The operator welcomes participants to the Molina Healthcare Fourth Quarter 2023 Earnings Call and provides instructions for the call. Jeff Geyer, Vice President of Investor Relations, introduces Molina's President and CEO, Joe Zubretsky, and CFO, Mark Keim. He also mentions the availability of a press release and replay of the call. Non-GAAP measures will be discussed and caution is given about forward-looking statements.

The speaker discusses the financial results for the fourth quarter and full year of 2023, growth initiatives, and strategy for sustaining profitable growth. They also mention the 2024 premium revenue and earnings guidance, as well as their long-term growth targets. The fourth quarter showed strong performance, with adjusted earnings per share of $4.38 and $8.4 billion of premium revenue. Medicaid, Medicare, and Marketplace all performed well, contributing to a 17% year-over-year growth in adjusted earnings per share and a 5% growth in premium revenue for the full year. The speaker also notes that their pretax margin is at the high end of their long-term target range for 2024 and that their Medicaid business is within their long-term target range for medical cost ratio.

The company has successfully managed various factors in the redetermination process for Medicaid, resulting in a solid start for 2024. In Medicare, the business was profitable but did not meet performance expectations due to higher utilization of certain services. The Marketplace business reported a lower MCR but is positioned for sustainable growth. Additionally, the company achieved several growth milestones in 2023, including retaining contracts in Texas and New Mexico, launching a new plan in Iowa, and acquiring other companies. They have also successfully launched a new health plan in Nebraska after winning a competitive bid process.

The company has had a successful year with acquisitions and RFP successes, resulting in $7 billion of annual premium revenue. They are continuing to pursue growth opportunities, including reprocurements in Florida, Virginia, and Michigan, and bidding for over $50 billion in premium revenue in other states. Their M&A pipeline remains strong, and they have completed eight transactions since 2019. The company's 2024 guidance includes projected premium revenue of $38 billion and adjusted earnings per share of at least $23.50, representing 17% and 13% year-over-year growth, respectively.

The company is projecting a well-balanced combination of new contract wins, acquisitions, and growth in their current footprint to reach $38 billion in premium revenue. They are also taking into account the impact of the Medicaid redetermination process on earnings and expect Medicare to return to profitability in 2024. The Marketplace product is expected to achieve mid to high single-digit margins, with membership and revenue growth. The company has confidence in their 2024 guidance and their long-term targets for premium and earnings growth.

The company is committed to achieving their targets, which were set at their Investor Day last May. They are confident in their ability to reach their long-term EPS growth target in 2025, and have a clear outlook for achieving this. They have a data-driven approach and have achieved significant growth and revenue through new contracts and managing medical cost trends. Their strategy is focused on providing access to high-quality healthcare for those relying on government assistance, and their business model is based on taking on capitated risk and managing costs to maintain target margins. The company is grateful to their 19,000 associates for their dedication to delivering healthcare to members.

The speaker, Mark Keim, discusses the financial performance of the company in the fourth quarter and full year. He mentions a total revenue of $9 billion and $8.4 billion in premium revenue, with a note that a tax item in California slightly affects the reported numbers. The medical cost ratio (MCR) for the quarter and full year is reported to be 89.1% and 88.1%, respectively, which is within the company's target range. The Medicaid segment had a reported MCR of 89.2% for the quarter and 88.7% for the full year, while the Medicare segment had an MCR of 93.3% and 90.7% for the quarter and full year, respectively. The higher MCR in Medicare is attributed to increased utilization of certain benefits and services.

The company is confident that their changes to benefit design and operational improvements will lead to target margins in their Medicare business in 2024. They have also successfully returned their Marketplace business to target margins. The company's adjusted G&A ratio for the quarter was 7%, but when accounting for a tax item in California, it restates to 7.3%. The acquisition of Bright has been completed and is expected to contribute $1.6 billion in premium this year, but it is also expected to be dilutive to 2024 adjusted EPS by $0.50. However, the company remains confident that the acquisition will ultimately result in a $1 per share accretion. As a result, the 2024 new store embedded earnings from the Bright acquisition have been updated to $1.50 per share. The company is also working on Medicaid redeterminations.

