Mark, anything to add? Look, I think that's well summarized. It's just one more data point that high trend, high utilization is pervasive from so many perspectives.

Speaker Change: Impact next year.

Mark Keim: Got it. And then just last thing, I know on the long-term side, I know you say you're pretty confident there, but if the 1BBB is going to impact Medicaid for probably a few years and the HICS market just constantly shifting, I guess does that imply you have to rely more on some of this accretive M&A to hit those longer-term goals? Thanks. I think on the Hicks, you've captured it appropriately. We like it at 10% of revenue, small, silver, stable, because every time you're lulled into thinking the risk pool hasn't shifted, yet another government regulation or competitive force that causes it to shift.

Speaker Change: great. Maybe just a follow up on the ACA. Uh, as you look to refile the rates, is there a number? You have in mind for the required premium increases next year to properly account for all the trend and risk School issues across, you know, both 25 and 26 and reset to a normalized margin. Thanks.

Speaker Change: Great. Thank you.

Speaker Change: The next question.

Speaker Change: Comes from the line of Josh Raskin from Nephron Research. Please go ahead.

Speaker Change: Yes. Thanks.

Speaker Change: Just a question on the marketplace would be in light of the trends developing even worse just the last couple of weeks, how much adjustment to your market marketplace pricing can actually be done at this point to the states and the fed exchange they allow significant adjustments at this point.

Speaker Change: And maybe when's the last time, you could submit pricing changes for 2026.

Josh: Yeah, Hey, Josh good morning.

Speaker Change: Yes, the states are adding a lot of flexibility this year in.

Mark Keim: So we like it where it is.

Sarah James: Mark, anything to add on that? No, I think that's appropriately said. Over time, if we can keep it small, silver, and stable, it'll be a nice kicker and minimal exposure in down markets. Even this year, where marketplace is not such an attractive place, we're still going to make very small, low single-digit pre-tax margins. Okay, thank you.

Speaker Change: In past years, it was pretty hard and fast when the deadlines are this year every state is a little bit different but there is either new deadlines.

Speaker Change: Even through August or Theyre soft kind of a rolling discussions about where we are now some states also parse things a little bit differently.

Speaker Change: Oh, we're not going to Andrew. We're not going to disclose our rate filing state by state, but I will tell you, uh, the rate model is very clearly. First have to catch up with the underperformance this year, to get it back to Mid single digit Target. Margins second, uh, a healthy dose of medical cost Trend. Bear in mind. We've increased our assumption this year. A medical cost trend year-over-year from 7% to 11% and you can rest assured. Uh, we're we're putting a healthy dose of trend into race and then thirdly, uh, the Acuity shift that's going to our next year. Um, due to the expiration of the apcs again, uh, modeled conservatively a healthy dose of conservatism put into rates, but we're not going to go state by state, but we've captured all the elements that need to be captured and we don't expect the business to grow next year. The market will shrink, and we're not looking to grow. We're looking to get back to Mid single digit Target. Margins having rated up for all.

Speaker Change: Can you change your trend assumption year to year, just on core utilization that might be harder than can you change your assumption for acuity shift as more data evolves. So it's a little bit about what components of pricing or changing states view the components differently on where the flexibility is but that's an ongoing discussion.

Speaker Change: All the elements that are going to impact next year.

Speaker Change: Great. Thank you.

Mark Keim: Next question is from Sarah James from Cantor Fitzgerald. Please go ahead. Thank you. I wanted to go back to the comment on sometimes it's taking a few years to bring M&A in line. When you think about Connecticut care, is that something that you think could run at margins similar to the rest of your book in 26, or could that take until 27? And then just given the growth in exchanges this year, can you touch on if you still think you're at 620 members and what the increase meant to MLR pressure this quarter? Thanks. If I recall correctly, the Connecticut acquisition model had us getting to target margins in a two year period of 2027.

Speaker Change: The next question comes from the line of Josh. Raskin from nephron research, please go ahead.

Speaker Change: And you have to appreciate that states need to be a little bit of accommodating here because the last thing. They want is folks to drop out they need to be accommodating on pricing because it's part of the sustaining market.

Speaker Change: Yeah that makes sense, but I guess I'm, just sort of thinking about your comments last quarter and the quarter before where you spoke stope spoke about a more stable marketplace membership you talked about higher retention. This year. So I guess I'm just still struggling with why do you think is the root cause of this pickup in utilization, then and now I guess market wide.

Speaker Change: Yeah, thanks. Um, I guess the question on the marketplace would be in light of the trends developing even worse just the last couple of weeks how much adjustment to your Market Marketplace pricing can actually be done at this point, you know, to the states and the FED exchange. They allow significant adjustments at this point and maybe when's the last time you could submit pricing changes for 2026.

Mark Keim: Mark's confirming. that was the original assumption. There's two competitors in the market. We're one of two.

Speaker Change: It is market wide and as demonstrated by the weekly analysis that the risk pool has deteriorated by 8% year over year.

Mark Keim: Obviously, we'll have to put rates in the market that get us there, but that was a two-year scenario of 2027 to get back to today. Your second question? On your second question, Sarah, was on Marketplace membership. We're seeing just a little bit more on SEP, not dramatically big, but I'm expecting about 650 of membership by year-end, so just a little bit more than we thought before. And did that contribute to some of the pressure in the quarter, the growth in SEP and I guess now the higher membership at your end? Well, it's a little bit more for a couple of reasons.

Speaker Change: Yeah. Hey Josh, good morning. Um, yes, the states are adding a lot of flexibility this year, um, in past years, it was pretty hard and fast when the deadlines are this year. Every State's a little bit different. But, um, there's either new deadlines, um, even through August or they're soft. Kind of rolling discussions about where we are.

Speaker Change: Acuity of the entire marketplace risk pool is higher by 8% year over year, which means on a relative basis risk adjustment is not going to keep up with the elevated trend as I said, we've increased our trend assumption from 7% that went into pricing to 11% in our forecast and as I said, we can do is put out.

Speaker Change: Healthy dose of trend into next year's rates catch up adjustment acuity adjustments and we feel confident that we'll get back to mid single digit margins at the expense of growth.

Speaker Change: But theres no other explanation, except that the marketplace risk pool nationally is higher acuity wakemed estimate 8% higher this year than last.

Mark Keim: SEP is the big one, and as we said, they're not coming in in a meaningfully different place as far as we know from the rest of the book. In the past years, sometimes SEP came in for all the wrong reasons, right, because of the changes in SEP rules. This year, it feels like they're coming in not as immediate pent-up demand, but pretty much with the same acuity and utilization profiles as the rest of the book. So I don't know that I would attribute necessarily more MLR pressure to what is a subtle increase in membership.

Speaker Change: Alright perfect. Thanks.

Stephen Baxter: The next question comes from Stephen Baxter from Wells Fargo. Please go ahead.

Stephen Baxter: Alright, Thanks, just a couple on the exchanges I guess I know you're not going to give specific.

Stephen Baxter: Rate increases a request by state, but I guess, just big picture. How are you thinking about market wide enrollment decline in FY 'twenty six obviously is a key component in forecasting.

Stephen Baxter: Acuity correctly and I guess, it's fair to say that the acuity shift that youre, putting in some pricing is going to be multiples of the acuity shifts we're seeing this year and ultimately if you do have states that don't let you take the rate increases that you want like how do you plan to respond.

Mark Keim: Thank you.

John Stansel: The next question is from John Stansel from JP Morgan. Please go ahead. Great. Just want to circle back to the M&A pipeline. Clearly, in the prepared remarks, you highlighted that the pipeline is active and that there are smaller players who are probably struggling with some of these pressures more than you are. How do you balance that with other capital deployment options around things like ShareRepo right now and think about that framework for the next? Well, obviously it would be opportunistic with with share repurchases. It's always part of our capital plan. But it's the it's the third use of capital.

Mark: Mark Yes, so a couple of things, we're hesitant to talk about specific acuity adjustments or members shifts.

Speaker Change: Just because this is a competitive market and you can imagine that's something everyone needs to do independently. The other thing though is it varies so much by state there.

Speaker Change: There are national averages for trend for acuity shift from the subsidies from acuity shift from from program integrity, but the dynamic state by state are so different one of the things you have to look at is some of these states didn't grow their marketplace meaningfully from pre pandemic.

Mark Keim: Organic growth is number one because the operating leverage is huge. Second is M&A. We're buying these things barely above book value. And they are fixer uppers. But we know how to we know how to get these things to target margins. And more of them are in the market today than even three to six. Single geography players don't have the diversification benefit that we have and others have. If you're a single geography player and you've got a rate problem, you've got a problem. So we're seeing more of these come to market in a very subtle way, so we're opportunistic and optimistic that we'll harvest some M&A here, the same way we always have, and maybe even at a better rate than 25% of revenue per year.

Speaker Change: So theyre not in a different place, but it also really matters what is the distribution of metallic cohorts what does the distribution of the federal poverty level cohorts and then finally, what states expand it which ones didn't all those things mean that some states will have very material declines in marketplace other ones will be.

Speaker Change: Quite subtle because things arent that meaningfully different under the new rules. So look we have to go about this and price state by state very specifically in some cases the numbers are big and in some cases not so much.

Speaker Change: And related to the acuity shift which is the wildcard for next year.

Mark Keim: anything to add? The only thing I'd add is I think about dry powder and capital all the time as you would expect and if you just look at our balance sheet our cash flow projecting anything forward I'm comfortable someplace between a billion five and two billion is what our dry powder is over the you know the coming year which you know puts us well positioned for a variety of ways to deploy it. We always prefer organic growth but M&A is going to be a big part of it going forward and we always have an eye towards share repurchase.

