Q2 2019 Earnings Call
[laughter].
German President and Chief Executive Officer, and Jeff <unk> Executive Vice President and Chief Financial Officer of 17 will host of this morning's call, which can also be accessed through our website at 17 Dot com.
A replay will be available shortly after the call's completion also it 17 dot com or by dialing 87734475 to nine in the U.S. and Canada or in other countries by dialing 412317 0088.
The playback number for both the islands is 10132753.
Any remarks at 17 may make about future expectations plans and prospects constitute forward looking statements for purposes of the safe Harbor provision under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those disgusting send teams. Most recent form 10 q. filing file today.
July 23rd and the Form 10-K . dated.
February 19th of 2019, and other public S.C.C. filings.
Centene anticipates that subsequent events and developments will cause it's estimates to change while the company may elect to update these forward looking statements at some point in the future, we specifically disclaim any obligation to do so.
The call will also refer to certain non-GAAP measures a reconciliation of these measures with the most directly comparable GAAP measures .
Can be found in our second quarter 2019 press release, which is available on our website at 17 Dot com at the investors section.
Finally, a reminder, that the 17 third quarter 2019 earnings call will be held on Tuesday October 22nd 2019, and our next Investor Day will be held Friday December 13th 2019 in New York City.
With that I'd like to turn the call over to our chairman and C.E.O., Michael Knight or Michael.
Thank you <unk>.
Good morning, everyone and thank you for joining send teams second quarter 2019, and it's cool.
During the course of this morning's call.
We will discuss how second quarter results and provide update incentives markets and products.
We also provide commentary on the health care legislative and regulatory environment as well as an update on the acquisition of Welk.
Let me begin with second quarter 2019 financial.
Well <unk> put another solid core marked by robust top and bottom line growth.
And operating cash flows.
Membership at quarter than was 15 million recipients. This represents an increase of 2.2 million beneficiaries are 17% over the second quarter of 2080.
[noise] second quarter revenues increase 29% yields a year to $18.4 billion.
The H.B.I. increase 100 basis points you over here to 86.7.
This was primarily attributable to the market page basis as expected margins have normalized on this table performance in 2018.
The increase was also I try to go to the here.
<unk>.
As well as the acquisition.
We recorded at Justin <unk>, who share of $1.34.
This compares to nineties and who put it in the same period last year, representing 49% increase you over your <unk>.
Lastly, operating cash flows came in at $917 million or 1.9 times net or.
This is a high n. about previously stated.
A 1.5 to two times.
These solid results.
Reflect the benefit of our ongoing diversification.
Which heads that is to become a 74 billion dollar enterprise.
Well no longer simply a Medicaid healthcare coverage.
Well it has to look at the totality of this enterprise.
As the scale and diversity allows us to absorb the opposition downs invade cycles market.
And subsidiary performance.
This ensures that no one part of the portfolio can jeopardize our total organization.
Jeff will provide further financial details, including updated 2019 guidance in his prepared remarks.
A quick comment on medical costs.
Sable and in line with our expectations in the low single digits.
Moving on to markets in product updates first we'll discuss Medicaid I too.
<unk> <unk> business continues recording well in the second floor.
At June 30, we had 8.5 million recipients represent <unk> of 1.3 million or 18%.
We continue to win Medicaid or peas in new and existing states.
<unk> industry, leading or p. when they have 80%.
No I just stayed updates Oregon.
Into the Rye Seventeensix actually read <unk>, it's Oregon, Medicaid managed care contracts.
We expanded our presents under this new contract added three additional counties.
We wouldn't have the operating in six counties, including Metro Portland.
Centene currently provides care to 92000 beneficiaries in his day.
Yeah additional three counties will maturity increase our membership it or.
We look forward to continue to work with the state.
Demonstrated the value of integrated care, focusing on social determinants of health and maintaining sustainable cost control.
The new contract is expected commands January 2020, and will run through December 31.
2024 [noise].
Iowa.
Hi July one we began operating in Iowa's Medicaid managed care program, a new state presenting.
Operations commenced as expected.
And we are now providing health care to approximately 254000 beneficiaries.
I always committed to operate a sustainable Medicaid managed care program.
As evidenced by the recent rate increase.
Which we did anticipate.
We expect to achieve a normal margin within a typical wrap up doing any new Medicaid contract.
I have marks.
Send teams.
32nd state of operation.
New York.
It has been just over one year since we closed because I was acquisition.
We could not be more pleased with the performance.
The integration of the company is running smoothly and we are realizing synergy and increase in time.
North Carolina.
As we have previously noted 17, one two large regions in North Carolina, Medicaid or A. and has an active appeal for the balance of the state.
We remain cautiously optimistic.
Regarding appeal.
[noise], Texas, Texas recently decided to delay the start prosecute the German announcement until the end of August .
We remain confident in the value we bring to the state.
Louisiana has also delayed the announcement.
<unk> reboot your man.
We now expect to hear.
Late July I remain confident in our prospects that.
Next Medicare.
At June 30, we sort of just under 400000, Medicare and M.N.P. beneficiaries across 20 states.
This represents a year over year increase approximately 55000 recipients.
And as you gradual basis membership increased over 4500.
As we have <unk>, we expect 2019, and they revenue and membership to be flat.
2018.
This is net of the actions taken by for Dallas.
To establish that poor star rating, which includes exiting 26 counties.