In the quarter, the company lost 200,000 members due to redeterminations, but has gained 1 million new members during the pandemic. They expect to retain 40% of these new members, resulting in a net loss of 600,000 from the redetermination process. However, the company's growth initiatives have resulted in a net 300,000 member growth over a two-year period. The company has visibility into rates impacting 80% of their 2024 premium and is confident that actuarially sound rates will offset any emerging trends. The company's balance sheet remains strong, with a parent company cash balance of approximately $740 million, which was used to fund the Bright Medicare acquisition.

At the end of the quarter, the company's debt-to-cap ratio was 36.3% and they have ample cash and capital for growth and investment. They are confident in their reserve position and have 50 days in claims payable. For 2024, they expect 12% growth in Medicaid membership, 58% growth in Medicare membership, and 31% growth in Marketplace membership. Their premium revenue guidance for 2024 is $38 billion, with $3.3 billion from recent RFP wins, $2.4 billion from acquisitions, and $1.7 billion from organic growth. However, they also anticipate a decrease of $1.9 billion in revenue from redeterminations.

The company expects to earn at least $23.50 per share in 2024, with factors such as new store growth, organic growth, and cost adjustments impacting their earnings. The Medical Care Ratio is expected to be 88.2%, with the Medicaid MCR at the high end of their target range and the Medicare MCR at the high end of their target range. The Marketplace MCR is expected to be at the low end of their target range. The company also expects their adjusted G&A ratio to decrease and their effective tax rate to be 25.7%. The adjusted pretax margin is expected to be 4.6%, and the weighted average share count will remain unchanged. The company's quarterly EPS will be weighted towards the second half of the year.

The company ended 2023 with $5.50 per share of new store earnings and expects to have $4 remaining by the end of 2024. They are confident in their long-term growth rate for EPS and are now ready to take questions. The first question is about the Medicare MLR margin and the company attributes their expected improvements to benefit design changes and operational improvements. They also mention three components of medical costs that ran higher than expected, but they have taken corrective actions to address them. They believe that their margin profile will be in line with their long-term targets after redeterminations.

The company is confident that their Medicare MLR will reach 88% in 2024. The Medicaid MLR was impacted by an acuity shift during the redetermination process, but rate adjustments and financial buffers compensated for this. The company finished 2023 with an MLR of 88.7% and is currently seeing a flat MLR on their legacy book. However, the addition of new business is expected to increase the MLR to 89%.

The speaker discusses the company's performance in the marketplace, noting a flat carryover on legacy products and increased pressure on new stores. They mention a target margin of 5% to 7% for the business and plan to grow it at a rate that allows them to achieve this. The company is competitively positioned this year and has a strong book with a high percentage of silver products and renewals. They believe the risk pool has stabilized and are confident in growing the business.

The company has experienced significant growth in membership and revenue, and hopes to maintain this growth in the future. They are aiming for mid to high single-digit margins. The next question from an analyst is about the Medicare business and the company's target margin. The CEO explains that the Medicare business is made up of three different components, with varying dynamics and profitability. The CFO will provide more details on the Medicare MLR, but it's important to consider all three components when analyzing the business.

The speaker discusses the Medicare MLR and how it is impacted by Bright and premium deficiency reserves. They mention that Bright has a PDR in place which reduces the MLR, but they are able to offset it with other components of their business. They also mention plans to grow membership and pick up more members from competitors' Medicaid plans. They expect the MLR to be sustained and normalized as members come off normal using services.

The speaker explains that there is no pent-up demand for their product and they are expecting a good pickup in Q3 and Q4 without pressure on the MLR. The next question is about the increase in health insurance exchange membership and revenues. The speaker clarifies that the metallic mix has remained unchanged and the difference in revenues is due to state geography. They also address confusion about Bright's MLR and embedded earnings, explaining that the PDR booked before the acquisition is pulling down the MLR below the target range but will be reversed throughout the year.

