Earnings call: Molina Healthcare projects strong growth in 2024

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Written By Pinang Driod

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Molina Healthcare, Inc. (NYSE:) has reported a positive outlook in its latest earnings call, with significant growth in adjusted earnings per share and premium revenue. The company’s adjusted earnings per share for the fourth quarter of 2023 were $4.38, contributing to a full-year figure of $20.88, marking a 17% increase from the previous year. For 2024, Molina Healthcare is projecting premium revenue of approximately $38 billion and an adjusted earnings per share of at least $23.50. The company has also highlighted its success in winning new contracts and completing acquisitions, which are expected to drive future growth.

Key Takeaways

  • Molina Healthcare reported Q4 adjusted earnings per share of $4.38 and full-year adjusted earnings per share of $20.88.
  • The company anticipates a 17% growth in premium revenue for 2024, with projections of around $38 billion.
  • Adjusted earnings per share are expected to reach at least $23.50 in 2024.
  • Molina’s long-term targets include 13% to 15% premium growth and 15% to 18% adjusted earnings per share growth.
  • The company has successfully expanded through new contracts and acquisitions.
  • Molina manages medical cost trends to achieve target margins and is confident in improving its Medicare business margins in 2024.
  • They expect to end 2024 with 5.1 million Medicaid members and 270,000 Medicare members.

Company Outlook

  • Molina Healthcare projects a positive outlook for 2024 with an estimated premium revenue of $38 billion.
  • The company has set an adjusted earnings per share target of at least $23.50 for the next year.

Bearish Highlights

  • The company expects the Bright acquisition to be dilutive to adjusted EPS by approximately $0.50 in 2024.
  • A net loss of 600,000 members is anticipated due to the redetermination process.

Bullish Highlights

  • Molina Healthcare has achieved growth milestones that will contribute to future revenue growth.
  • The company reports strong target margins in the Marketplace, with a fourth-quarter MCR of 79.8%.


  • Molina experienced increased pressure on the Medicare MCR due to higher utilization of supplemental benefits and high-cost drugs.

Q&A Highlights

  • The company plans to restore Medicaid MCRs to the top end of the range in 2024.
  • Molina is confident in achieving a $1 accretion in the third full year of ownership for the recently acquired Bright.
  • The Inflation Reduction Act’s impact on the PDP product is considered not relevant to Molina’s business.

Molina Healthcare’s strategic approach involves managing capitated risk and ensuring access to high-quality healthcare for individuals on government assistance. Despite some challenges, such as pressure on the Medicare MCR and the anticipated dilutive impact of the Bright acquisition on adjusted EPS, the company remains optimistic about its ability to grow and achieve its financial targets. Molina’s focus on operational improvements and benefit design adjustments in its Medicare business, along with its competitive positioning and membership growth in the Marketplace, are key factors contributing to its positive outlook for 2024.

InvestingPro Insights

Molina Healthcare, Inc. (MOH) has demonstrated resilience and strategic growth, as evidenced by their latest earnings call. InvestingPro provides a deeper dive into the company’s financial health and market performance, offering insights that could further inform investors about Molina’s potential.

InvestingPro Data indicates a robust market capitalization of 22.19 billion USD, showcasing Molina’s significant presence in the healthcare sector. The company’s P/E ratio stands at 23.54, suggesting investor confidence in its earnings potential. Additionally, Molina’s revenue growth over the last twelve months as of Q4 2023 is reported at 6.12%, reinforcing the company’s positive trajectory as highlighted in its earnings call.

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1. Management has been aggressively buying back shares, which can be indicative of their belief in the company’s intrinsic value and a positive signal to investors about future growth prospects.

2. Molina holds more cash than debt on its balance sheet, providing a strong liquidity position that may enable the company to navigate market uncertainties and invest in growth opportunities.

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Full transcript – Molina Healthcare Inc (MOH) Q4 2023:

Operator: Good morning, and welcome to the Molina Healthcare Fourth Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Standing in for Joe Krocheski today is Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Jeff Geyer: Good morning, and welcome to Molina Healthcare’s fourth quarter and full year 2023 earnings call. Joining me today are Molina’s President and CEO, Joe Zubretsky, and our CFO, Mark Keim. A press release announcing our fourth quarter and full year 2023 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks made are as of today, Thursday, February 8, 2024, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures for 2023 and 2024 can be found in our fourth quarter 2023 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2024 guidance, Medicaid redeterminations, our recent RFP awards and related revenue growth, our recent acquisition and M&A activity, our long-term growth strategy and our embedded earnings power and projected 2025 earnings per share. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Joe Zubretsky: Thank you, Jeff, and good morning. Today, I will discuss several topics. Our financial results for the fourth quarter and full year 2023, our growth initiatives and our strategy for sustaining profitable growth, our 2024 premium revenue and earnings guidance and an affirmation of our long-term growth targets. Let me start with our fourth quarter performance. Last night, we reported adjusted earnings per diluted share of $4.38 on $8.4 billion of premium revenue. Our fourth quarter results and performance metrics demonstrated strong medical cost management and operating cost discipline. Medicaid continued to perform well, withstanding the impacts of the unprecedented redetermination process. Medicare experienced higher than target medical costs, consistent with prior quarters and Marketplace performed very well despite the late in-year medical cost seasonality typically experienced. Our fourth quarter completes a strong year of operating and financial performance. Full year adjusted earnings per share of $20.88 represents 17% year-over-year growth, squarely in line with our long-term target range of 15% to 18% and 6% above our initial 2023 guidance of at least $19.75. Our full year premium revenue of $32.5 billion represents 5% year-over-year growth, and our pretax margin of 4.8% is at the high end of our long-term target range heading into 2024. In Medicaid, our flagship business representing over 80% of revenue, we reported an 88.7% MCR for the full year, which is within our long-term target range. Throughout the redetermination process, we have managed through a number of factors that shape Medicaid’s performance, all to land the full year result at a solid jump-off point into 2024. These factors included medical cost utilization, various state corridors and MLR minimums and prospective rate changes. In Medicare, the full year MCR was 90.7%. While the business is profitable, we did not meet our performance expectations due to higher utilization of supplemental benefits, in-home services and high-cost drugs. I am confident that our 2024 bid strategy, adjustments to benefit design and various operational improvements will return the business to target margins in 2024. In Marketplace, we reported a 75.3% MCR for the full year, below the low end of our target range, which reflects the successful execution of our small, silver and stable strategy. This business is now positioned to grow at a rate, which allows us to sustain mid-single-digit margins. In addition to delivering strong financial results, in 2023, we continued to execute on our profitable growth strategy. To recap the growth milestones achieved in 2023. In January, we successfully reprocured our contract in Texas for the state’s STAR+PLUS program, retaining all eight regions and likely growing market share. In July, we successfully launched our Iowa Medicaid plan following the RFP, which we had won in a highly competitive process in late 2022. In August, we announced that we were awarded a contract to once again serve Medicaid beneficiaries in the state of New Mexico. In September, we closed on the My Choice Wisconsin acquisition, further expanding our market-leading LTSS franchise. In June, we agreed to acquire Bright Health’s California Medicare business, which we have now closed effective January 1, 2024. Also effective January 1 and after another win in a highly competitive bid process, we successfully launched our Nebraska health plan. And finally, on January 1, we launched our expanded California platform, including Los Angeles County, which doubled the size of our business in the state. Collectively, these acquisitions and RFP successes represent $7 billion of annual premium revenue, a portion of which was in our 2023 results, most of which is in our 2024 guidance and all of which will be fully realized in 2025. To say we are pleased with the execution of our 2023 growth initiatives would be an understatement. But the growth story doesn’t stop there. The pipeline of opportunities, fueling our future growth trajectory is extremely strong. Let me begin with reprocurements. We have submitted our RFP responses for contract renewals in Florida, Virginia and Michigan. We are proven partners with all three of these states, and we are confident in our ability to retain and grow these relationships. With regard to new state opportunities, including the Florida opportunity just described, there is over $50 billion of total premium revenue opportunity, active or near term, up for bid in several states over the coming years. We have already submitted bids in the states of Kansas and Georgia. With our demonstrated capabilities and referenceable track record, we remain confident in our ability to continue to win new state contracts. With respect to our M&A initiatives, our acquisition pipeline remains robust with actionable opportunities and we are confident in our ability to deliver growth from this key component of our strategy. Since 2019, we have completed eight transactions having acquired over $11 billion of premium for which we paid 22% of revenue. This capital allocation to M&A will continue to be a value driver. Turning now to our 2024 guidance. We project 2024 premium revenue of approximately $38 billion, which is consistent with our previous outlook and represents 17% year-over-year growth. We project 2024 adjusted earnings per share of at least $23.50, representing 13% year-over-year growth. Mark will take you through the detailed guidance build in a few minutes. But in the meantime, let me offer some high-level commentary. Our projected premium revenue growth to $38 billion represents a well-balanced combination of new contract wins, acquisitions and growth in our current footprint, partially offset by the impact of Medicaid redeterminations. With respect to earnings guidance in the core business, in Medicaid, our guidance fully considers the impact of the redetermination process. From a margin perspective, this is playing out as we have predicted. The impact of acuity shifts is real, but not significant. The risk corridors acted as a financial buffer and rates prospective and retrospective are largely capturing the trend impact. On a same-store basis, we are projecting the 2024 Medicaid MCR to be within our long-term range. We expect Medicare to return to mid-single-digit