Speaker Change: It will be interesting to see how all the market participants have reacted that we have very intricate models trying to assess what the elasticity of demand is around $1 differential in price looking at whether we're number 123 or four in that market and where the competitors where last year is a bronze.

Speaker Change: Available in that market. So a lot of factors go into it and as you said.

Speaker Change: All you can do is lean on the assumptions.

Speaker Change: Approach it conservatively when it comes to the acute adjustment and.

Mark Keim: If we did take advantage of the market where it is now and did a share repurchase it would not impact our ability to do M&A at the amount of revenue we need to acquire and at the price that we acquire. Great. And if I can just squeeze one more in.

Speaker Change: The R State based partners are absolutely willing to give us a second pass rate filing to use the latest information, which should mitigate any of this pricing risk.

Mark Keim: At Investor Day last year, you did highlight the idea that marketplace might have a pull forward of demand in the fourth quarter ahead of, you know, subsidy expiration or integrity rule changes. Is that embedded in the current guidance that there be uptick beyond normal seasonality in the fourth quarter for your marketplace? Absolutely. With marketplace, I think you have to be very conservative on your projections. There's a few things in the back half of the year. Some people refer to what you're talking to about is induced demand at the end of the year, fourth quarter. Maybe.

Justin Lake: Our next question comes from Justin Lake from Wolfe Research. Please go ahead.

Justin Lake: Thanks, Good morning.

Speaker Change: First question is around there.

Speaker Change: Our run rate earnings it looks like your back half is around 750.

Speaker Change: But you've talked about and even seen historically about even split give or take.

Speaker Change: First half the second half. So you look like you're run rating at about $15 a share in the back half of the year curious.

Mark Keim: I mean, it's a valid concept. Just historically, in these situations, we don't see it. There's FTR, which we really haven't talked about. I don't think it's a meaningful item for us in the third quarter. But of course, we have placeholders in our projections for these kinds of items. I just don't think either of them are particularly meaningful. With a trend increase from 7% in our original guidance to 11%, we think we have it captured. Thank you.

Speaker Change: That's a reasonable way to think about it in your minds and if so how does that bias to think about your ability to grow.

Speaker Change: Earnings year over year into the into 2026.

Speaker Change: Well I think that is the run rate math.

Speaker Change: Bear in mind that over half of our Medicaid revenue has a one one renewal cycle, we're advocating very hard for adequate rates for one one.

Speaker Change: Making sure our state partners use the most reasonable and recent baseline we're advocating for July of 24th of July 25, as the baseline.

Erin Wright: The next question is from Erin Wright from Morgan Stanley. Please go ahead. Great, thanks. So you gave us some of your expectation on the impact of the one big, beautiful bill on on the expansion population. But how do you think about that, the cadence of that? And what are you factoring now in terms of state mitigation efforts? Or does this not incorporate that at this point? And that would be upside? All of our membership projections at this point, $46 billion for 2020. and the $52 billion for 2027 do not yet include an estimate from the budget.

Speaker Change: Which is really important it takes a lot of risk out of whack.

Speaker Change: The jumping off point that you trend off of so we're optimistic about the one one rate cycle for 2006 of course, we have a third of embedded earnings that are going to emerge in 2026, including the $1 implementation costs that just disappears, but too early to make a call in 2026, but that is the back half and half.

Speaker Change: About $15 a share, but we feel good about the pricing cycle for marketplace feel pretty good about the rate cycle for $1 26 in Medicaid and then of course, we have embedded earnings but far too early to make a call on 2026, we'll have to wait till the third or the fourth quarter to do that mark anything to add just that your math is good.

Joseph Zubretsky: We are working on it. Regulations have not come out yet on exactly how it's going to work. There is flexibility on the timing of the state. Bi-annual Re-verification and the Work Requirements. So which states will take advantage of that? Will it follow political lines, red, blue? We just don't know yet. But we do believe that what will happen will be gradual and not abrupt, and therefore allow the market, not only the market to adjust to it from an acuity perspective, But the administrative burden on the states to actually do this is going to be significant.

Speaker Change: Roughly 750 in the second half, but you can't just double it for next year for all the reasons Joe mentioned.

Speaker Change: Again the rate cycle is just critical for January one and the industry needs. These rates more than Molina does at the moment. The industry is very under funded we need money just to get back to target margins. So we should see a lot of progress on the rate cycle for January one and then lastly, as Joe mentioned, we're kind of in that $8.

Speaker Change: 65 of embedded earnings we had previously guided to seeing about a third of it next year, we will update that as we see the rate cycle and everything else coming forward, but as Joe mentioned.

Joseph Zubretsky: And it will be in their best interest to do it gradually, not immediately. Okay all right thank you.

Michael Hoffram-Baird: So our revenue estimates at 46 and 52 do not yet include an estimate from the Great, thank you. The next question is from Michael Hoffram-Baird. Please go ahead. Thank you. So, when I look at your updated guidance, I know you've embedded a wider range of outcomes in your MLR and talked about added conservatism. But when I look at the implied second half MLR progression versus your historical average first half versus second half seasonality for both total MLR and bi-segment, it doesn't appear to be overly, overly conservative versus historical. So, Mark, I know you mentioned those lists of things, FTR rechecks, induced utilization, maybe even more SCT member pickup and redetermination pressure.

Speaker Change: If the guidance is a third of that for next year a dollar of its guaranteed it's just the reversal of the implementation fees. We carry this year. So too soon to give guidance for next year, but I think those are the building blocks and the setup for next year. The last comment on the last comment I'll make on the back half is.

Speaker Change: When we closed out.

Speaker Change: The second quarter.

Speaker Change: It became obvious to us that quarterly trend and Medicaid add again accelerated trended in the first quarter off of fourth was one 2% that's just quarterly trend.

Speaker Change: When we closed our junior was one six just a quarterly trend.

Speaker Change: We of course, you have a decision to make how conservative do you want to be for the back half we repeated at one 6% Medicaid trend in each of Q3 and Q4, so whether it proves to be conservative or not or enough remains to be seen but we used the last data point, which is the highest quarterly trend we've observed in the last four.

Mark Keim: But of those lists of items you've mentioned, I wanted to get a sense of which one right now do you think carries the most, call it uncertainty, and potential magnitude of impact into the remainder of the year? I'll frame it and kick it to Mark, but our first half marketplace MCR was, I believe, 83.7 on a reported basis. As Mark said, it includes 200 to 300 bases. of non-recurring items, both the Connecticut Acquisition Drag and some of those one-time items from the first quarter. So call it 81-82, and it's progressing to 86-6 in the second half to blend to the 85 for the full year.

Speaker Change: And projected it forward.

Speaker Change: Thanks, and then just a couple of quick numbers questions first the SG&A benefit for the year from lower comp.

Speaker Change: Decorative comp probably comes back next year, if it's possible to put a number on that that'd be helpful. If I missed it I apologize, but I heard Steve ask what you think the.

Speaker Change: The exchanges.

Speaker Change: Decline by next year in terms of membership I Didnt hear an answer there.

Speaker Change: So a couple of things there are original G&A guidance was $6 nine way back at the beginning of the year. We're currently guiding to six six and a meaningful part of that is the.

Mark Keim: So there is a pretty meaningful normalized increase first half to second half. That's exactly right. If you go through the normalized numbers I had in the script, a normalized 80 in the first half goes to a normalized 86 in the second half. That's beyond normal seasonality. Heck, we all know that Marketplace is seasonal because of copays, deductibles, and things like that in the first half. But that 600 basis points shift first half to second half is beyond what we would normally see in our mix of metallics. So I think there's a lot of conservatism baked in there.

Speaker Change: The one time or the management compensation that came out in the second quarter now if youre, if youre going to how do I think about the setup for next year.

Speaker Change: Yes that management compensation piece comes back next year is potentially a G&A headwind.

Speaker Change: The good news is it's offset by that implementation costs thats in our G&A that go away for next year right. So those two offset which if I were modeling a G&A number for next year it would be a little better than six nine call. It six eight and we'll see how that evolves, but I think that's the Zip code.

Mark Keim: And the same means we have first half, second half Medicare. 89-2 going to a 99.9 in the second half. That's a pretty meaningful shift beyond what you would normally see. And then Medicaid, we've got just a little bit hotter in the second half, but that's with a very big assumption on trend, which as Joe said, it just continues as much as it was first and second half. And a pretty good rate pattern that we thought was enough to really give us a kick in the second half, which is now going to just keep us level.

Speaker Change: Now on marketplace membership.

Speaker Change: We're not here to give.

Speaker Change: To give projections on the market and specifically not on our own of our member base.

Speaker Change: Some pundits out there have kicked around numbers of a roughly 30% decline you can make an argument for why it's more you can make an argument for why it's less we need to take our own views internally and why that's critical is linked to the membership decline is the acuity shift. So we're working through that right now as you can imagine.

Speaker Change: So a couple of things there are original G&A guidance was six nine way back at the beginning of the year. We're currently guiding to six six and a meaningful part of that is the.

Joseph Zubretsky: So I think we've got a fair amount of conservatism layered in here, which is why we feel pretty good about saying $19 as a floor. Thank you. And just another question, so longer-term topics of policy, I understand you're expecting 15 to 20 percent ultimate impact on your expansion population. I know you mentioned this a few times already, but I guess just given what we saw with the last redeterminations, I guess the magnitude of unexpected outsized procedural disenrollment, and as it relates to work requirements, to the extent that does drive, you know, more outsized procedural disenrollment for even members that might, that maybe shouldn't even be eligible for work requirements, that pressures rate for security, just trying to think, like, are there any learnings from your recent redetermination, things that Molina can do to potentially, practically, perhaps engage your own Medicaid patients, promote compliance, help prevent procedural disenrollment going forward?