Right.
Next year, we plan to expand into 100 counties and he says he states and add one more new state that.
We will begin a joint venture with essential in in court geography and 2020.
Further 17 will return to a course R.M.A. parents rating.
And the addition of World cares, Hi, <unk> and apolitical, we'll we'll go so I am a password.
Going forward.
They should accelerate profitable long term growth and the 2020 instantly on.
No health insurance market price [noise].
The market price business continues from the form well.
Consistent with our expectations.
Hi to 30, we served approximately 1.9 million exchange members across 20 states.
This represents a sequence will decline.
58000, the Shippings, which is lower that our historic.
Attrition rate.
We continue to see higher member retention and priors.
Which we previously noted.
Importantly, the key demographics.
Membership.
Remain in line with our previous previous remarks.
On this subject.
Consistent with our previous comments, a marketplace margins continue to be in 5% to 10% range.
[noise], we continue anticipate another strong year of operations.
As a national leader of exchange products and expect to continue to grow this business in 2020.
Next international.
Nature, we purchased an additional 40% ownership <unk> Bronco stop ago.
Expand you know say to 90%.
We believe how knowledge and skills, along with our leading edge I.T. systems.
As further enhance an already strong business in Spain.
We continue to look for opportunities to expand our international business.
Please notice are growing international business will not distract.
I was gonna impede our ability to pursue the growth opportunities.
In the U.S.
Oh now provided an update on the health care and legislative regulatory environment.
Or go there appears to be <unk> to revisit comprehensive health care reform.
Congress and the administration continuing school ways to improve health care delivery system.
We support the administration's decision to withdraw its we'd be proposal to eliminate the existing safe Harbor protection within Medicare Medicaid.
While the Senate still needs to take up the matter. The house recently voted on a very bipartisan basis to eliminate the health insurance.
Unfortunately, there are opportunities you wish we could work together to green down not only pharmaceutical costs costs across the entire health care.
Delivery system.
The administration's approach to dealing with the rebate who is another example.
Demonstrating how 17 is not focus on short term headline or Charlie.
We focus on the facts as we know today.
[noise], we did he advocate for greater price transparency.
Which includes moving towards that pricing and promises.
And it seemed like we commend Congress on a bipartisan effort to take steps to reduce the amount of money.
Oregon's clear out of pocket put her cut costs by ending surprised though.
[noise], yeah, physical can wash United States that further stabilize the market birds.
The administration's final rule, allowing employers to offer H.R.A.'s.
As an option to pay per market price coverage provides an opportunity to have a positive impact on premium.
Also pending waivers in Utah in Georgia aimed to stabilize the marketplace to provide a portable comprehensive coverage to those between 100 and 250% of the federal poverty level.
This has the potential to improve a portability, but those with and without success.
As exemplified by Georgia.
States are taking the lead with meaningful discussion on how to improve and expand government health care.
They are focusing on seeking private sector Susan [noise].
To enhance quality and lower costs of health care.
Well well positioned to be supportive these efforts.
We are encouraged by anything.
Moves us back.
From politics to policy.
17 is committed to working with both parties.
Bipartisan solutions that strengthens the nation's health care delivery system.
[noise] her now like to quite an update on the acquisition well.
We were please shareholders are both Sentinelle Wildcat voted overwhelmingly to approve the acquisition.
And to 24.
We appreciate demand days.
Investors as they recognize the value of this transaction.
Regulatory discussions.
Well underway have been very constructive.
Both companies are currently working through the state insurance, who who who calls that required for the completion of the transaction.
Required for amazing he's having filed in 27 states.
Conditional approvals have been obtained in each state.
Which is ahead of schedule.
Web clickable divestiture process is underway.
<unk>, we are pleased to be seen a great deal of interest.
And potential.
Require.
<unk> each received requests for additional exclamation.
Document.
To the materials from the department of Justice.
This was expected given the size of this turns out [laughter].
Both companies continue work expeditiously and cooperatively with the D.O.J.
[noise] inflation planning is well underway.
Teams are doing extensive work to ensure a smooth and seamless combination of the company.
Both companies according engaged and the integration planning.
Progressing well.
Remind you that they combine company.
We'll have estimated proof whoever 2019 revenues in excess of $100 billion and even.
$5 million.
You are comfortable with previously communicated synergy and increasing targets.
We continued to be comfortable that we will receive all necessary approvals to close the deal in the first half a 2020.
Given the progress of activities to date, there may be an opportunity to close earlier.
In 2020.
Shifted gear to our radar.
We expect a composite Medicaid rate increase of approximately 1.5% to 2%.
2019.
In summary.
Centene continues to be a good company, both Ghana and to eliminate.
A targeted pipeline remains you know best.
We continue to go 'cause on margin expansion and are already realize he benefits Tomorrow Centene board.
Transformation culture.
<unk>.
Position Gourmet solidifies 2020 vision of maintaining initially leading position in the highly competitive government sponsored health care market.
We look forward to leveraging the strengths each company brings in terms of providing high quality health care at lower costs two hours recipients in state custody.
We thank you for your continued interest in 17.
And I'll now turn it over to chat.
Thank you Michael and good morning.
This morning, we reported solid second quarter 2019 results.
Second quarter revenues were 18.4 billion, an increase of 29% over the second quarter of 2018.