The speaker is discussing the PDR and how it affects expected operating losses on a contract year. They mention that there are certain accounting matters that are not included in the PDR and that there will still be a small operating loss. The speaker also mentions that when discussing embedded earnings, they include carrying costs and that they have a $0.50 hole in their EPS bridge for this year. They expect to have a $1 ultimate benefit from this property, which will increase to $1.50 over the next couple of years. The next speaker asks for the PDR number for 2024 and the speaker responds that they acquired the business with a $75 million PDR on the balance sheet. The PDR books all of the losses, including a portion of G&A losses, into the medical cost line. This is just an accounting convention and the net of losses will be reflected in either the MLR or G&A line.

In this paragraph, Justin Lake and Mark Keim discuss the expected increase in MLR and decrease in SG&A for the upcoming year. Joe Zubretsky explains that the first year losses were expected and they have plans to decrease the G&A ratio and increase the MCR. They anticipate a full dollar of accretion in the third year of ownership. Justin also asks about the RP in Florida, but Joe cannot comment on it due to the bidding process.

The company has high expectations for their Medicaid business in Florida, and they have a strong team working on bids and contracts. They hope to expand their presence in Florida and expect to hear about awards in the spring. The company also discusses their Medicaid MLR expectations for the year and how they plan to stay within their long-term range. They mention the redetermination process and rate increases for 2024.

The Marketplace MCR is moving back to the low end of the long-term range, with a 300 basis point increase year-over-year. This is driven by membership growth. The long-term target for the business is still 78% to 80%. Quarterly EPS is weighted towards the back half of the year, with this year potentially being over 50%. The company consciously bid to grow the business moderately.

The company priced slightly below the observed trend in order to invest in growth, resulting in 31% membership growth and 17% revenue growth in 2023. They expect a shift in their quarterly phasing due to new business and a growing book in Marketplace. The next question asks for clarification on the company's plans for the two-midnight rule and V28 in their 2024 plan design for both the company and Bright.

Joe Zubretsky and Mark Keim address concerns about Medicare pressures and trends. They explain that their company has a different mix of members, with a low income and high acuity population that uses services consistently throughout the year. They also clarify that the two midnight rule and changes in risk adjustment have been factored in for some time.

The author discusses the two midnight rule and how providers still need to prove medical necessity. They also mention the impact of V28 on risk adjustment, which can be helpful for polychronic conditions. The company is forecasting a 78% MCR for the year, which is at the low end of their target range. They need to strike a balance between growth and new members.

The speaker discusses the importance of finding risk adjustment for new members in order to achieve profitability in the near term. They also mention the balance between annual enrollment and special enrollment periods, and how the maturity and duration of the membership affects the stability of the risk pool. Additionally, they mention that the company is prioritizing margin over volume and is pricing the product to defend reasonable margins. They also note that the company conceded some margin in their pricing for 2024 due to being below their target range in 2023.

The speaker discusses the possibility of increasing prices and driving volume while still meeting margin targets. They also mention potential disruption in PDP in 2025 due to changes from the Inflation Reduction Act. When asked about the preliminary analysis of the 2025 MA advance notice, the speaker states that it does not adequately compensate for observed trends and projects a 0.5 point rate increase, which they believe is insufficient. They anticipate a better final notice.

Mark Keim and Joe Zubretsky discuss the data on effective benchmark rates and risk score normalization for the advance notice and risk or normalization. They mention that most people see a net of zero, but their company sees a net of positive 50 bps. They also mention that the impact of STARS and risk scores has yet to play out, but they are confident in achieving $1 accretion in the third full year of ownership. They are still working through issues with the recently acquired legacy book and are not ready to comment on the effects on the Bright book. The call concludes after the question-and-answer session.

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