Speaker Change: The one time or the management compensation that came out in the second quarter now if youre, if youre going to how do I think about the setup for next year.

Speaker Change: And given that given that it's only 10% of the portfolio, we have far more optionality and flexibility than many others in the market.

Speaker Change: Yes that management compensation piece comes back next year as potentially a G&A headwind.

Speaker Change: He'd like to keep it at 10, but if it if it becomes lowered in order to get to mid single digit margins. That's the way it's going to be.

Speaker Change: The good news is it is offset by that implementation costs thats in our G&A that go away for next year right. So those two offset which if I were modeling a G&A number for next year it would be a little better than six nine call. It six eight and we'll see how that evolves, but I think that that's the Zip code.

Speaker Change: Great. Thank you.

Speaker Change: The next question comes from AJ Rice from UBS. Please go ahead.

Speaker Change: Okay.

Speaker Change: Think about second half of this year versus potentially first half of next year I know, you've got 55% a year.

Speaker Change: Now on marketplace membership.

Speaker Change: Right or your book resets rates, if I think about where you're at margin for first half of this year versus and then second half I assume when you came into the year you assume that step up.

Speaker Change: We're not here to give.

Speaker Change: To give projections on the market and specifically not on our own of our member base.

Speaker Change: Some pundits out there have kicked around numbers of a roughly 30% decline you can make an argument for why it's more you can make an argument for why it's less we need to take our own views internally and why that's critical is linked to the membership decline is the acuity shift. So we're working through that right now as you can imagine.

Speaker Change: In our performance in the second half of this year that doesn't seem like it's materialized.

Joseph Zubretsky: Thank you. We are working state by state to make sure that the administrative process goes smoothly and everything we can do to help. to your question, the data, as we analyzed the 1.3 million. expansion members that we have. There is a definition of able-bodied. I don't like the term, but that's the term that's used. And people with certain medical conditions are not able. a significant number of our expansion members meet that definition and therefore qualify for one of the exclusions and could stay on. Of the remaining, two-thirds of the remaining, our data shows work in some capacity.

Speaker Change: Turning to understand how much of a hole you have.

Speaker Change: When you compare first half of this year again, you are jumping off points for first half next year are you dependent on those rate updates to even get back to where you had in the first half of the year or.

Speaker Change: And that.

Speaker Change: Given that it's only 10% of the portfolio, we have far more optionality and flexibility than many others in the market.

Speaker Change: Or would that be a step forward to getting to your target margins. If you understand what I'm trying to ask.

Speaker Change: To keep it at 10, but if it if it becomes lowered in order to get to mid single digit margins. That's the way it's going to be.

Speaker Change: I think I would do a J, it's a matter of degree. So clearly we are disappointed in our outlook for the second half of the year.

Speaker Change: Yeah.

Speaker Change: Great. Thank you.

Speaker Change: Rates that should have been good enough to carry us through the year. Prior expectations are now woefully short of how trend is emerging which is why we have a significantly lower second half of the year than first now for the setup of next year as Joe mentioned, 55% of the revenue on January one we clearly need.

AJ Rice: The next question comes from AJ Rice from UBS. Please go ahead.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: Think about second half of this year versus potentially first half of next year I know, you've got 55% a year.

Joseph Zubretsky: Now they may not be working to the capacity of 80 hours a month, we don't know, but they are working in some capacity. And by the way, at a minimum wage job for 80 hours a month, you still might be under 100% of FPL. So we're analyzing the book of business. That's all we can do right now. And it's too complicated to go in and how we're working with our state-based partners on a gradual approach to doing this in a meaningful way and what we can do to help. But that's our best estimate for now.

Speaker Change: Right Oh your book resets rates, if I think about where you're at margin for first half of this year versus and then second half I assume when you came into the year you assume that step up.

Speaker Change: The rate cycle to help us get back to our normal target margins. The question is how much will we see.

Speaker Change: And how does it manifest I'm also somewhat encouraged that there will be some off cycles, along the way that juice that 55% of revenue a little further but we're just not going to project those for right now does that help.

Speaker Change: Our performance in the second half of this year that doesn't seem like it's materializes I'm trying to understand how much of a hole you have when you compare first half of this year against your jumping off point for first half next year are you dependent on those rate updates to even get back to where you had in the first half of the year.

Speaker Change: Yes, I'd say I'm, just trying to figure out I don't think your target margins in the first half of the year. So just.

Speaker Change: How much of a hole.

Joseph Zubretsky: It's consistent with the think tank estimates and the consulting house estimates.

Speaker Change: Are you starting in the year to year comparison before you take into the rate updates or they move you forward you just might not get the full target margins in the first half of 'twenty six but they definitely move us forward. It just a matter to what degree we get them.

Speaker Change: Or would that be a step forward to getting to your target margins. If you understand what I'm trying to ask.

Joseph Zubretsky: And if it happens gradually over time, the market can absorb it.

Speaker Change: I think I'd do a J, it's a matter of degree. So clearly we are disappointed in our outlook for the second half of the year.

Jason Cassorla: The next question is from Jason Cassorla from Guggenheim. Please go ahead. Great, thanks. Good morning. I just wanted to ask about the embedded earnings number. You left that the same at $8.65.

If the industry is funded to where it needs to be will be well back into the target margins, even paying into core doors again. So it's just a matter of how quickly do states move back to what is accurate actuarially appropriate.

Speaker Change: Right.

Speaker Change: Should have been good enough to carry us through the year. Prior expectations are now woefully short of how trend is emerging which is why we have a significantly lower second half of the year than first now for the setup of next year as Joe mentioned, 55% of the revenue on January one, we clearly need the rate cycle.

Mark Keim: I know you got the dollar implementation costs out on wine next year, but maybe can you just give us a sense of how much of that embedded earnings you can kind of like feasibly harvest next year or how to think about that just as we think about next year? Yeah, I'm not going to give you specific numbers and you'll appreciate why, but some framing concepts. So the 865 is comprised of about $2.25 from acquisitions. and about 540 from new contractors. You add in a dollar of the implementation cost that's in our P&L this year that just automatically reversed next year, those are the components that get you to $865,000.

Speaker Change: Okay.

Speaker Change: Just the other thing I wanted to ask you about is I appreciate the comments about the budget Bill I think there is in the 15% to 20% of the expansion population that could be at risk under the work rules.

Speaker Change: To help us get back to our normal target margins. The question is how much will we see.

Speaker Change: Any comments about how that might affect us.

Speaker Change: And how does it manifest I'm also somewhat encouraged that there'll be some off cycles, along the way that juice that 55% of revenue a little further but we're just not going to project those for right now does that help.

Speaker Change:

Speaker Change: Underlying acuity or risk pool.

Speaker Change: And whether we're going to be dealing with another Medicaid redetermination type of phenomenon there.

Speaker Change: You didn't mention the.

Speaker Change: Yeah, I think I'm, just trying to figure out I don't think your target margins in the first half of the year. So just.

Speaker Change: The issue of the undocumented.

Speaker Change: Immigrants that are getting covered in some of the states. Some I know you have exposure to how meaningful an issue is that it.

Speaker Change: How much of a hole.

Speaker Change: Are you starting on the year to year comparison before you take into the rate updates or they move you forward you just might not get the full target margins in the first half of 'twenty six but they definitely move us.

Mark Keim: Now the good news, and Joe pointed this out, is the dollar has no execution risk. It just happens. We're not going to spend that money next year. Now of the remaining, we have a really good transformation and integration team that look at our acquisitions and also look at our new implementations. They're doing a good job tracking from an operating perspective to the ultimates.

Speaker Change: They eliminate federal funding for the Medicaid population.

Speaker Change: First with respect to the risk pool, we believe this will happen in a gradual manner state would be well served not to have a shock loss they can't be dealt with either administratively or from an acuity perspective, we have look at all of our cohorts by age duration.

Speaker Change: Forward, it's just a matter to what degree we get them.

Speaker Change: If the industry is funded to where it needs to be we will be well back into the target margins, even paying into core doors again. So it's just a matter of how quickly do states move back to what is accurate actuarially appropriate.

Mark Keim: The wild card then becomes, where are we in the rate cycle? And what would have been a 4.5% pre-tax margin at the ultimate, does it take longer to get there because of the rate cycle?

Speaker Change: Geography, etcetera for our expansion population and the MCR.

Speaker Change: Okay.

Speaker Change: The other thing I wanted to ask you about is I appreciate the comments about the budget Bill I think there is in the 15% to 20% of the expansion population that could be at risk under the work rules.

Speaker Change: Skewers.

Speaker Change: It's skewed are not significant now you start with the premise that if people need insurance are going to keep it in people.

Mark Keim: Well Joe and I don't have a view on the rate cycle for January 1st yet, so I just can't give you a view on that. Rate cycle aside, we feel pretty good about what I've said in the last couple of quarters, which is roughly a third of that $865,000 would come out next year. Okay, got it. Thanks.

Speaker Change: Any comments about how that might affect us.

Speaker Change: We don't need it so there'll be a little bit of a shift there, but the skus by cohort are not so significant and the fact that we believe it'll happen gradually gives us comfort that it can ease into the rate cycle without a seismic shift the way the three year pause on the redetermination process caused the risk pool to shift.

Speaker Change: The underlying acuity or risk pool.

Speaker Change: And whether we're going to be dealing with another Medicaid redetermination type of phenomenon there.

Speaker Change: Didn't mention the <unk>.

Speaker Change: The issue of the undocumented.

Mark Keim: And maybe I could just follow up. I wanted to go back to your commentary on Medicaid inpatient and outpatient specifically. I know you spiked kind of calling those out. Was that kind of where those pieces kind of included in previous commentary around trend? Or are you seeing that those two kind of accelerate at this juncture? And then, you know, thinking about the inpatient outpatient that you're seeing, like, should we think about that as the new cost baseline for which to grow off of for those pieces? Or, you know, the inpatient outpatient, you're just seeing kind of like a spike in the near term, just any color around the inpatient outpatient side would be helpful.