And adjusted diluted earnings per share was $1.34 this quarter compared to 90 cents last year.
Adjusted diluted earnings per share for the second quarter of 2019 was driven by solid performance across our business segments.
The reconciliation of the 2018 marketplace risk adjustment.
Which exceeded our expectations by five cents per diluted share.
And three cents per diluted share associated with a gain on the Roberto salute acquisition.
Let me provide additional details for the quarter total revenues grew by approximately 4.2 billion over the second quarter of 2018.
Primarily as a result of the acquisition infidels care.
Growth in the health insurance marketplace business.
Expansion's, a new programs and many of our states and 2018 in 2019, particularly Arkansas, New Mexico in Pennsylvania.
This growth was partially offset by the health insurance <unk> moratorium in 2019.
Moving on to H.B.R. or health benefits ratio was 86.7% in the second quarter this year compared to 85.7% and last year second order and 85.7% in the first quarter of 2019.
The H.B.R. increase was primarily driven by the performance in the marketplace business the acquisition of Fidelis, which operates at a higher H.B.R. and the health and Sherfey moratorium.
As we have highlighted previously at our Investor day, we expected a return to more normalized margins in 2019 for our marketplace business.
Additionally, we continue to experience a higher membership retention rate compared to prior years as members stay with us longer it increases medical costs than the H.B.R. I just want to emphasize that this is a slight increase and we were still well within our 5% to 10% pretax margin targets for the product.
Sequentially, the 100 basis point increase in H.B.R. from the first quarter of 2019 is primarily due to the performance and seasonality in the health insurance marketplace business.
[noise] before I get into S.U.N.A., let me provide an update on the marketplace business as expected and highlighted at our Investor day. The final risk adjustment was lower than our you're under cruel by $238 million.
Additionally, after adjusting for other sharing programs, including minimum M.L. ours are estimated red v. adjustment and other programs the net amount exceeded our expectations by approximately $31 million or five cents per diluted share.
Recall, we had included approximately $100 million in our annual guidance.
This benefit was driven by our Centene Ford program and has highlighted during our Investor day in June we are reinvesting this amount and other <unk> initiatives and the back half of the year.
Now on to S.G.N.A.
[noise] are adjusted selling general administrative expense ratio was nine per cent in the second quarter this year compared to 9.6% last year, and 9.5% and the first quarter of 2019.
You over your decrease was primarily driven by the acquisition of adults care, which load the ratio by 60 basis points.
The sequential decreases primarily due to the higher selling costs and the first quarter associated with the marketplace in Medicare products.
Additionally, we spent four cents per diluted share in business expansion costs during the second quarter.
[laughter] investment another income was $120 million during the second quarter compared to $65 million last year, and 99 million last quarter.
The increase reflects increase investment balances over 2018, as a result of the Fidelis care acquisition.
Higher interest rates.
And again of $16 million associated with the step up in basis of our previously held equity investment and Roberto salute upon were acquiring a controlling interest.
Sequentially investment income increase due to the previously mentioned gain on the acquisition of Roberto salute recognized in the second quarter.
Interest expense was $101 million for the second quarter 2019, compared to $80 million last year and $99 million last quarter.
The increase your over here was driven by the additional debt to fund the Fidelis acquisition and higher interest rates associated with our interest rate swaps.
Are effective tax rate for the second quarter was 25.7% compared to 36.9% and the second quarter of 2018, which reflects the impact of the help ensure fee moratorium.
Now onto the balance sheet caching investments total $15.9 billion, a quarter n., including 801 million held by unregulated subsidiaries or risk based capital percentage for any I see fathers continues to be in excess of 350 per cent of the authorized control level.
[noise] dead at quarter end was $7.1 billion, which includes 513 million of borrowings on our revolving credit facility.
Or debt to capital ratio was 36.3%, excluding or non recourse that compared to 36.7% last year and 36.5% at the first quarter of 2019.
Or medical claims liability totaled $7.4 billion, a quarter N. and represents 47 days and claims payable compared to 48 days in the first quarter of 2019.
We continue to expect the D.C.P. to be in the mid 40 range on a runway but basis with the inclusion of Fidel us.
Cash flow provided by operations was 917 million in the second quarter or 1.9 times earnings.
The cash provided by operating activities in the second quarter of 2019 was due to net earnings collections is premium and trade receivables and an increase in other long term liabilities driven by the risk adjustment payable for the health insurance marketplace business in 2019.
Lastly, I would like to highlight a few of the changes to our 2019 annual guidance.
We are increasing the total revenues guidance at the midpoint by $700 million to reflect the second quarter results in higher membership retention and the marketplace business [noise].
Additionally, we are increasing our gap and adjust the diluted earnings per share guidance at the mid points by three and five cents per share respectively associated with the second quarter performance and the gain from the Roberto salute acquisition.
Well risk adjustment delivered an additional five cents per diluted share of earnings during the quarter. We are reinvesting the additional earnings and other initiatives to accelerate dissenting Ford program.
Overall, the operating metrics for the second quarter were good across all of our business segments. We believe the continued growth in revenue provides opportunity for future earnings growth.
That concludes my remarks, and operator, you may now open the line or questions.
Thank you.
And the question and answer session.
On your touched down south.
If you are using.
Please pick up your handset.
Keith.
Yeah.
Yeah.
At this time, we will.
To assemble our roster. Our first question today comes from Scott sit out with Stevens.
