The paragraph is an introduction to Molina HealthCare's Third Quarter 2024 Earnings Call. It is hosted by Jeffrey Geyer, Vice President of Investor Relations, with participation from CEO Joe Zubretsky and CFO Mark Keim. The earnings announcement was released the previous day and is available on the Investor Relations website. A replay of the call will be accessible for 30 days. The call will cover non-GAAP financial measures and include forward-looking statements on various topics such as 2024 guidance, Medicaid updates, medical costs, revenue growth, and strategic initiatives. These statements are subject to risks and uncertainties that could affect actual outcomes.

The paragraph is part of a financial update during an investment call, where the company's CEO, Joe Zubretsky, discusses the third-quarter financial results. The company reported earnings per share of $6.01 and $9.7 billion in premium revenue, with a consolidated Medical Care Ratio (MCR) of 89.2%, which was higher than expected due to medical cost pressures in Medicaid and Medicare. Despite this, they achieved a 4.5% adjusted pre-tax margin. The year-to-date MCR is 88.8%, slightly above their long-term target. The CEO also mentions an issue with a retroactive premium rate reduction in California for their Medicaid business, which is being reviewed with the state. Overall, the company maintains a well-balanced portfolio and reaffirms its 2024 guidance.

The paragraph discusses the financial challenges faced in a recent quarter due to higher medical costs related to acuity shifts and increased utilization, particularly in long-term services and supports (LTSS), pharmacy, and behavioral health. Three factors helped partially offset these costs: improved margins from new store additions, implementation of rate adjustments, and risk corridors acting as financial buffers. In the third quarter, they received five on-cycle rate updates averaging 4.5%, along with positive off-cycle adjustments, indicating state recognition of underfunding issues. For the fourth quarter, on-cycle rate updates averaged 9%, contributing to a projected $350 million benefit for the second half of 2024. This is expected to largely counterbalance elevated costs. Looking ahead to 2025, while the direction of rates and costs is unclear, 55% of Medicaid premiums are up for renewal on January 1st, and preliminary rates appear promising. The company is cautiously optimistic about these developments as they monitor ongoing trends.

The paragraph discusses the company's performance and outlook across various sectors. They are pleased with operating at a 90% Medicaid MCR for the year, which is above their long-term target, and expect improvements in the upcoming rate cycle to help them meet their 2025 goals. The Medicare MCR for the third quarter is above the target range due to increased medical costs, and outpatient utilization. In California, their business aligns with expectations, and the marketplace sector outperformed with a third quarter MCR of 73%. The company's third quarter adjusted G&A ratio is strong at 6.4% due to operational discipline and efficient cost management. They maintain their full-year premium revenue and EPS guidance, indicating no change in their financial outlook, and expect further growth in 2024 and beyond.

The business is poised for growth across its segments, maintaining its Medicaid presence in Florida and awaiting contract results in Georgia. Recent successes include winning a contract in Michigan to expand services to dual-eligible populations, expected to boost revenue by $1 billion by 2027. Additionally, Massachusetts awarded contracts to manage the One Care Under 65 program and continue with the Senior Care Options Program, projecting nearly $400 million in revenue in three years. However, the company will discontinue offering MAPD products in 13 states by 2025, affecting $200 million in annual premiums.

The paragraph outlines the company's strategic focus on expanding its presence among dual-eligible and low-income populations, particularly in California, and leveraging the new CMS integration rule to strengthen its Medicaid position. It emphasizes growth opportunities in under-penetrated markets through competitive rate filings for 2025 and aims for mid-single-digit pre-tax margins. The anticipated acquisition of ConnectiCare is expected to close in early 2025, with a target of reaching $46 billion in premium revenue by 2026. The company reaffirms its 2024 earnings guidance and highlights its commitment to long-term profitable growth. An upcoming Investor Day event will provide further updates, and the paragraph ends by transitioning to Mark Keim for more financial details.

