The operator welcomed everyone to the Molina Healthcare Second Quarter 2023 Earnings Conference Call and introduced Joe Krocheski, Senior Vice President of Investor Relations. He explained that a press release was distributed after the market closed yesterday and that a replay of the call will be available for 30 days. He also warned that forward-looking statements will be made and that they may differ from actual results due to certain risks and uncertainties.

Joe Zubretsky provided updates on the company's financial results for the second quarter of 2023, including an adjusted earnings per diluted share of $5.65, a consolidated MCR of 87.5%, and an adjusted pre-tax margin of 5.3%. The company also reported a Medicaid MCR of 88.3% and a Medicare MCR of 89.2%. Investment income produced higher than expected results due to the increasing yield environment.

In the second quarter of 2023, the company's Marketplace MCR was 73.7% and 71.2% year-to-date, reflecting successful implementation of pricing, metallic mix, and membership continuity strategies. As a result, the company increased their full year 2023 adjusted earnings per share guidance by $0.50 per share to at least $20.75. Additionally, their Medicaid membership decreased by 93,000 members during the quarter, with a negligible impact on the overall MCR, due to outreach to members to minimize procedural disenrollment.

The company is executing on their growth strategy to increase premium revenue to $46 billion by 2026. This includes five recent RFP wins and the acquisition of Bright HealthCare's California Medicare Business, which will add approximately $1.8 billion of premium revenue and $1 of adjusted earnings per share at full run rate. The transaction is expected to close by the first quarter of 2024. The company is also working with state partners to ensure rates remain actuarially sound.

In the fifth paragraph, the speaker discusses the closing of the Bright Health Group, which is subject to certain conditions such as solvency and continued operation as a going concern and regulatory approval. They also provide an update on their long-term financial targets, which is an annual growth rate of 15-18%. The speaker then turns the call over to Mark to discuss additional details of their second quarter performance, balance sheet, 2023 guidance, and 2024 premium revenue outlook.

In the second quarter, the major medical cost categories were largely in line with expectations and COVID-related costs have largely subsided. Medicaid membership decreased, while Medicare reported an MCR of 89.2%. In the Marketplace, the MCR was 73.7% due to pricing strategies and normal seasonal patterns. The company's adjusted G&A ratio for the quarter was 7.4%, and the parent company cash balance was approximately $0.5 billion.

Bright HealthCare's Medicare business acquisition is expected to be funded in the first quarter of 2024 with cash on hand and no debt. The company's reserve approach remains unchanged and their 2023 adjusted earnings guidance has increased by $0.50 to at least $20.75 per share due to second quarter performance and higher expected investment income. The remaining COVID era with corridors would provide upside to the $5.50 of new store embedded earnings. The company is monitoring the redetermination process and has built tracking systems to maximize retention of members.

The paragraph discusses early observations of the Medicaid redetermination process, including successful outreach protocols and automatic re-enrollment rates ranging from 20-70%. It also notes that two-thirds of those disenrolled have been procedural rather than due to verification of ineligibility. Terminated members have slightly lower medical costs than the portfolio average, and states representing half of the Medicaid revenue began the process in June and states representing a third of the revenue are now initiating disenrollments in July. The outlook on the impact of redeterminations on the business remains consistent with expectations.

In the first quarter, the company estimated they had gained 800,000 Medicaid members organically since the start of the pandemic, and they expected to retain roughly half of the members. The premium impact of members disenrolling was estimated to be $1.6 billion, and the earnings impact could be approximately $1 per share. The company has line of sight to $38 billion in projected revenue in 2024, which includes organic growth, recent state contract wins, and an acquisition. This is partially offset by $1.4 billion for the impact of redeterminations and known pharmacy carve-outs. The company concluded their prepared remarks and opened the floor for questions.

Joe Zubretsky explains that the rate cycle in the company's portfolio of states is well positioned for the redetermination process, and that acuity shifts are part of the dialogue they are already having in the states. Mark Keim adds that in July, five states representing 10% of their revenue moved into a new pricing cycle, with half of them offering a proactive concession for redetermination and the other half saying they will make an adjustment as data develops.

Joe Zubretsky and Mark Keim discussed the rate of redetermination and the accounting policies required for documentation. They also discussed the exchange benefits from the 2022 final risk adjustment true-up and the strategy of keeping the marketplace business small, silver, and stable. This, along with a 9% price increase for the year, should result in mid-single-digit margins and a pretax margin of just over 6% for the full year.

This paragraph explains how analysts have been incorrectly estimating the amount of money that will be gained from risk adjustment. It states that the benefit of $66 million is actually cut in half by the retention of margins that do not fall to the bottom line. Additionally, it explains that the risk adjustment liabilities are being tracked through a service called Wakeley, and that most of the benefit will be recognized in the first quarter with a smaller amount in the second quarter.

Joe Zubretsky and Mark Keim discuss the expectations for investment income for the rest of the year. They explain that half of the $8 billion portfolio is in intermediate term securities and the other half is in cash, which is more responsive to interest rate changes. They forecast lower interest rates for the back half of the year on the cash balance, which will be reduced due to the payment of some significant government payables.

Joe Zubretsky explains that the automatic renewal rates have ranged from 20%-70%, and two-thirds to 75% of terminations have been procedural. He believes that the reconnection activity of members who were procedurally terminated within the 90-120 day grace period will be quite high, and that this will result in retroactive premiums back to the initial date of disenrollment.

Mark Keim discussed the importance of ex parte reviews, which can help retain eligibility for up to 70% of applicants. He also discussed the importance of reconnects, which allows those who lose eligibility to refile and be reinstated with retroactive coverage and premiums. Joe Zubretsky added that the medical loss ratio of those who have disenrolled is slightly more favorable than the portfolio average and is expected to hit the projected 88.5% medical care ratio for the full year.