I think it's a good morning I'm already wanted to.
I just want to do I start on the exchanges and.
You just update us in terms of.
On the market and I know that you're still within that by 10% range.
Just interested in terms of our you try.
[laughter], where you had thought previously and any sense in terms of within that range.
[laughter].
<unk>.
Tracking for the year.
Manager sent a follow up just on the exchanges as well just to understand.
A lot of the the right files coming out and.
Or 2020, and just interested in your opinion views on on how the pricing environment appears to be trendy for 2020 on the exchanges and and just your views on on whether competition is.
Increasing in the marketplace, that's okay, I'm going to start off with the margins Ooh comment on competition, and then Jeff and Kevin others comment.
[noise] margins are well within a 5% to 10% targeted range.
I cannot emphasize enough to everybody.
<unk> in this business.
And I've said this historically at best two days other times, you see movement up and down within that range.
In this instance, we commented our retention of membership.
Has been longer than typically what we have typically seen that means we're going to get increased revenue.
<unk>.
They will reach their maximum out of pockets and so some of the costs will go up.
So so have increased revenue and increased earnings from that increased.
It's the nature of this insurance business.
And it's really what one expects and the longer we retain a member the better it is because over time, we have demonstrated keeping for a long period of time, we bring the cost down for that person. So I <unk> as I said, it's it's a little frustrating to see people concerned about a margin.
And moving a margin, which is doing so well within the range.
Normal health insurance performance.
And shows that this business is really growing and performing as we expect it to.
And we've commented earlier to expect this so from a marketing standpoint, it's doing just what we want it to do and what we expect it to do and we we see that continuing and the long you keep the member hi, the M.L.R. might go.
But also you get all that incremental revenue.
<unk>, which gives you <unk> earnings increases.
And the shareholders everybody benefit from it.
I'll start off a little bit from the competitive standpoint, but we like competition.
And then we think it's important we have it it just makes us better.
We've also commented that in our.
Segment, which is 400 per cent of federal poverty level and below.
That it's fully subsidized.
Highly subsidized and therefore price in those types of issues do not give somebody trying to come in on price an advantage.
So I think you know this is a solid business.
Actions, we talked and building it and become a leader in it I think is going to pay a lot of dividends for our shareholders going forward.
<unk>.
Yeah, I think I think Michael Michael addressed to the you know the member staying longer comment I think the only thing I would like to buy for Kate is is we did talk about previously about a margin normalization and the marketplace margins would be consistent with 17, 16, and 15 and 18 was a very good year.
And so that that piece was completely expected in in our forecast and then the second piece I think that Michael mention here was the member staying longer which.
Just to highlight we've increased our guidance our revenue guidance over $1.4 billion, you know for the first and second quarters here really due to the the member retention and them staying longer and I completely agree with the comments. He stated about that I want to make one more comment, though when you have a.
75 billion dollar business, it's different when you have a 20 30 billion dollar business.
You have more complexity get more products you have more stage, it's going to be some variability, but it's really a very strong position to be in.
In that it really affords us the offsets.
And with that size business and now going international you're going to have a market that may have an issue. It's no different than investors have funds that have a stock.
And maybe the job of limit they have others that offset marketplace is one of our t. strengths and I can't emphasize that enough.
Got it and it sounds like Michael.
Just to clarify 2020, with what you're seeing the pricing at this point it sounds like you're still so comfortable with with.
Growth rate that you've been targeting in that market for next year, Yeah I. They I commented by prepared remarks that I expected to grow next year.
Oh and.
I think that's and I still feel that way.
Okay.
Next question comes from.
Thank God.
Merrill Lynch money Kevin.
The morning, Thanks, So I guess.
Maybe two questions first question being what do you think about the guidance update you know there's a few items in there you know you you had the three sent game and then you had you know the five cents I came in but it sounds like you're spending five cents away what do you think about.
The components of the guidance rating, because I need to raise a little bit less than what the beat wildly versus consensus in the quarter. How how do you think about that guy didn't raise how much of that is gonna core operational earnings versus kind of one time things versus potential off that's as far as me investments.
One common than Jeff can go into all the detail you one okay, but.
Well, we tried to say until we have this.
17 forward, which is really working well, it's gonna excuse free up funds to invest in technology that things are paid big dividends going for it couldn't be more pleased with it.
What happened is we started to realize results in this quarter.
And the shovel ready projects won't be ready until next week.
So we had to take the earnings but in effect said, we've taken him and he says corridor.
But <unk>, we're going to have the expense, Jeff you might just further.
Yeah.
I mean, a couple of things I would say is that if you're comparing to I think the consensus number I think that was around $1.24. That's 10 cents.
So we were at $1.34. So that's a 10 cent beat five cents is really driven by what Michael mentioned, the 17 Ford which were reinvesting in the back half of the year and then you would have another call. It five cents three cents from the Roberto salute gain and and call it too since from operations, if you're comparing to consensus.
And so I would say the guidance raise was was in line with that.
It's the three since from the rebel a salute game plus.
Two cents from operations again, if you're comparing against consensus that we increase the gods by.
Okay. That's helpful and then I guess.
The second question being if we're getting ready to embark on a part time basis points keep talking what about what was driving that I I would've thought it'd be better exchange enrollment and retention might have helped bring that M.L.R. down a little bit.