In the third quarter, the company reported approximately $10 billion in total revenue and $9.7 billion in premium revenue, with an adjusted EPS of $6.01. The consolidated Medical Cost Ratio (MCR) was $89.2, exceeding expectations due to cost pressures in Medicaid and Medicare. Specifically, Medicaid's MCR was impacted by a retroactive 50 basis point premium rate reduction in California, affecting margins as revenue was below target for new operations. Despite ongoing discussions with the state regarding this unusual rate adjustment, future rate trends are positive. Adjusting for the rate change, Medicaid's MCR would be $90, consistent with the second quarter but still higher than expected due to increased medical costs. Redetermination dynamics affected results with higher utilization noted among the stayers, especially in long-term services, pharmacy, and behavioral health services, though other factors mitigated the overall impact.

The paragraph outlines improvements in new store additions with Medicaid premium, resulting in better target margins. Rate adjustments were made in 11 states, and effective medical cost management created a buffer against acuity shifts. Medicaid membership remained stable at 4.9 million by the end of the third quarter, with gains from contract implementation and reconnects offsetting earlier redeterminations. Medicare saw increased medical costs due to higher utilization of services. Higher outpatient use was noted, partly due to past risk adjustment true-ups. The California branch met expectations, while Marketplace's reported Medical Cost Ratio (MCR) exceeded expectations, despite slower special enrollment growth. The adjusted General and Administrative (G&A) ratio reflects cost management efficiencies, and the overall capital foundation of the company remains robust.

In the quarter, the company harvested $385 million in subsidiary dividends, ending with a cash balance of $195 million and repurchasing 1.5 million shares. The full-year guidance now assumes 57.9 million shares outstanding. Debt levels rose slightly due to the repurchases, with a debt-to-capital ratio of about 35% and debt at 1.4 times trailing EBITDA. The company has renewed its credit facility, increasing its capacity to $1.25 billion. Operating cash flow for the first nine months of 2024 was $868 million, reflecting the timing of risk corridor payments and taxes. For the full year, premium revenue guidance is $38 billion and EPS guidance is at least $23.50, unchanged despite changes in components. EPS guidance benefits from strong marketplace performance, G&A efficiencies, and higher investment income, offset by higher MCRs in Medicaid and Medicare. Full-year 2024 MCR is expected at 88.7% and G&A ratio at 6.8%, with a fourth-quarter Medicaid MCR of 89%, down from 90.5% in the third quarter.

The paragraph discusses a 150 basis point improvement driven by factors such as a one-time premium adjustment in California, rate increases, and new store additions. It outlines expectations for Medicaid, Medicare, and Marketplace MCRs for the fourth quarter and full year, highlighting changes from previous guidance due to cost trends and market performance. The paragraph also provides an outlook for 2025 EPS, noting contributions from new store earnings, organic growth, strategic initiatives, and share repurchases, while anticipating challenges from declining interest rates.

In the Q&A session following the company's prepared remarks, Josh Raskin from Nephron Research asks about the impact of strong marketplace performance on potential rebate positions in 2025. Joe Zubretsky responds by noting that the company has experienced two consecutive years of outperformance and has invested excess margins to grow the business for 2024 and 2025 while targeting mid-single-digit pre-tax margins. Regarding rebates, he mentions the importance of a three-year test and notes that an 80% minimum medical loss ratio (MLR) is approximately equivalent to a 75% GAAP standard. Mark Keim adds that their guidance is tracking a 74% MLR, close to the 76% equivalent.

In the paragraph, Joe Zubretsky and Mark Keim discuss trends impacting Medicaid's Medical Loss Ratio (MLR) and how it has exceeded initial expectations by 300 basis points, settling at about a 6% trend. This increase is attributed to a combination of factors, including redetermination impacts, higher utilization among continuing members, GLP-1s and prescription drugs, Long Term Services and Supports (LTSS), and a national rise in behavioral health services utilization. The trends vary by geography, but they collectively contribute to the overall pressure on Medicaid costs. Josh Raskin and A.J. Rice inquire about the possibility of adjusting rate updates to accommodate the increased trend.

In the paragraph, Joe Zubretsky explains the differences in rate increase needs between his company and a large peer, highlighting that an acuity shift due to redetermination impacts rate adjustments. He mentions a temporary buffer provided by being deep in risk corridors and that their operations are comfortable at 90%. Encouragement comes from rate updates seen in the second half of the year, with some being off cycle due to states acknowledging underfunded program components. He notes that on-cycle rate adjustments were 4.5% in Q3 and nearly 9% in Q4, and although only a few draft rates for the upcoming year have been seen, they are promising.