Joe Zubretsky responds to a question about the reverification process, noting that the state mix is important and that some states moved more aggressively than others. He also mentions that they have outreach efforts to engage more effectively and that they have data on how often members engage with locations that could catalyze a renewal.

Joe Zubretsky explains that the comment about a solvency contingency in the Bright Health acquisition did not refer to the properties they acquired, which have the necessary regulatory capital to run the plan, but rather to the parent company's ongoing financial solvency. He goes on to explain that many members are associated with family members, which means the whole family gets renewed if one family member needs medical care. This helps maintain the mean MCR of the portfolio.

Joe Zubretsky commented on the Bright acquisition, stating that the business had its own profit improvement plan in place and that the financial status and margin status of the plan that will be delivered to them at the time of closing is unknown. Mark Keim then commented on the marketplace, stating that they are constantly picking up members month-to-month due to the special enrollment period, and that they will also start to pick up people that came off the Medicaid roles.

Joe Zubretsky states that the company's position on the balance of margin and growth for the Marketplace has not changed. He also notes that there is good visibility into special enrollment period, month-to-month, and Medicaid gains, which he expects to increase in the coming months. Additionally, the membership forecast does not include the retention of Medicaid membership losses into the marketplace product, and the company does not have a good estimate of what that would look like. Finally, he mentions that they are sensitive to managing the exposure on this business given how volatile it has been on the margin side.

Joe Zubretsky explains that the company is projecting 19% growth in revenue for the coming year, including moderate growth in Marketplace, and that they do not need to allocate more capital to Marketplace to achieve this growth. He then explains that they have been conservative in their trend estimates for their Medicare bids for 2024, and that the other half of their business which is MMP does not rely on the Medicare bidding process. He also notes that the MNP business is helpful in terms of star ratings and risk adjustment.

Joe Zubretsky discusses how the protocols for member outreach differ from state to state, with some states allowing more involvement from MCOs than others. He mentions that CMS has suggested that states should allow MCOs to be more involved in the reverification process. Mark Keim and Scott Fidel also provide information on their pricing and guidance for the rest of 2023.

Joe Zubretsky explains that they are working with state regulatory authorities to ensure that those who need to be on Medicaid stay on it. He also states that the due diligence process they did through a clean room process gave them visibility into the Bright bid and that they are confident that the bid was rational and included all trend factors. He goes on to say that the profit improvement plan will be the key factor in determining the earnings picture at the point of closing. Lastly, he mentions that the states made proactive concessions and rates for redeterminations in July.

Mark Keim explains that rate concessions in July 1st were already incorporated into their guidance, and were a small component of their revenue. Joe Zubretsky then explains that the pressure on the MA MLR was due to outpatient utilization, such as ambulatory surgeries, PCP visits, and preventive screenings. Additionally, there was $27 million of unfavorable PPD in the quarter, which Mark Keim will explain further.

Mark Keim addressed Michael Ha's question about the prior year development of $27 million and explained that the noise was due to California SB 510, which held health plans liable for certain COVID expenses. Steven Valiquette asked about the risk of a higher Medicaid MLR due to lower utilization members coming off the rolls during redeterminations, and Keim reassured that there was no concern. He also mentioned that there is no preliminary buy as for 2024 Medicaid MLR.

Joe Zubretsky and Mark Keim discuss the outlook for the redetermination process, which is that 800,000 members will go up and 400,000 will go down, resulting in $1.6 billion in premium and an 88.5% Medicaid MCR for the year. They are confident in this outlook because of the corridor programs and minimum MLRs that they have in place, and they don't expect much volatility into the next year.

Kevin Fischbeck asked about quantifying the amount states are putting in for rate adjustments due to redeterminations. Mark Keim explained that it differs state to state and that it is difficult to give specific numbers as the rates were done academically without data. He noted that other adjustments may be made up and down, and that the focus should be on actuarial soundness. Joe Zubretsky then commented that it is difficult to explain why Medicare Advantage is seeing an above-average return while Medicaid is not.

Joe Zubretsky explains that the company's Medicare book is different than many of the other books of business, with trends in the quarter being 3% in Medicaid, 6% in Medicare, and 7.5% in Marketplace. He then explains that the mix of the book of business is likely the reason for some of the differences in competitors' results. Nathan Rich then asks if there has been any early success in redirecting members to Marketplace plans if they are not eligible for Medicaid, to which Joe Zubretsky responds that the process is in full gear but it is still early.

Joe Zubretsky is discussing the process of transferring people from Medicaid to the Marketplace, as well as the potential for states to cover GLP-1 drugs for obesity. He explains that Medicare does not pay for off-label uses, so the decision to include the drugs in state programs is based on rate discussions. He believes that medical costs that are rated for should be included in programs, as the trend in these prescriptions is well known and well documented.

Joe Zubretsky was asked to quantify the magnitude of the changes in Medicare Advantage benefits in 2024, given the challenging rate environment and the need to preserve the margin profile of the business. He responded that they wouldn't be publishing the percentage of actuarial value of the product represented by ancillary benefits, but that their products are competitive and include a variety of benefits such as vision, dental, cash cards, travel benefits, and gym memberships.

Mark Keim and George Hill discussed competitive intelligence and analysis that suggests they can have a zero premium product with competitive benefits if their star ratings are not benchmarked with the rest of the market. They also discussed how they are thinking about changing benefit design to be competitive with the broader markets, and Joe Zubretsky concluded the call.

This summary was generated with AI and may contain some inaccuracies.