Yeah, I think if you're if you're comparing to year over year in specifically for this year I think Michael commented on the higher member retention.
So what we what we did have in the forecasts was the margin normalization and we talked about that at our December and probably Q. on earnings calls that we anticipated that exchange margins would be similar to 2017 and prior and then 18 was a very good year.
And so Michael commented on the membership retention and it members are staying longer and so it's a increase in the H.B.R. at the margins just a little bit and and that's why we did the 10th on the increase in the in the H.B.R. guidance in other words cover you know the the stay longer so they reach their maximum out of pocket.
Sooner.
It doesn't mean that the health conditions have deteriorated if anything over time, we'll see improvements along who we keep them, but that's really why you see that jump. It's it's a normalization of the business and the good news is I like the Bachelor retaining people.
Was it says longer term, we're going to have a very strong base.
Well, yeah, I mean, I can I can see why the higher M.L.R. versus the normal exchange person, but I thought or normal exchange person I below average M.L.R. So even if it was higher than an average exchange person it might be lower than your consolidated M.L. or you're saying that if you keep them longer it's actually higher than your consolidated <unk> hold up your consolidated I'm a lot.
No no it's just higher than our previous expectations. Kevin I mean, we had we had we had <unk> I mean, if you look at the Q1 and Q. to have we raised.
Guidance at the top line that's over you know almost a billion four of additional revenue.
And what we're saying is is that you know that M.L.R. is higher than our expectations that we originally had so the members are staying longer which is you know outside of our expectations as well and we're adjusting the forecast for that.
Alright. Thanks.
Actually the <unk>.
[noise] pens from Josh.
Hi, Thanks that good morning, just want to ask on a five cent that gets reinvested I guess the first question is that that five cents that ran back when attempting forward as any of that go into the M.L.R. line or that all G.N.A.
[noise] the the bulk of that would've been in the G.N.A. line.
It is gosh, there's a lot of investments in other words, we will continue to update our systems.
And we said way back when we're going to be investing in that and that's going to deliver longer term really efficiencies and so this this whole effort on reducing our sharing costs are we investing that money without affecting the earnings stream.
It's expected that's what it's all about.
Recognizing that growth.
Not that makes sense and then my real question. It's just from a strategic standpoint, Michael you alluded to the potential to close well care slightly earlier than it sounded like you know for by the end of the first half of next year. It sounds like you're saying some progress on the regulatory front that that gives you. Some comfort there. So my question on that it does that do anything strategically you know as you think about the Medicare advantage line, you know any other investments or or branding or your emanate strategy or anything along those lines that change based on your ability to potentially closed that transaction faster.
Well I think that okay. One I mean, your first day was right. We're seeing a lot of success with the states. They understand it we've had good discussions with justice, we understand they're rolling with they have to do and provide any more than the two on an expedition spaces.
<unk> and I want to just cautiously let people know, it's going well enough that it could closer.
The sooner as close as we get the company integrated.
Sooner we're prepared to move ahead with some accelerated activity, we have in mind, but we're going to be patient and manage it through.
[noise] carefree. After we've demonstrated this is fully integrated without going to bite off more than we can chew.
And we know how to integrate companies we've demonstrated that.
And so anything that picks up that speech is puts us in a position to do something soon.
Perfect <unk>. Thank you Michael.
Your next question comes from.
James with Piper Jaffray. Please go ahead.
[noise] <unk>.
Yeah, he's talked about.
On the next five key.
Can you help size, but that.
<unk>.
Same region and are there any quality checks for that contract you concerned with us that give us insight on how sense.
Performing from the T.I.D. viewpoint.
Kevin you want to take that sure.
Hi, Good morning, we've been working very closely with with D.O.D. for awhile about this so potential new arrangement and also with the house and Senate Armed services committees.
There's to your point, there's a variety of different thinking going on within the H.T.K.
As well as in a house and Senate Armed services committees about what that final new benefit plan might look like.
The risk arrangement that you're talking about is one of the things that they're considering but there's a lot of different things are considering too.
With respect to care management with respect to value based contracting with respect to network design, we're very pleased to be at the table and and providing a lot of different draw recommendations and and ideas to them.
When do you think that.
How the contract.
Potential difference in size at the new contract for instance, what it's contributing to 17 now.
Well as you're probably aware, there's a a leadership change it's going to be taking place over the next couple of months.
And so our thinking is probably after that takes place which was probably in the late summer early fall, we'll probably know more so I would imagine that the next three to six months.
Thank you.
The next question comes from plants, well, let's Bernstein. Please go ahead.
Yeah good morning.
Could you.
Medical costs trend and the components of and it was interested in what the implications are for Iowa.
In the latter part of the.
And maybe as a contributor to <unk>.
Withdrawal and one of the competitors.
Yeah. This is Jeff Lance I think what Michael said, you know, we continue to see stable stable costs trends.
In the Medicaid business and as far as Iowa, you know, it's it's nothing has changed I would say our our commentary around Iowa has has been that we don't we don't have that forecasted are projected to be a contributor to earnings in the first six months of operation for this year and I think Michael had reiterated in his commentaries prepared remarks that you know, we do see kind of a a normal what I'd call Medicaid margin profile on a going forward basis. Yeah. We typically have said that we we always book at a higher level.
For the first three quarters and so sometimes for.
But it doesn't mean, it's losing inches and maybe break even but.