Speaker Change: Immigrants that are getting covered in some states. Some I know you have exposure to how meaningful an issue is bad.

Speaker Change: Initially.

Speaker Change: And just so there's no confusion age as a 15% to 20%. We're talking about is of the expansion population not the Medicaid book. So this is a dramatically lower.

Speaker Change: Eliminate federal funding for that Medicaid population.

Speaker Change: First with respect to the risk pool, we believe this will happen in a gradual manner state would be well served not to have a shock loss they can't be dealt with either administratively or from an acuity perspective, we have look at all of our cohorts by age duration.

Speaker Change: Packed and potential of a decline than the broader read that we experienced over the last couple of years on the second question about undocumented immigrants we have.

Speaker Change: Five states, where they are in the program, but it's very very minor the one state where there is a significant number of where we are a player as California. We have we are working to.

Joseph Zubretsky: Thanks. Yeah, as we started to talk about trend as early as the third quarter of 2024 in Medicaid, we mostly attributed it to high-cost drugs, LTSS services, both skilled nursing and home-based services. and Behavioral. That persisted into the fourth quarter, and I will say that the inpatient-outpatient, what we call core utilization, did start to trend in the first quarter of this year, but the increase in the second quarter was significant that it deserved a call-out. And I believe it's consistent with what everybody else is saying, what the national provider reports are saying. ER visits up significantly.

Speaker Change: Geography et cetera for our expansion population and the Ncr's.

Speaker Change: We continue to figure out how they're going to handle that cover them or not obviously the F match reduction if they do decide to cover them disappeared and the and the final budget Bill. So that's not a factor, but the only state that is material to us.

Speaker Change: Skewers.

Speaker Change: <unk> skewed are not significant now you start with the premise that if people meet insurance are going to keep it and people.

Speaker Change: We don't need it so there'll be a little bit of a shift there, but the skus by cohort are not so significant and the fact that we believe it'll happen gradually gives us comfort that it can ease into the rate cycle without a seismic shift the way the three year pause on the redetermination process caused the risk pool to shift.

Speaker Change: The program is California, we're monitoring that closely but no answers at this point.

Speaker Change: Thanks, so much.

Speaker Change: Yeah.

Speaker Change: The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Speaker Change: Okay.

Speaker Change: Initially.

Speaker Change: Great. Thanks.

Speaker Change: And just so there's no confusion age as a 15% to 20%. We're talking about is of the expansion population not the Medicaid book. So this is a dramatically lower.

Speaker Change: Wanted to see if you guys have a better understanding of why trend is so elevated across all of these products. I know you already mentioned kind of the buckets that they are elevated in but is there something.

Joseph Zubretsky: What happens when somebody goes to the ER? They get admitted, and they're being admitted for complex medical conditions, not for episodic care, or for episodic care, but for complex conditions. On the outpatient side, people are going to get their screenings and seeing their primary care physician. Is it back to pre-pandemic levels? Likely. And once you go to see your PCP or get a screening, there's typically a specialist follow-up visit. So yes, the trend on those two categories in particular began to trend up in the first quarter, but the rate cycle kept pace with it.

Speaker Change: Packed and potential of a decline than the broader read that we experienced over the last couple of years on the second question about undocumented immigrants we have.

Speaker Change: Driving that this year that would give you confidence or optimism that these trends will will start to moderate in future years. Its just not clear to me why we are so persistently high and therefore, it's hard to forecast how much margin promotion forecasting.

Speaker Change: Top five states, where they are in the program, but it's very very minor the one state where there is a significant number of where we are a player is California.

Speaker Change: Interesting question, we have really we have our arms around the what.

Speaker Change: We are working.

Speaker Change: The industry generally doesn't have their arms around the why I mean, you can go cost component by cost component for behavioral.

Speaker Change: To continue to figure out how they're going to handle that cover them or not obviously the F match reduction if they do decide to cover them disappeared and the and the final budget Bill So thats not a factor, but the only state that is material to us.

Joseph Zubretsky: But it spiked yet again in the second, and we decided to call it off. Okay, thank you.

Speaker Change: The prevalence of behavioral conditions is up so the prevalence is higher the stigma around getting services has begun to disappear.

George Hill: The next question is from George Hill from Deutsche Bank, please go ahead.

Speaker Change: The program is California, we're monitoring that closely but no answers at this point.

Speaker Change: Older populations that existed in younger populations, a dozen states have encourage us to widen our networks.

Mark Keim: Yeah, good morning, guys. Thanks for taking the question. I guess, too, first, Mark, at a high level, you'll get the free bucks next year from the implementation costs and the embedded earnings that should help grow earnings in 2026. But I guess from where you sit right now, is it clear that you guys can grow underlying earnings in 2026?

Speaker Change: Thanks, so much.

Speaker Change: Yeah.

Speaker Change: People did not go for services during the pandemic and now they are so there is some pent up demand, but I could go cost category by cost category and.

Kevin Fischbeck: The next question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Speaker Change: Okay.

Speaker Change: Great. Thanks.

Speaker Change: And you know, it's a supply and demand side equation.

Speaker Change: Wanted to see if you guys have a better understanding of why trend is so elevated across all of these products. I know you already mentioned kind of the buckets that they are elevated in but is there something.

Speaker Change: The supply side is finding interesting ways to code to bundled codes et cetera, using AI et cetera. So there's a myriad of reasons why the demand is higher and the supply is more rich.

Joseph Zubretsky: And then, Joe, my follow-up would just be, given what you guys saw in the redetermination process, as we move in the future to a biannual redetermination process, I would just love your commentary on, like, beneficiary response rates and time to turn to get people re-enrolled and kind of, like, kind of following up on Michael's question, how disruptive do we expect that to be? I'll answer the second question first. On the biannual redetermination process, I mean, it's really a question of. If somebody became ineligible during a year, didn't notify the state, it's possible that we're collecting premium for 11 months without anybody legitimately collecting premium for 11 months until they had to re-verify and couldn't.

Speaker Change: Driving that this year that would give you confidence or optimism that these trends will we will start to moderate in future years. It just it's just not clear to me why we're so persistently high and therefore, it's hard to forecast how much margin promotion be forecasting.

Speaker Change: But it's happening nationally and it's not just Medicaid, it's not just Medicare and commercial population and self insured populations it's across the board.

Speaker Change: Okay and then maybe just the second question would just be on timing because I think that.

Speaker Change: Interesting question, we have really we have our arms around the what.

Speaker Change: These rate cycles go through and there is still always on a lag I mean do you do you believe that.

Speaker Change: I think the industry generally doesn't have their arms around the why I mean, you can go across component by cost component for behavioral.

Speaker Change: When you get these rate updates you'll be at in.

Speaker Change: The prevalence of behavioral conditions is up so the prevalence is higher the stigma around getting services has begun to disappear.

Speaker Change: And that target margin range next year does it take more rate cycles. It seems like the risk pool is continuing to shift underneath everything that youll get the rate cycle to reflect last year's cost, but this year's cost will be high this year as costs, we'll still see.

Speaker Change: The older populations that existed in yogurt populations dozen states have encourage us to widen our networks.

Joseph Zubretsky: Now, the maximum that somebody can go unverified is, you know, 5 or 6 months. So there will be a slight decline in membership as a result of that faster spin, that faster turn, but it's all contemplated in the models.

Speaker Change: With full shifts so like do you ever catch up and then I guess separately, but similarly on that to better earnings power number you reaffirm the number but do you still feel like you will capture it in the same time period over that time period stretching out a little bit because of these underlying risk pool ships.

Speaker Change: People did not go for services during the pandemic and now they are so there is some pent up demand, but I could go cost category by cost category and.

Speaker Change: You know, it's a supply and demand side equation.

Joseph Zubretsky: on your first question about underlying earnings, it's too early for 2026. The building blocks are The Rape Cycle for Medicaid. are rate filings for Marketplace and embedded earnings. And it's just too early to put the pieces together.

Speaker Change: The supply side is finding interesting ways to code to bundled codes et cetera, using AI et cetera. So there's a myriad of reasons why the demand is higher and the supply is more rich.

Speaker Change: With respect to rates.

Speaker Change: The model that you've articulated is exactly the right model, which is why we are strongly advocating using a baseline period of July 24 to June 25, because that will capture a lot of the cost inflection it's already occurred.

Speaker Change: But it is happening nationally and it's not just Medicaid Medicare and commercial population self insured populations, it's across the board.

Joseph Zubretsky: As we move forward here to Q3 and perhaps even Q4 when we give guidance for next year, we'll give, as we always have, we'll give the building blocks of what are 2026 hours. Medicaid, rate cycle 1-1 key, our marketplace rate filings, second key, and third, maybe up to a third of the 865 and the better earnings. But that's as much as I can say right now. It's just really simple. That's helpful. Thank you.

Speaker Change: Okay and then maybe just the second question would just be on timing because I think that.

Speaker Change: Trending off the most recent baseline that includes the inflection is the best position to be in and we're hoping states and recognizing that theres been a cost inflection will use that as the baseline period. Then of course as you suggested is okay. What's the most recent trend are you putting enough trend into the rates.

Speaker Change: Yeah.

Speaker Change: These rate cycles go through and there is still always on a lag I mean do you do you believe that.

Speaker Change: When you get these rate updates you'll be at.

Speaker Change: And that target margin range next year does it take more rate cycles. It seems like the risk pool is continuing to shift underneath everything in that youll get the rate cycle to reflect last year's costs, but this year's cost will be high this year's cost will still see.