The paragraph discusses how future cost trends in the fourth quarter will impact achieving the target Medical Care Ratio (MCR), with some level of delay in state recognition of these trends. Mark Keim expresses confidence in their outlook due to state responsiveness and corridor adjustments. The conversation shifts to utilization trends in Medicaid and Medicare, where Joe Zubretsky explains that while everyone faces the same rate and market conditions, their company has effectively managed medical costs, consistently operating below state benchmarks due to their expertise in medical and care management. Mark Keim adds that they focus on net trends when discussing these issues.

In this conversation, Joe Zubretsky and Mark Keim discuss financial metrics related to Medicaid Medical Loss Ratio (MLR). Sarah James inquires about financial adjustments for the third quarter, specifically a one-time vendor credit and an unusual tax item. Joe Zubretsky explains they are operating Medicaid at a 90% MCR for the full year, with a guidance of 89.3% MCR for the legacy book. Mark Keim adds that the third quarter's MCR was reported as 90.5%, but adjusting for a one-time item in California, it's effectively 90%. They aim for an MCR of 89% in the fourth quarter, utilizing rates and trends to achieve this.

The paragraph discusses a financial outlook and trends affecting the fourth quarter. The speaker mentions the on-cycle rates of three states contributing 80 basis points (bps) positively, while assuming additional trends will result in a 50 bps reduction. New stores are expected to add 20-30 bps each quarter, helping improve the trajectory from a 90 adjusted to an 89. Regarding General and Administrative (G&A) expenses, they reported a 6.4% for the third quarter, aided by vendor credits, and project a 6.8% for the full year. Stephen Baxter from Wells Fargo queries about the negative impacts of acuity shifts and rejoiner dynamics. Mark Keim responds by acknowledging significant trend impacts in the third quarter, partly due to redetermination effects and its carryover.

The paragraph discusses the impact of state determinations on enrollment dynamics in the third quarter, noting that some states extended their processes, resulting in more significant changes in joiners and leavers than expected. Higher utilization was observed among those leaving. The speaker anticipates a stabilization and a 50 basis point trend increase in the fourth quarter. In a follow-up question, Stephen Baxter inquires about rate updates and their relation to changing enrollment and claims dynamics. Joe Zubretsky explains that while the rate-setting process remains unchanged, a notable shift in acuity is occurring due to a substantial decrease in enrollment from 92 million to 72 million enrollees. This shift, although not new to the model, is more significant and highly visible now.

In a discussion during an earnings call, an analyst, Justin Lake, inquires about the company's expectations for achieving 13% to 15% growth next year. The company's executives, Joe Zubretsky and Mark Keim, respond by explaining the factors influencing their projections. They acknowledge that while certain elements, like embedded earnings, are predictable, other factors, such as investment income and growth from core operations, may be less certain. Mark clarifies that a $2.70 adjustment relates to their current year guidance, noting it involves gains and declines in trends within Medicaid and Medicare. The executives emphasize the need to wait for more data from the fourth quarter before providing a precise forecast.

The paragraph discusses a financial outlook for 2025, noting optimism but no specific numbers due to current uncertainties in trends and rates. The company highlights their embedded earnings, with expectations for a little less than half to emerge next year, and addresses pressures on net investment income. A small stock repurchase in the third quarter should be considered in calculations. Justin Lake inquires about the impact of retroactive rates on quarterly outcomes, especially regarding California's retro cut, and whether any adjustments are needed. Mark Keim responds that while the third-quarter rates are a strong baseline, some minor discrepancies exist due to retroactive rates, which are factored into future outlooks. The conversation ends with another analyst, Andrew Mok from Barclays, preparing to ask a question.

In the paragraph, Joe Zubretsky discusses the notable performance of SEP (Special Enrollment Period) membership, which has exceeded typical gains, largely due to the Medicaid redetermination process. The SEP membership saw a significant increase initially, stabilizing in the following quarters, and came in with a healthier, younger demographic than usual. This resulted in lower medical cost ratios (MCR) than historically observed. The excess margin gained from this situation is seen as an opportunity for further growth investment. Andrew Mok inquires about revenue recognition for off-cycle rate adjustments, to which Mark Keim responds that recognition requires documented evidence, not just suggestions. Finally, Adam Ron from Bank of America asks about core trend differences related to rate and acuity mismatch.