And a new business, we work with our providers on evolution not revolution.
And so there's an educational process as we were through and they they're in our systems and things so.
We we see it performing normally has all new markets too.
<unk>.
The membership you're getting there kind of Oh above all your original expectations were or is it in line with those original expectations, Chris you want to comment on that.
Sure.
Sure. Thanks, Michael.
We as as I think Michael mentioned in the in his remarks were out about 254000, we do expect to come in close to our.
Anticipated membership of 300000 by the end of the year.
So we do see a growing and.
Being a very effective market for us.
Thanks.
Thank you.
The next question comes from.
Parsed with.
Please go ahead.
Yeah.
Yeah, if I could just ask US first question.
Texas, R.S.P., the Texas contract towards any.
Any.
<unk> disability on the timing at this point.
Yeah, they they've indicated the end of August but.
I've said historically like they've made quotas that and put my hand and fire for any state in their time and.
<unk>.
They do what they want but still.
Confident that it's going to continue to be a good opportunity for us.
Oh, Okay, Okay and.
And if I could also ask could you talked about supporting price range.
[noise] <unk> should I should we take that to mean that you would support.
The initial idea to have hospitals and insurers.
Essentially open up their books.
<unk> you know in terms of their negotiated rates and it's so do you think that would be something good for pricing is good for 17, I think I don't think that everything I've read about it historically, where they've tried those kinds of things. It has to have a negative impact on pricing all prices seemed to rise to the highest level now it's up to the lowest level.
I don't know what I'm talking about is particularly in pharmacy I think there's been an half since because the rebates and things on transparency, there and we are working aggressively to move to net pricing.
The pharmacy fun.
Okay, and I'm, sorry, just last one last one which is [noise].
<unk> <unk> <unk> <unk> <unk>, you'll see a substantial.
Impact from the I. you touched on the H.R.A.D. ability.
Employers to use H.R.A.'s for employees to pay a C.A. premiums D. do you do you think that's going to have significant follow through.
I think that there's an opportunity there I have not quantified if yet.
But <unk> a team has one but I think we see it as potential upside having no downside risk.
It's only good but we have to we have to see how it reacted him hopefully in the future because we really do more guidance on.
Alright, thank you.
The next question comes from Steve.
Goldman Sachs. Please go ahead.
Good morning, and thanks for the question morning.
I just wanted to dig into it to some of the specifics as much as you're willing to share on risk adjustment. So so into q. It sounds like a you know 238 million favorable reduction in parables, but then a net pretax benefit of 131 million and so so to question.
The offset sound like minimum M.L. ours in rat V.. So a lot of you could quantify those but then getting back to the five cents sounds like that number could have been a lot higher and I want to understand if there's any if there's been a change that sort of permanent nature and the way they'll accrue for this going forward.
You know.
Does that mean that the marketplace businesses more profitable essentially now that then then you had been occurring for it just how how should we think about all that thanks, but I'm going to turn that over to our resident expert of risk adjustment.
Yeah.
Thanks, Yeah, I think so.
You know we previewed this obviously at the Investor Day said you know it was we thought at the time it was going to be more than 200 million. So 230 age the number.
I would say I would size the minimum M.L.R. and the Red V. as the two largest components of the offsets and and primarily of equal.
Equal magnitude one thing to highlight just about Red V., specifically is it gets finalized in August of this year and this is the first year that they're doing the red b. adjustment for the market place.
And and they've decided not to collect the funds with the route be adjustment until 2021.
And and as a result, there's really there was no ability for us to offset the red via adjustment in our minimum M.L.R. calculation.
Meaning usually the M.L.R. calculations the last right. So you would have a <unk> adjustment that would then be calculated into the minimum and all are but as this was the first year for the ride be adjustment.
We were unable to do that so some of the red via adjustment would've been mitigated.
In our minimum M.L., our calculations, but it.
It wasn't for this quarter because of the unique circumstance.
But I guess, what I would say is you know the 17 Ford program delivered a good value and continues to do that on the risk adjustment side and you know I think that's a good thing long term I just want to add you know this I want to remind everybody that these two elements to this could just.
One that we control and that's how well, we do a medical expenses than others.
But if somebody else has a negative.
Has a different than expected result that impacts us and that's outside our control. So when you look at this is not just how we're doing but what the total market. It in a particular products too.
They tell you what you already know.
Yeah, absolutely and I guess, the the the 238.
Pretty sizable on a percentage basis or just over the last sort of follow up paces.
Do you guys expect to make any changes to the way you occur or is it going to be consistent guy.
Again, I mean, you know we were following gap right. So our job is to make the best estimate at the end of each quarter and at the end of each year and that's what we'll continue to do so yes. If we have historical information that indicates that we're performing a better than we we would absolutely include that information into our estimates.
Okay. Thanks, guys.
Thank you.
Your next question comes from Dave when lean with Jeffries. Please go ahead.
Hi, good morning.
Question wanted to.
One of the to follow up on M.L. are just when the cadence question I think the first half M.L. ours up about 120 basis points to year over year.
The guidance implies that the second half would be up a little less than that you're update on exchange sounds like that drags the the back half of the year up a little bit so I wondered.
What's the offset that makes that you're over your chain smaller in the second half isn't a Dallas is that is that it exclusively are there other factors things.
Well I think if you're comparing year over year first have to second half. Obviously fidelis is is a change meaning we did not have that in the first half of last year.