Speaker Change: Trend is typically two three maybe 4% in a bad year in Medicaid we're forecasting six this year year over year, one 6% per quarter. So.

Operator: This concludes our question and answer session. I would like to turn the conference back over to the speakers for any closing remarks. Thank you very much for your time this morning. We'll be available for any follow-up questions. Thank you and have a great day.

Speaker Change: You are asking the right question, one catch up with it completely we're at 90.

Speaker Change: You know with full shifts so like do you ever catch up and then I guess separately, but similarly.

Speaker Change: Call. It a 91% MCR 200 basis points 190 basis points above the top end of our range. So we need 200 basis points on top of trend in order to get back to our target margin.

Speaker Change: That embedded earnings power number you reaffirmed the number but do you still feel like you'll capture in the same time period or that cause that time.

Speaker Change: Time periods stretching out a little bit because of these underlying risk pool shifts.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change: With respect to rates.

Speaker Change: We think the broader market based on external analysis needs a lot more than that.

Speaker Change: The model that you've articulated is exactly the right model, which is why we are strongly advocate advocating using a baseline period of July 24 to June 25, because that would capture a lot of the cost inflection it's already occurred.

Speaker Change: So if we can get 200 basis points on top of an appropriate trend it will bring us back into target margin territory, whether that happens on one 126 or not remains to be seen mark anything gas Kevin on the embedded earnings question, Yes, <unk> hundred 65 unchanged.

Speaker Change: Trending off the most recent baseline that includes the inflection is the best position to be in and we're hoping states and recognizing that theres been a cost inflection will use that as the baseline period. Then of course as you suggested is okay. What's the most recent trend are you putting enough trend into the rates.

Speaker Change: <unk> hundred 65 or embedded earnings is always an ultimate run rate that we talked about and the reason that in the near term it can be something less than the ultimate has historically been because we buy fixer uppers and it takes us a year or two to get them to target margin in.

Speaker Change: Trend is typically two three maybe 4% in a bad year in Medicaid.

Speaker Change: In a situation like where we are right now.

Speaker Change: Another reason that initial earnings is different than ultimate is obviously, just where we are on industry trends and rates.

Speaker Change: We're forecasting six this year year over year, one 6% per quarter. So.

Speaker Change: So I don't think <unk> hundred 65 changes because in the long term these markets need to be appropriately funded we'll have to wait till guidance for 2026 to let you know specifically how that affects what we realize next year out of the 865, but the principle stays the same and the ultimate intact.

Speaker Change: You are asking the right question, one one catch up with it completely we're at 90.

Speaker Change: Call. It a 91% MCR 200 basis points 190 basis points above the top end of our range. So we need 200 basis points on top of trend in order to get back to our target margin.

Speaker Change: We think the broader market based on external analysis needs a lot more than that.

Speaker Change: Alright. Thanks.

Speaker Change: So if we can get 200 basis points on top of an appropriate trend it will bring us back into target margin territory, whether that happens on one 126 or not remains to be seen mark anything gas Kevin on the embedded earnings question, Yes, <unk> hundred 65 unchanged.

Speaker Change: The next question comes from the line of Ryan Langsam from TD Cowen. Please go ahead.

Ryan Langsam: Good morning on the exchange side I believe in the past you've given us some commentary on what I might call. A same store basis is there any way you can callout unit utilization for your same membership that you had in 2024 and this year versus the new members in 2025, and maybe just any differences between those two.

Speaker Change: <unk> hundred 65 or embedded earnings is always an ultimate run rate that we talked about and the reason that in the near term it can be something less than the ultimate has historically been because we buy fixer uppers and it takes us a year or two to get them to target margin in.

Speaker Change: Hearts.

Mark: I'll kick it to Mark.

Speaker Change: Well I'll frame it for you.

Speaker Change: Interestingly enough this year, whether a member came in through or EP or S&P or whether there we call. It the freshman class of the sophomore class.

Speaker Change: In a situation like where we are right now.

Speaker Change: Another reason that initial earnings is different than ultimate is obviously, just where we are on industry trends and rates.

Speaker Change: Everything ran higher than expected, sometimes and usually there is a disparity FEP members given the.

Speaker Change: So I don't think 865 changes because in the long term these markets need to be appropriately funded we'll have to wait till guidance for 2026 to let you know specifically how that affects what we realize next year out of the 865, but the principle stays the same and the ultimate is intact.

Speaker Change: Free period of getting in when you need it usually run hotter as as the initial year and then settle down but this year, whether a member came in through OUP S&P or whether there is a freshman class at the sophomore class or beyond we saw very little distinction and the performance of the member.

Speaker Change: Alright. Thanks.

Speaker Change: The next question comes from the line of Ryan Langsam from TD Cowen. Please go ahead.

Mark: We do have a lot of members that have very low HCC, which means youre not going to get risk adjustment, but that it is typical for this line of business Mark anything gas look I think that's well summarized it as just one more data point that high trend high utilization as pervasive from so many perspectives.

Ryan Langsam: Good morning on the exchange side I believe in the past you've given us some commentary on what I might call. A same store basis is there any way you can call out unit utilization for your same membership that you had in 2024 and this year versus the new members in 2025, and maybe just any differences between those two.

Speaker Change: Got it and then just last thing I know in the long term side I know you say you are pretty confident there, but if the one BBB is going to impact Medicaid for probably a few years and the hix market just constantly shifting I guess does that imply you have to rely more on some of this accretive M&A to hit those longer term.

Speaker Change: Hearts.

Mark: I'll kick it to Mark.

Speaker Change: Well I'll frame it for you.

Speaker Change: Interestingly enough this year, whether a member came in through E T or S&P or whether there we call. It the freshman class at the sophomore class.

Mark: Goals. Thanks.

Speaker Change: Everything ran higher than expected, sometimes and usually there is a disparity FEP members given the.

Speaker Change: Well I think.

Speaker Change: On the hix, you've captured it appropriately we like it at 10% of revenue small silver stable because every time youre lulled into thinking the risk pool hasnt shifted yet another government regulation.

Speaker Change: Free period of getting in when you need it usually run hotter as as the initial year and then settle down but this year, whether a member came in through OUP S&P or whether there are the freshman class at the sophomore class or beyond we saw very little distinction in the performance of the member.

Mark: Or competitive force that causes it to shift so we like it where it is mark anything to add on that no I think thats appropriately said.

Mark: Over time, if we can keep it small silver and stable.

Speaker Change: We do have a lot of members that have very low HCC, which means youre not going to get risk adjustment, but that is typical for this line of business Mark anything to add look I think that's well summarized it as just one more data point that high trend high utilization as pervasive from so many perspectives.

Mark: Will be a nice kicker and minimal exposure in down markets. Even this year, where marketplace is not such an attractive place, we're still going to make very small low single digit pre tax margins.

Mark: Yeah.

Mark: Okay. Thank you.

Speaker Change: Next question is from Sarah James from Cantor Fitzgerald. Please go ahead.

Speaker Change: Got it and then just last thing I know in the long term side I know you say you are pretty confident there, but if the one BBB is going to impact Medicaid for probably a few years and the hix market just constantly shifting I guess does that imply you have to rely more on some of this accretive M&A to hit those longer term.

Speaker Change: Thank you I wanted to go back to the comment on sometimes they're taking a few years to bring M&A in line. When you think about Connecticut care is that something that you think could run at margins similar to the rest of your book in 2006 or could that take until 'twenty seven and then just given the growth in <unk>.

Speaker Change: Golf Thanks.

Speaker Change: Well I think.

Speaker Change: On the hix, you've captured it appropriately we like it at 10% of revenue small silver stable because every time youre lulled into thinking the risk pool hasnt shifted yet another government regulation.

Speaker Change: Just can you touch on if you still think you're going to end year end.

Speaker Change: Six 'twenty numbers and what.

Speaker Change: What's the increase.

Speaker Change: Thank you.

Speaker Change: Or competitive force that causes it to shift so we like it where it is mark anything to add on that no I think thats appropriately said.

Speaker Change: MLR pressure this quarter.

Speaker Change: If I recall correctly, the Connecticut acquisition model that is getting to target margins in a two year period of 2027 marks confirming here.

Speaker Change: Over time, if we can keep it small silver and stable it'll be a nice kicker and minimal exposure in down markets. Even this year, where marketplace is not such an attractive place, we're still going to make very small low single digit pre tax margins.

Speaker Change: That was the original assumption.

Speaker Change: There's two competitors in the market, we're one of two.

Speaker Change: Obviously, we'll have to put rates in the market that get us there, but that was a two year scenario 2027 to get back to target.

Speaker Change: Yeah.

Speaker Change: Okay. Thank you.

Speaker Change: Your second question on your second question Sarah was on marketplace membership.

Speaker Change: Next question is from Sarah James from Cantor Fitzgerald. Please go ahead.

Speaker Change: We're seeing just a little bit more on S&P not not dramatically big.

Sarah James: Thank you I wanted to go back to the comment on sometimes they're taking a few years to bring M&A in line. When you think about Connecticut care is that something that you think could run at margins similar to the rest of your book in 2006 or could that take until 'twenty seven and then just given the growth in <unk>.

Speaker Change: But I am expecting about 650 of membership by year end, so just a little bit more than we thought before.

Speaker Change: And did that contribute to some of the pressure in the quarter the growth in <unk>.

Speaker Change: And I guess now that the whole membership at year end well.

Speaker Change: It's a little bit more for a couple of reasons Sep's the big one and as we said, they're not coming in in a meaningfully different place as far as we know.

Sarah James: Just this year can you touch on if you still think you're going to end year end.

Sarah James: 620 members and what.

Speaker Change: From the rest of the book.

Sarah James: What's the increase not too high MLR pressure this quarter. Thanks.