The paragraph discusses the core trend and acuity rate mismatch in the company's performance over the year. Joe Zubretsky explains that the core trend in Medicaid increased from an anticipated 3% to 6% and continued to build throughout the year, with expectations of a slight increase in the fourth quarter. He mentions that the combination of rates, trend, and financial buffers, or "corridors," allowed the company to operate at a projected ratio of 90 instead of 89. Mark Keim adds that the trend was 3% higher than initially forecasted, while rates improved by 1.5%. The use of corridors helped offset the mismatch, influencing the full-year guidance adjustment from 89 to 90.

In the paragraph, Joe Zubretsky explains the performance of their legacy book amidst changes in the risk pool and highlights some California-related factors that affect clarity. He notes that despite these challenges, the legacy book is performing within their expected range due to protective measures. Ryan Langston from TD Cowen inquires about service line performance, specifically behavioral services and its higher utilization in Kentucky. Joe clarifies that Kentucky's situation was due to a suspension of utilization management during the pandemic, leading to increased behavioral costs there, and that there is now a broader trend of increased behavioral services usage across the country.

The paragraph involves a discussion between several individuals about the impacts of the pandemic on service revenue and various state-level challenges. Michael Hall raises a question regarding D-SNP (Dual Eligible Special Needs Plans) redeterminations and the potential impact of a six-month grace period on these plans. Joe Zubretsky seeks clarification on Hall's question about potential visibility issues due to this grace period, explaining that their Medicare business, which includes D-SNP, is performing well.

In this discussion, the speaker reflects on a 4.5% pre-tax margin, noting that while they initially targeted a 5.5-6% margin, they are satisfied with the current achievement given the challenging environment. The company is performing well in demonstrations and their D-SNP (Dual Eligible Special Needs Plans) book, having expanded their county footprint by 23%. They are focusing on the dual eligible D-SNP population, highlighting a significant success in Michigan. An MMP (Medicare-Medicaid Plan) book is set to convert to a fully integrated product by 2026. The new CMS regulation benefits companies with substantial Medicaid involvement, presenting a profitable growth opportunity. Michael Hall inquires about the impact of outsized favorable PYD (Prior Year Development), around $700 million this year, on MLR (Medical Loss Ratio) potential in 2025. Mark Keim responds that the business has grown, attributing the increased PYD to this growth and improvements in areas like payment integrity. He's optimistic about managing this aspect without facing headwinds, as it aligns with their business operations.

The paragraph discusses the complexities of managing medical costs, highlighting components such as case management (CM), utilization management (UM), network contracting, and payment integrity. It emphasizes the importance of settling costs appropriately to avoid fraud, waste, and abuse, and notes that prior year developments (PYD) will continue to be a significant aspect of the business without expecting major changes next year. The conversation transitions to Scott Fidel's question about the company's financial corridors and cushioning, as he seeks to understand their positioning throughout the year and heading into 2025. Joe Zubretsky and Mark Keim explain the variability and protection provided by corridors, noting that while past operations have maintained about 200 basis points of protection, the actual impact depends on where trends occur and the available corridor protection.

The paragraph discusses how the company manages its medical loss ratio (MLR) by using a corridor expense. Initially, the company expected to have 200 basis points of corridor expense in its MLR for the year, but halfway through, it has used half, leaving 100 basis points remaining. The company is optimistic about replenishing this corridor through rate increases and revenue adjustments, as 55% of its revenue will reprice in the new year. However, the effectiveness of the corridor as a hedge against rising medical costs is not perfect and depends on various factors. The speaker, Mark, highlights these dynamics in response to George Hill's question from Deutsche Bank.

In the paragraph, Mark Keim of Molina HealthCare discusses financial expectations for the year, indicating he expected to start with 200 and use half by the end of the year, resulting in a 100 basis points corridor expense within the reported MLR. He also mentions the influence of the new rate cycle. George Hill inquires about the number of states with corridor positions and their rate cycles. Keim explains that nearly every state has a corridor or similar mechanism, with most states on an annual repricing cycle, though some commit to reassessing rates twice a year. The paragraph concludes with the operator ending the earnings call session.

The paragraph thanks the audience for attending the presentation and informs them that they can now disconnect.

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