Right and we do have fidelis in the first half of this year and as we've commented they they were running a higher H.B.R. then 17 based business. When we did the acquisition. So that is definitely a driver.
And and then just a quick follow up on a separate topic there are Michael some some enrollment moving parts sequentially.
In both your your 10 of friendship an A.B.D.L.T.S.S. categories.
Could you describe what some of the moving parts are there and then is the international line now just the <unk> the changing the ownership basin Roberto saloon is that what drives that that addition, thanks.
I I'm I'm going to start doing that to pick up her obviously on our 10 F.R.L.L.S.
Long term care et cetera.
So we've got a new business in the east side of Pennsylvania, and other things. So there are moving parts affected by new businesses coming in and all these categories and so that's going to move it to move it up down around but <unk> overtime was smoothed out Jeff do you want to pick up on the second quite yeah, and the second piece you're spot on when we took control of the rubber salute. We've included those members now in our membership reporting table. So that's the change there.
Okay. Thank you.
[noise]. Your next question comes from Peter <unk>. Please go ahead.
Thanks for taking my question. Most my questions are asked and answered, but I might like to.
A couple of detail first off what are the incremental start up costs in the fourth quarter from Oregon and second what are the changes to your reported earnings you know revenues are and minority intertwined for Roberto <unk> changing ownership there.
[noise] Yeah. So first question. The there were there are costs, obviously associated with Oregon start up and we had a place holder in our original startup costs guidance. So it fits well with them what we'd already previously communicated and then the second thing when you're talking about the consolidation now obviously, we would you know the net earnings impact is is in theory. The same other than we have more share of those earnings but now we will include the revenue and we'd had that in the in the guidance because we had a we knew this was acquisition was coming.
So we'd already had that the previous guidance.
Okay. Thank you.
The next question comes from H.K. Rice Slash scratch.
Oh God.
Hi, everybody first off just ask about the.
Update on the P.B.M. side of the business I think Mississippi in Nebraska, you're rolling out our eggs advance.
Any learning is from that maybe talk about that okay. That's it for the roll out there I know arch advance is talking about.
Additional capabilities are they have care management help operating efficiency held or you explore any of that and what kind of opportunity my Debbie.
Oh, it's spreading Kevin to pick up on that but it.
Hi, <unk>. So we are currently live in Ah six states with just over 1 million lives on the R.X. advance platform and very pleased with our progress and what we're seeing today and we look forward to I guess exploring the new things that are accidents platform allows us to do and said we'll have more to come in teacher, a teacher calls, but very pleased with the progress today.
Yeah, if I could just.
I have a file a little bit with brandy and so this is Kevin.
I think one of the core learnings that we've we've had is the importance of engaging independent pharmacies very early on in the process. So we get out to the I.P.A. you know the independent Pharmacy Association early we talk about what we're doing why are we doing on what the new website is going to look like getting their newsletter things of that sort. So that's been a a core learning.
Okay great.
Now you're coming up on a year with for Dallas I know when that deal was originally struck there was an expectation of improving the medical loss ratio or trend, but also maybe give it a little bit back in the G.N.A. area, but that positive.
You talk maybe.
Back over the last year has it.
Developed as you expected or your head.
A little bit behind and how much is there still further things to do once year anniversary. This.
Yeah. This is this is Jeff and it's it's a I think Michael as mentioned this previously but it's been a very good deal for the company. It's performing in line with expectations. We're capturing the synergies that we thought we would and I would say the initiatives and what we expected at the beginning where we were going to invest more G.N.A. dollars to lower the medical costs have actually have occurred and so we're pleased with the performance and I think there's still more opportunity for continued improvement and we're working on those actions as we speak.
Okay.
Comment had commented before that we could find more for dialysis I do one in the morning and one in the afternoon.
Okay, Okay absolutely.
The last question. This guy's raised by one of your larger competitors that are already reported the question prior appeared development or you don't.
Specifically for that in the <unk>.
Any comment about.
A normal corner proper development and and then you realize this quarter relative to last year for score.
<unk>, Yeah, it's been normal I mean, A.J., we've talked about this before I mean, what we really focus on is the consistency.
Right of development, meaning we have a consistent process. We used you know.
We use claims received we use an impatient validation methodology. So our methodology is a little unique compared to others in the industry, but we look for consistency and I think ours has been consistent.
For a long time.
Okay. Thanks, a lot.
The next question comes from.
J.P. Morgan. Please go ahead.
Hi, Good morning, most of my questions answers or just too quick follow ups. It it sounds like from the commentary this is <unk>.
What is it.
And so on.
In Spain, it was 50% ownership before but it but it was not consolidated financials and now.
It will be correct, yes, that's good that is correct, yes, okay.
And then just my other one just going back to the exchanges and certainly acknowledging your commentary that you thought.
<unk> normalized to some degree after 20.
18, we saw in the first quarter when we look at the stat filings that that the loss ratios and exchange enough about 300 basis points. So when we when we get a chance to see that again for the two q. is that going to be a pretty consistent.
Factory or should we anticipate based on some your retention comment that maybe that's up a little more.
No I I guess, what I would I would say is I think it will it will be up you know the other thing you have to realize is when you're you're looking at there's a difference between the statutory and the gap H.B.R. is that we talk about so that's that's all I would highlight but yes, it will be up on a year over year basis.