Speaker Change: In the past years, sometimes S&P came in for all the wrong reasons right because of the changes in <unk>.

Speaker Change: If I recall correctly, the Connecticut acquisition model that is getting to target margins in a two year period of 2027 marks confirming here.

Speaker Change: <unk> rules.

Speaker Change: This year it feels like Theyre coming in not as immediate pent up demand, but pretty much with the same acuity and utilization profiles as the rest of the book. So I don't know that I would attribute necessarily more MLR pressure to what is a subtle increase in membership.

Sarah James: That was the original assumption.

Sarah James: There is two competitors in the market, we're one of two.

Sarah James: Obviously, we'll have to put rates in the market that get us there, but that was a two year scenario 2027 to get back to target your.

Speaker Change: Thank you.

Sarah James: Your second question.

Speaker Change: On your second question Sarah was on marketplace membership.

Speaker Change: The next question is from John Stanfill from J P. Morgan. Please go ahead.

Speaker Change: We're seeing just a little bit more on S&P not not dramatically big.

Speaker Change: Great just wanted to circle back to the M&A pipeline are clearly in the prepared remarks, you highlighted that the pipeline is active and that there are smaller players who are probably <unk>.

Speaker Change: But I'm expecting about 650 of membership by year end, so just a little bit more than we thought before.

Speaker Change: And did that contribute to some of the pressure in the quarter the growth in.

Speaker Change: Struggling with some of these pressures more than you are.

Speaker Change: How do you balance that with other capital deployment options around things like share repo right now and think about that framework for the next six to 18 months.

Speaker Change: And I guess now that the whole membership at year end.

Speaker Change: Well, it's a little bit more for a couple of reasons Sep's the big one and as we said, they're not coming in in a meaningfully different place as far as we know.

Speaker Change: Obviously, it would be opportunistic with share repurchases, it's always part of our cash.

Speaker Change: Capital plan, but let's see it's the third use of capital.

Speaker Change: From the rest of the book in.

Speaker Change: In the past years, sometimes SVP came in for all the wrong reasons right because of the changes in <unk>.

Speaker Change: Organic growth is number one because of the operating leverage huge second is M&A, we're buying these things fairly above book value.

Speaker Change: <unk> rules.

Speaker Change: This year it feels like Theyre coming in not as immediate pent up demand, but pretty much with the same acuity and utilization profiles as the rest of the book. So I don't know that I would attribute necessarily more MLR pressure to what is a subtle increase in membership.

Speaker Change: They are fixer uppers, but we know how to we know how to get these things to target margins and more of them are in the market today than even three to six months ago.

Speaker Change: Single geography players don't have the diversification benefit that we have and others have if you don't if you're a single geography player and you got a rate problem you got a problem.

Speaker Change: Thank you.

Speaker Change: So we're seeing more of these come to market in a very subtle way. So we're opportunistic.

Speaker Change: The next question is from John Stanfill from J P. Morgan. Please go ahead.

Speaker Change: Great just wanted to circle back to the M&A pipeline are clearly in the prepared remarks, you highlighted that the pipeline is active and that there are smaller players who are probably <unk>.

Speaker Change: Opportunistic and optimistic that we will harvest some M&A here.

Speaker Change: Same way, we always have and maybe even at better rates and 25% of revenue purchased Mark anything to add the only thing I'd add is I think about dry powder and capital all the time as you would expect and if you just look at our balance sheet, our cash flow projected anything forward I'm comfortable someplace between 1 billion and $5 2 billion is what our dry power.

Speaker Change: Troubling with some of these pressures more than you are.

Speaker Change: How do you balance that with other capital deployment options around things like share repo right now and think about that framework for the next six to 18 months.

Speaker Change: Well, obviously it would be opportunistic with share repurchases, it's always part of our.

Speaker Change: Or is over the coming year.

Speaker Change: Which.

Speaker Change: Capital plan, but let's see it's the third use of capital.

Speaker Change: Lets us well positioned for a variety of ways to deploy it.

Speaker Change: Organic growth is number one because of the operating leverage huge second is M&A, we're buying these things barely above book value.

Speaker Change: We always prefer organic growth but.

Speaker Change: But M&A is going to be a big part of it going forward and we.

Speaker Change: We always have an eye towards share repurchase if we did take advantage.

Speaker Change: They are fixer uppers, but we know how to we know how to get these things to target margins and more of them are in the market today than even three to six months ago.

Speaker Change: And of the market, where it is now and did a share repurchase it would not impact our ability to do M&A.

Speaker Change: Single geography players don't have the diversification benefit that we have and others have if you don't if you're a single geography player and you got a rate problem you got a problem.

Speaker Change: The amount of revenue, we need to acquire and at the price that we acquire it.

Speaker Change: Great and if I can just squeeze one more in.

Speaker Change: So we're seeing more of these come to market in a very subtle way. So we're.

Speaker Change: Investor Day last year, you did highlight the idea that marketplace might have a pull forward of demand in the fourth quarter ahead of subs.

Speaker Change: Opportunistic and optimistic that we'll harvest some M&A here tip.

Speaker Change: Subsidy exploration or integrity rule changes is that embedded in the current guidance that there would be.

Speaker Change: Same way, we always have and maybe even at better rates and 25% of revenue purchased Mark anything to add the only thing I'd add is I think about dry powder and capital all the time as you would expect and if you just look at our balance sheet, our cash flow projected anything forward I'm comfortable someplace between 1 billion and $5 2 billion is what our dry powder.

Speaker Change: Uptick beyond normal seasonality in the fourth quarter for your marketplace business.

Speaker Change: Absolutely with marketplace.

Speaker Change: Thank you have to be very conservative on your projections.

Speaker Change: There is a few things in the back half of the year. Some people refer to what you are talking to about is induced demand at the end of the year fourth quarter, maybe I mean, it's a valid concept just historically in these situations we don't see it.

Speaker Change: Odor is over the coming year.

Speaker Change: Which.

Speaker Change: Puts us well positioned for a variety of ways to deploy it.

Speaker Change: We always prefer organic growth but.

Speaker Change: Theres FTR, which we really haven't talked about I don't think its a meaningful item for us in the third quarter, but of course, we have placeholders in our projections for these kind of items I, just don't think either of them are particularly meaningful with.

Speaker Change: But M&A is going to be a big part of it going forward and we.

Speaker Change: We always have an eye towards share repurchase if we did take advantage.

Speaker Change: And of the market, where it is now and did a share repurchase it would not impact our ability to do M&A.

Speaker Change: With a trend to increase from 7% in our original guidance to 11%, we think we have to capture.

Speaker Change: The amount of revenue, we need to acquire and at the price that we acquire it.

Speaker Change: Thanks.

Speaker Change: Great and if I can just squeeze one more in our Investor day last year, you did highlight the idea that marketplace might have a pull forward of demand in the fourth quarter ahead of you know subsidy exploration or integrity rule changes is that embedded in the current guidance that there would be uptick.

Erin Wright: The next question is from Erin Wright from Morgan Stanley. Please go ahead.

Speaker Change: Great. Thanks, So you gave us some of your expectation on the impact of the one beautiful bell on on the expansion population.

Speaker Change: How do you think about that the cadence of that and what are you factoring now in terms of state mitigation efforts Eric.

Speaker Change: Beyond normal seasonality in the fourth quarter for your marketplace business.

Speaker Change: Absolutely with marketplace.

Speaker Change: It does not incorporate that at this point and that would be upside.

Speaker Change: You have to be very conservative on your projections.

Speaker Change: All of our membership projections at this point.

Speaker Change: There's a few things in the back half of the year. Some people refer to what you are talking to about is induced demand at the end of the year fourth quarter, maybe I mean, it's it's it's a valid concept just historically in these situations we don't see it.

Speaker Change: 46 billion.

Speaker Change: For 2026 and <unk>.

Speaker Change: $52 billion for 2027 do not yet include an estimate from the.

Speaker Change: The budget Bill.

Speaker Change: We are working on it regulations have not come out yet on exactly how it's going to work there is flexibility on the timing of the states implement.

Speaker Change: Theres FTR, which we really haven't talked about I don't think it's a meaningful item for us in the third quarter, but of course, we have placeholders in our projections for these kind of items I, just don't think either of them are particularly meaningful with.

Speaker Change: The biannual reader application and the work requirements, So which states will take advantage of that will follow political lines Red Blue. We just don't know yet, but we do believe that what will happen will be gradual and not abrupt and therefore allow the market not only in the market to adjust to it from an acuity perspective, but the administer.

Speaker Change: With a trend to increase from 7% in our original guidance to 11%. We think we have a captured.

Speaker Change: Thanks.

Speaker Change: The next question is from hearing right from Morgan Stanley. Please go ahead.

Speaker Change: Great a burden on our states to actually do this is going to be significant and it will be in their best interest to do it gradually not abrupt.

Speaker Change: Great. Thanks, So you gave us some of your expectation on the impact of that one big beautiful Bell on on the expansion population.

Speaker Change: Okay alright. Thank you so our revenue does not our revenue estimates at <unk> 46 to 52 do not yet include an estimate from the budget Bill.

Speaker Change: How do you think about that the cadence of that and what are you factoring now in terms of state mitigation efforts. Eric. This is not incorporate that at this point and that would be upside.

Speaker Change: Yeah.

Speaker Change: All of our membership projections at this point the $46 billion.

Speaker Change: Great. Thank you.

Speaker Change: The next question is from Michael Hoffman with Baird. Please go ahead.

Speaker Change: For 2026 and $52 billion for 2027 do not yet include an estimate from the budget Bill.

Michael Hoffman: So when I looked at your updated guidance I know you've embedded wider range of outcomes in your MLR talked about added conservatism.