Okay.
As expected.
Go ahead.
God sorry.
Well I said that's fine.
The next question comes from Justin like what the rough research. Please go ahead.
Morning, Thanks morning.
Ah purchase the question on exchanges appreciate the comment on the 2020 membership growth wanted to ask about margins or should we expect margins to normalize lower again in 2020 or do you see the current margin it's sustainable into next year.
I think.
When you look at margins, it's going to be a function of this as you continue to attract.
How long you retain your existing membership there's <unk>.
It was there.
And what's important to me and I said this so we talk about a five.
10% range, we see nothing that's going to change that it's going to move up and down within that range based on retention on the membership you attract a series of things and that's to be expected in any insurance business as it grows and as you keep people longer you'll see some leveling off of it is because they are being managed to it under control.
But and you and the laws ride your numbers.
Such a price so.
I guess going into as we look at 2020 will give more guidance.
In December which is our standard factories versus trying to get into too much at this stage.
We'll have we'll have more history that point to understand what our retention is what the membership is.
Mind, you know every year, we've retained 80 per cent of the previous years membership.
So all those factors come into play chess.
Sure that that makes sense, maybe maybe another way to ask is just if you're saying, 5% to 10% is a reasonable range or margins and obviously, we could pick the midpoint of seven and a half.
Because this year and if we think about seven and a half is the is the kind of mid point of normal with this year b. below or above that mid point.
Well, we know we I'm not going to get into it to that level of detail because once again, it's it's a very large business and it's a growing business and we started getting that finite we're losing sight of what this total 75.
Billion dollars soon it'll be 100 plus billion dollar company is so.
You have to look at the totality and we don't look at it and say isn't going to be able to send 8.2, a blue one.
The totality of our businesses.
And we beat them operations by two cents.
And that that's kind of the way we look at it just.
Totally reasonable, okay, and if I could just ask a court follow up on the M.L.R.
You took up the guidance as we as you mentioned by 10 basis points, just trying to figure out where that you know it was coming from you know the consensus was 86 three this quarter, but I know you don't die quarterly so we could have clearly gotten it wrong just curious how how the court or the M.L.R.
Ah looked versus your internal expectations.
Yeah that was the 86 seven in line or was it a little bit higher or are you taking up the back half of the year because of the higher retention rate I'm really the second quarter was fine.
Oh no it was like there's <unk>.
Yeah, I mean versus our expectations it was in line.
I mean, the marketplace business was was in line I mean I, that's that's our view.
So 86, seven is pretty much where you would expect it and it 10 days the point guide up for the year is really just taking up the back half of the year for higher retention is that the way we should think about that.
Yes, that's that's correct.
Okay, 'cause remember remember I mean <unk> Michael explained this at the beginning remember, there's there's deductibles and maximum amount of pockets right. So.
The longer.
You know you can do the math or.
Short, maybe you could just tell us what is like the member that drops off in the middle of the year.
That you typically see what's the M.R. on that member versus animal.
That's what we had <unk> <unk> Jess and we have 1.9 million members you want to tell me, which one you're thinking about.
I mean seriously and then that'd be another.
<unk>, but Alex excuse me, but I mean, you think about what you have one point.
9 million members.
111 could have an M.R., 72% ones that have an M.R.R., 85%.
I mean, it just there's no way of of doing that.
All right I'll leave it there thanks guys.
Mm.
The next question comes from Val di a cop was city. Please go ahead.
Thanks morning, just wanted to clarify quickly the the incremental benefit from risk adjustment comes through the M.L.R. right. So it benefited the ratio about probably about 20 basis points. This quarter is is that fair.
You're correct. It does come through the M.L. or as a component of revenue right. It's a it's a revenue adjustment.
Right, Okay, Yeah, I try to.
And then second question maybe just.
Back to the exchanges here, but it's been a little bit of a different angle can he talk about the provider networks on the exchange at this point how can how it's kind of evolved over time have you sort of adding or narrowing offerings and then I guess more importantly, but can you help us on in terms of the annual rate bump to providers is that similar to kind of a composite Medicaid rate that you typically see in that low single digit range or is it more like a pure commercial rate bump that may be more in the C.P.I. plus level and and maybe even more importantly, how's that try and get over time can you give us a sense for that as you've obviously.
Entered into new markets. Thanks.
Yeah, that's a lot there so.
No first we're not going to get into the you know provider specific rate increases for providers right, but the other thing is I would say is we've continued to manage our provider network to offer a competitive product and be successful and grow the business.
And so that's what we continue to focus on that's what we continue to do and make sure that our members have access to the highest quality care.
And I just might add that I've come at it we're moving more and more to these recipes contracts and providers had managed to the business.
It goes back to the old fashioned manage your patient can do incredibly well with that.
It puts him anything tools, how they're practicing medicine. So we think there's real opportunities we're providers, who do very well on this.
Okay I guess.
This concludes our question and answer session I would like to turn the conference back over to Michael Neidorff for any closing remarks. Thank you I wanted to I I just want to emphasize that as we sit here as a group to date.
We we feel very good about the business, where it is is performing well it's fired on all 12 cylinders and on balance as you can see there's a growth there's a a b from operations were dealing with all the issues and so Oh, we look forward to continuing to report what we consider to be very successful quarters. Thank you for your time and look forward to seeing.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.