Speaker Change: We are working on it regulations have not come out yet on exactly how it's going to work there is flexibility on the timing of the states implement.

Michael Hoffman: But when I look at the implied second half MLR progression versus PCR historical average first half versus second half seasonality for both auto MLR and by segment. It doesn't appear to be overly overly conservative versus historical.

Speaker Change: The biannual reader application and the work requirements, So which states will take advantage of that power political lines Red Blue. We just don't know yet, but we do believe that what will happen will be gradual and not abrupt and therefore allow the market not only in the market to adjust to it from an acuity perspective, but the.

Mark: So Mark I know you mentioned those list of things that Charlie checks induced utilization.

Mark: Maybe even more S&P member picked up and Redetermination pressure.

Mark: But all of those list of items, you mentioned I wanted to get a sense of which one right. Now do you think carries the most call it uncertainty and potential magnitude of impact to the remainder of the year.

Speaker Change: Right a burden on our states to actually do this is going to be significant and it will be in their best interest to do it gradually not abrupt.

Mark: I'll frame, it and kick it to market.

Speaker Change: Okay alright. Thank you so our revenue does not our revenue estimates at <unk> 46 to 52 do not yet include an estimate from the budget Bill.

Mark: Our first half marketplace.

Mark: <unk> was 83, 7% on a reported basis.

Mark: As Mark said it includes two to 300 basis points of nonrecurring items, both the Connecticut acquisition drag and some of those onetime items from the from the first quarter. So call. It $80 82, and its progressing to 86 six in the second half to blend to the 85% for the full year. So there is a pretty big.

Speaker Change: Yeah.

Speaker Change: Great. Thank you.

Speaker Change: The next question is from Michael Hoffman with Baird. Please go ahead.

Michael Hoffman: So when I looked at your updated guidance I know you've embedded wider range of outcomes in your MLR talked about added conservatism.

Mark: Meaningful normalized increase first half second half and that's exactly right.

Michael Hoffman: But when I look at the implied second half MLR progression versus PCR historical average first half versus second half.

Speaker Change: If you go through the normalized number as I heard in the script, our normalized <unk> in the first half goes to a normalized 86 in the second half that's beyond normal seasonality heck, we all know that marketplace is seasonal because of co pays deductibles and things like that in the first half but that that 60.

Michael Hoffman: For both auto MLR and by segment it doesn't appear to be overly overly conservative versus historical.

Speaker Change: So Mark I know you mentioned those list of things that Charlie checks induced utilization.

Michael Hoffman: Maybe even more S&P member picked up and Redetermination pressure.

Michael Hoffman: But all of those list of items, you mentioned I wanted to get a sense of which one right. Now do you think carries the most call it uncertainty and potential magnitude of impact into the remainder of the year.

Speaker Change: 600 basis points shift first half the second half is beyond what we would normally see in our mix of metallics. So I think theres a lot of conservatism baked in there and the same means we have a first half second half Medicare 89 to go into a 99.9 in the second half that's a pretty meaningful.

Michael Hoffman: I'll frame, it and kick it to mark, but our first half marketplace.

Michael Hoffman: <unk> was 83, 7% on a reported basis as Mark said it includes two to 300 basis points of nonrecurring items, both the Connecticut acquisition.

Speaker Change: <unk> beyond what you would normally see and then Medicaid we've got just a little bit hotter in the second half, but thats with a very big assumption on trend, which as Joe said. It just continues as much as it was for us in second half and a pretty good rate pattern that we thought was enough to to really give us a kick in the second half which is.

Michael Hoffman: Acquisition drag and some of those onetime items from the from the first quarter. So call. It $80 82, and its progressing to 86 six in the second half to blend to the 85 for the full year. So there is a pretty meaningful normalized increase.

Speaker Change: Now going to just keep us level. So I think we've got a fair amount of conservatism layered in here, which is why we feel pretty good about saying $19 as a floor.

Michael Hoffman: First half to second half and that's exactly right.

Michael Hoffman: If you go through the normalized number as I heard in the script, our normalized <unk> in the first half goes to a normalized 86 in the second half that's beyond normal seasonality heck, we all know that marketplace is seasonal because the co pays deductibles and things like that in the first half but that that 66.

Speaker Change: Thank you and just another question on longer term topics of policy I understand youre expecting 15, 15% to 20% ultimate impact on your expansion population I know you mentioned this a few times already but I guess just given what we saw with the last redetermination. So just the magnitude of unexpected outsource.

Michael Hoffman: Basis points shift first half to second half is beyond what we would normally see in our mix of metallics. So I think theres a lot of conservatism baked in there and the same means we have a first half second half Medicare 89 to go into a 99.9 in the second half that's a pretty meaningful shift.

Speaker Change: <unk> procedural dis enrollment and as it relates to work requirements to the extent that does drive.

Speaker Change: More outsized procedural just enrollment for even members that might maybe you shouldn't even be eligible for work requirements that pressures rate for security.

Speaker Change: Just trying to think.

Michael Hoffman: Beyond what you would normally see and then Medicaid.

Speaker Change: Are there any learnings from your recent Redetermination things at Molina can do to potentially practically perhaps engage your own Medicare patient promote compliance help prevent procedural discipline going forward. Thank you.

Speaker Change: Got just a little bit hotter in the second half, but thats with a very big assumption on trend, which as Joe said. It just continues as much as it was for us in second half and a pretty good rate pattern that we thought was enough to to really give us a kick in the second half, which is now going to just keep us level. So I think we've got a fair amount of conservative.

Speaker Change: We are working state by state.

Speaker Change: To make sure that the administrative process goes smoothly and everything we can do to help now.

Speaker Change: To your question the data as we analyze the one 3 million.

Michael Hoffman: <unk> layered in here, which is why we feel pretty good about saying $19 as a floor.

Speaker Change: Expansion members that we have.

Speaker Change: Yeah.

Speaker Change: Thank you and just another question so longer term topics with policy I understand youre expecting 15, 15% to 20% ultimate impact on your expansion population I know you mentioned this a few times already.

Speaker Change: There is a definition of able bodied.

Speaker Change: I would like to turn but it is.

Speaker Change: Is used.

Speaker Change: And people with certain medical conditions are not able bodied.

Speaker Change: A significant number of our expansion members meet that definition and therefore quad.

Speaker Change: Just given what we saw with the last Redetermination. So just the magnitude of unexpected outsized procedural just enrollment.

Speaker Change: Qualify for one of the exclusions in Cookstown.

Speaker Change: And as it relates to work requirements to the extent that does drive.

Speaker Change: Of the remaining two thirds of the remaining our data shows work in some capacity now they may not be working to the capacity of 80 hours a month, we don't know, but they are working in some capacity.

Speaker Change: Outsides procedural just enrollment for even members that might maybe you shouldn't even be eligible for work requirements that pressured rate for security.

Speaker Change: Trying to think.

Speaker Change: And by the way.

Speaker Change: Are there any learnings from your recent Redetermination things at Molina can do to potentially practically perhaps engage your own Medicare patient promote compliance help prevent procedural disagreement going forward. Thank you.

Speaker Change: At a minimum job at a minimum wage job for 80 hours a month, you still might be under a 100% of NPL. So.

Speaker Change: We're analyzing the book of business Thats, all we can do right now and it's too complicated to go in and how we're working with our state based partners on a gradual approach to doing this in a meaningful.

Speaker Change: We are working a state by state.

Speaker Change: To make sure that the administrative process goes smoothly and everything we can do to help now.

Speaker Change: Meaningful way and what we can do to help.

Speaker Change: To your question the data as we analyze the one 3 million.

Speaker Change: That's our best estimate for now it's consistent with the the think tank estimates in the consulting house estimates.

Speaker Change: Expansion members that we have.

Speaker Change: And if it happens gradually over time the market can absorb it.

Speaker Change: There is a definition of able bodied.

Speaker Change: I'd like to turn but it is used.

Speaker Change: And people with certain medical conditions are not able bodied.

Jason: The next question is from Jason <unk> from Guggenheim. Please go ahead.

Speaker Change: A significant number of our expansion members meet that definition and therefore.

Jason: Great. Thanks, Good morning, I, just wanted to ask about the embedded earnings number youll up at the same at 865 I know you've got the dollar implementation costs that unwind next year, but maybe can you just give us a sense on how much of that embed in earnings you can kind of like feasibly harvest next year or how to think about that just.

Speaker Change: Qualify for one of the exclusions in Cookstown.

Speaker Change: Of the remaining two thirds of the remaining our data shows work in some capacity now they may not be working to the capacity of 80 hours a month, we don't know, but they are working on some capacity.

Jason: As we think about next year.

Jason: Yeah, I'm not going to give you a specific numbers and youll appreciate why.

Speaker Change: And by the way.

Speaker Change: At a minimum job at a minimum wage job for 80 hours a month, you still might be under a 100% of NPL. So we're analyzing the book of business Thats. All we can do right now and it's too complicated to go in and how we're working with our state based partners on a gradual approach to doing this in a meaningful.

Jason: But some framing concepts. So the 865 is comprised of about $2 25 from acquisitions.

Jason: And about $5 40 from new contract wins.

Jason: You add in a dollar of the implementation costs. That's in our P&L. This year that just automatically reverse next year. Those are the components that get you to $86 65 now the good news and Joe pointed. This out is the dollar has no execution risk. It just happens we're not going to spend that money next year now of the remaining.

Speaker Change: Meaningful way and what we can do to help.

Speaker Change: That's our best estimate for now it's consistent with the the think tank estimates in the consulting house estimates.

Speaker Change: And if it happens gradually over time the market can absorb it.

Jason: We.

Jason: We have a really good transformation and integration team that look at our acquisitions and also look at our new implementations.

Speaker Change: The next question is from Jason <unk> from Guggenheim. Please go ahead.

Jason: Great. Thanks, Good morning, I, just wanted to ask about the embedded earnings number youll have to at the same at 865 I know you got the dollar implementation costs that unwind next year, but maybe can you just give us a sense on how much of that embedded in earnings you can kind of like feasibly harvest next year or how to think about that just.

Jason: They're doing a good job tracking from an operating perspective to the ultimate the wildcard then becomes.

Jason: Where are we in the rate cycle, and what would've been a four 5% pretax margin.

Jason: At the ultimate does it take longer to get there because of the rate cycle, well, Joe and I don't have a view on the rate cycle for January 1st yet. So I just can't give you a view on that rate cycle. Aside we feel pretty good about what I've said in the last couple of quarters, which is roughly a third of that 865 would come out next year.

Speaker Change: As we think about next year.

Speaker Change: Yes, I'm not going to give you a specific numbers and youll appreciate why.

Speaker Change: But some framing concepts. So the 865 is comprised of about $2 25 from acquisitions.

Speaker Change: And about $5 40 from new contract wins.

Speaker Change: Okay got it thanks, and maybe I could just follow up I wanted to go back to your commentary on Medicaid inpatient and outpatient specifically.

Speaker Change: You add in the dollar of the implementation costs. That's in our P&L. This year that just automatically reverse next year. Those are the components that get you to 86 <unk> hundred 65 now the good news and Joe pointed. This out is the dollar has no execution risk. It just happens we're not going to spend that money next year now of the remaining.

Jason: You spiked kind of calling those out.

Jason: Was that kind of where those pieces kind of included in previous commentary around trend or are you seeing that those to kind of accelerate at this juncture and then thinking about the inpatient outpatient are you seeing like should we think about that as like new cost baseline for which to grow off of.

Speaker Change: We.

Speaker Change: We have a really good transformation and integration team that look at our acquisitions and also look at our new implementations.

Jason: Those pieces are.

Speaker Change: They're doing a good job tracking from an operating perspective to the ultimate the wildcard then becomes.

Speaker Change: Inpatient outpatient you're just seeing kind of like a spike in the near term just any color around the inpatient and outpatient side would be helpful. Thanks.

Jason: Yes, we started to talk about trend.

Speaker Change: Where are we in the rate cycle, and what would've been a four 5% pretax margin.

Jason: As early as the third quarter of 2024.

Jason: In Medicaid, we mostly attributed it to high cost drugs Lts as services, both skilled nursing and home based services.

Speaker Change: At the ultimate does it take longer to get there because of the rate cycle, well, Joe and I don't have a view on the rate cycle for January 1st yet. So I just can't give you a view on that rate cycle. Aside we feel pretty good about what I have said in the last couple of quarters, which is roughly a third of that 865 would come out next year.

Jason: And behavioral.

Jason: Persisted into the fourth quarter, I will say that the inpatient outpatient core utilization.

Jason: Did start to trend in the first quarter of this year, but the increase in the second quarter with significant debt.

Speaker Change: Okay got it thanks, and maybe I could just follow up I wanted to go back to your commentary on Medicaid inpatient and outpatient specifically.

Jason: Deserve to call out and I believe it's consistent with what everybody else is saying what the national provided reports are saying ER visits up significantly what happens when somebody goes to the ER. They get admitted and they are being admitted for complex medical conditions.

Speaker Change: You spiked kind of calling those out.

Speaker Change: Was that kind of where those pieces kind of included in previous commentary around trend or are you seeing that those to kind of accelerate at this juncture and then thinking about the inpatient outpatient are you seeing like should we think about that as like new cost baseline for which to grow off of.

Speaker Change: For episodic care.

Speaker Change: For episodic care, but for complex conditions on the outpatient side.

People are going to get their screenings in there and seeing their primary care physicians.

Speaker Change: Is it back to pre pandemic levels likely and once you go to see your PCP or get a screening there is typically a specialist follow up visit so yes. The trend on those two categories in particular began to trend up in the first quarter, but the rate cycle kept pace with it but it spike yet again in the.

Speaker Change: Those pieces are.

Speaker Change: Inpatient outpatient you're just seeing kind of like a spike in the near term just any color around the inpatient outpatient side it would be helpful. Thanks.

Speaker Change: Yes, we started to talk about trend.

Speaker Change: As early as the third quarter of 2024.

Speaker Change: In Medicaid, we mostly attributed it to high cost drugs LT FSS services, both skilled nursing and home based services.

Speaker Change: And we decided to call it out.

Speaker Change: Yes.

Speaker Change: Okay. Thank you.

Speaker Change: And behavioral.

Speaker Change: The next question is from George Hill from Deutsche Bank. Please go ahead.

Speaker Change: Persisted into the fourth quarter, I will say that the inpatient outpatient CLARCOR utilization did start to trend in the first quarter of this year, but the increase in the second quarter with significant that deserve to call out and I believe it's consistent with what everybody else is saying what the national provided reports are saying ER.

George Hill: Yes. Good morning, guys. Thanks for taking my question I guess I have two first mark at a high level Youll get the free Bucks next year.

Speaker Change: <unk>.

Speaker Change: From the implementation costs and the embedded earnings.

Speaker Change: This should help grow earnings in 2006, but I guess from where you sit right now is it clear that you guys can grow underlying earnings in 2026, and then Joe My follow up would just be given what you guys saw in the Redetermination process as we move in the future to a bi annual Redetermination process I would just love your commentary on like for like.

Speaker Change: It's up significantly what happens when somebody goes to the ER, They get admitted and theyre being admitted for complex medical conditions not for episodic care.

Speaker Change: For episodic care about for complex conditions on the outpatient side people are going to get their screenings in there and seeing their primary care physicians.

Speaker Change: Sherri response rates and time to turn around to get people re enrolled in and kind of like kind of following up on Michael's question, how disruptive do we expect that debate.

Speaker Change: Is it back to pre pandemic levels likely and once you go to see your PCP or get a screening there is typically a specialist follow up visit so yes. The trend on those two categories in particular began to trend up in the first quarter, but the rate cycle kept pace with it but it spike yet again in the <unk>.

Speaker Change: I'll answer the second question first on the biannual redetermination process.

Speaker Change: It's really a question of math.

Speaker Change: If somebody became eligible during a year didn't notify the state it's possible that we are collecting premium for 11 months.

Speaker Change: And we decided to call it out.

Speaker Change: Okay. Thank you.

Speaker Change: Without anybody legitimately collecting premium for 11 months until they had to re verify it could now the maximum that somebody can go.

George Hill: The next question is from George Hill from Deutsche Bank. Please go ahead.

George Hill: Yes. Good morning, guys. Thanks for taking my question I guess I have two first mark at a high level, you'll get the free Bucks next year from.

Speaker Change: Verified is five or six months, so there'll be a slight decline in membership as a result of that faster spend that faster churn, but it's all contemplated in the models.

George Hill: From the implementation costs and the embedded earnings. This should this should help grow earnings in 'twenty, six, but I guess from where you sit right now is it clear that you guys can grow underlying earnings in 2026, and then Joe My follow up would just be given what you guys saw in the Redetermination process as we move in the future to a bi annual redetermination process.

Speaker Change: On your first question about underlying earnings it's too early for 2026.

Speaker Change: The building blocks are.

Speaker Change: The rate cycle for Medicaid.

Speaker Change: Our rate filings for marketplace.

George Hill: I would just love your commentary on like for like.

Speaker Change: And embedded earnings and its just too early to put the pieces together.

Michael Hoffman: Beneficiary response rates and time to turn around to get people re enrolled in and kind of like kind of following up on Michael's question, how disruptive do we expect that debate.

Speaker Change: But.

Speaker Change: As we move forward here through Q3, and perhaps even Q4, when we give guidance for next year, we will give as we always have we'll give the building blocks of what our 2026 outlook as medic.

Speaker Change: I'll answer the second question first on the biannual redetermination process.

Speaker Change: Medicaid rate cycle, one one key our marketplace rate filings second key third.

Michael Hoffman: It's really a question of math.

Michael Hoffman: If somebody became eligible during a year didn't notify the state it's possible that we are collecting premium for 11 months.

Speaker Change: Maybe if they are up to a third of the aged 65 and better earnings, but thats as much as I can say right now because of early stage.

Michael Hoffman: Without anybody legitimately collecting premium for 11 months until they had to Reverify could now the maximum.

Speaker Change: That's helpful. Thank you.

Michael Hoffman: Somebody can go.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to the speakers for any closing remarks.

Michael Hoffman: Verified is five or six months, so there'll be a slight decline in membership as a result of that faster spend that faster churn, but it's all contemplated in the models.

Speaker Change: Thank you very much for your time. This morning, we'll be available for any follow up questions. Thank you and have a great day.

Michael Hoffman: And your first question about underlying earnings.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Michael Hoffman: Too early for 2026.

Michael Hoffman: The building blocks are.

Michael Hoffman: The rate cycle for Medicaid.

Our rate filings for marketplace.

Michael Hoffman: And embedded earnings and its just too early to put the pieces together.

Michael Hoffman: But.

Michael Hoffman: As we move forward here through Q3, and perhaps even Q4, when we give guidance for next year well give as we always have we'll give the building blocks of what our 2026 outlook is.

Speaker Change: Medicaid rate cycle, one one key our marketplace rate filings second key third.

Michael Hoffman: Maybe if they are up to a third of the 65 and better earnings, but thats as much as I can say right now because it's early stage.

Speaker Change: That's helpful. Thank you.

Speaker Change: This concludes our question and answer session I would like to turn the conference back over to the speakers for any closing remarks.

Speaker Change: Thank you very much for your time. This morning, we'll be available for any follow up questions. Thank you and have a great day.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Speaker Change: [music].

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