profitability in 2024 as a result of our bid strategy, adjustments to benefit design and operational improvements in the legacy business. Our Marketplace product has been priced right, is competitively positioned and the risk pool has stabilized. We expect the business to achieve mid to high single-digit margins, membership to grow over 30% and revenue to grow 17%. On top of our 2024 earnings per share guidance of at least $23.50, we now have $4 per share of new store embedded earnings, which, as you may recall, represents the expected accretion produced by our new store growth. Mark will review the components of the updated $4 per share in his remarks. Our confidence in our 2024 guidance starts with a high-quality 2023 earnings baseline and then takes a thorough account of all the various factors, exogenous and company-specific, that could impact earnings in 2024. Now, a few comments on our longer-term trajectory. Our 2024 guidance picture is one more data point that validates our long-term targets of 13% to 15% premium growth and 15% to 18% adjusted earnings per share growth. We committed to these targets at our Investor Day last May, and we reaffirm that commitment today. With the majority of the $4 of new store embedded earnings expected to emerge in 2025, we already see a clear outlook to achieving the low end of our long-term EPS growth target in 2025, even before considering the execution of additional growth initiatives and driving growth from our current footprint. In summary, we are very pleased with our 2023 performance, our trajectory to deliver the growth and profitability inherent in our 2024 guidance and the embedded earnings outlook we provided for 2025. Our confidence in continuing to achieve our long-term targets is data-driven as demonstrated by the following historical fact set. We have reprocured approximately $12 billion in existing revenue. We have added approximately $7 billion of new revenue through wins of new or expanded contracts in seven states. From 2020 to 2023, we achieved 21% annual premium growth and 25% annual earnings per share growth. 2024 guidance, 17% premium revenue growth year-over-year, 13% earnings per share growth year-over-year. And for 2025, and we expect to harvest the majority of our $4 per share of embedded earnings. Our strategy is clear and simple. We are in the business of providing access to high-quality health care for individuals relying on government assistance. Our business model is also clear and simple. We take on capitated risk, take or make rates that are commensurate with medical cost trends, and manage those trends to consistently achieve our target margins while maintaining higher standards of quality. The execution of our strategy and business model has been and will continue to be strong which is why we look to the future with a great deal of confidence. In conclusion, I want to extend my special thanks to our 19,000 associates who are dedicated to delivering access to high-quality healthcare to our members. It is my privilege to serve with such a committed and capable group of professionals. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Mark Keim: Thanks, Joe, and good morning, everyone. Today, I’ll discuss some additional details on our fourth quarter and full year performance, the balance sheet redeterminations and our 2024 guidance. Beginning with our fourth quarter and full year results. For the quarter, we reported $9 billion in total revenue and $8.4 billion of premium revenue. I will note that total revenue includes approximately $380 million in reimbursement for our California MCO tax item that was retrospective to April. This item modestly distorts our reported G&A and margin ratios, but has no net economic consequence. On a consolidated basis, our fourth quarter MCR was 89.1% and our full year was 88.1%, reflecting continued strong medical cost management. Our full year consolidated MCR was consistent with our expectations and squarely in line with our long-term target range. In Medicaid, our fourth quarter reported MCR was 89.2%. The MCR included a moderate impact from the net effect of redetermination acuity shifts and corridors in several states, as well as some MCR pressure from the additions of our Iowa health plan and our My Choice acquisition. Across our Medicaid segment, the major medical cost categories were largely in line with our expectations and normal quarter-to-quarter trend fluctuations. Our full year Medicaid MCR was 88.7%, within our long-term target range and consistent with our expectations. In Medicare, our fourth quarter reported MCR was 93.3% and our full year was 90.7%, both above our long-term target range and impacted by increased utilization of supplemental benefits, in-home services and high-cost drugs. As Joe mentioned, we are confident that our 2024 bid strategy adjustments to benefit design as well as operational improvements will produce target margins in our Medicare business in 2024. In Marketplace, our reported fourth quarter MCR was 79.8%, reflecting our continued success in returning this business to target margins. Our full year Marketplace MCR of 75.3% was well below our long-term target range. Our adjusted G&A ratio for the quarter was 7% as reported. However, when accounting for the California pass-through premium tax item, the ratio restates to 7.3%. This result includes new business implementation spending for new contract wins in California, Nebraska and New Mexico as well as expected seasonal expenditures from Medicare and Marketplace marketing. Our full year adjusted G&A ratio was 7.2%. Recognizing the California tax item in the fourth quarter, the full year G&A ratio restated to 7.3%. Turning to our Bright acquisition. We successfully closed the transaction effective this past January 1, at final price of $425 million net of tax benefits which was lower than our initially announced terms. The acquisition adds 109,000 members and contributes $1.6 billion in premium this year. We acquired the business with a premium deficiency reserve, which is expected to moderate first year losses, but we still expect the acquisition to be approximately $0.50 dilutive to 2024 adjusted EPS. Now that we have owned the business for six weeks, we have increased confidence in our assumption that the Bright acquisition will deliver an ultimate accretion of $1 per share as final run rate margin. Given the expectation of this modest lot in the first year, we are updating the 2024 new store embedded earnings from the Bright acquisition to $1.50 per share, reflecting this $0.50 of first year dilution. Moving on to Medicaid redeterminations. In the quarter, we estimate we lost 200,000 members driven by redeterminations, bringing the full year figure to approximately 500,000. We are now updating our estimate of members gained during the pandemic to 1 million to include new business additions in 2023 and 2024 as well as the legacy business. Given the high rate of procedural disenrollments rather than through verification, we are seeing a nearly 30% reconnect rate, consistent with previous quarters. As reconnects continue, we expect the membership losses just described to restate to a lower level over the coming months. We continue to project ultimately retaining 40% of our updated members gained, which implies a net loss of 600,000 from the redetermination process. The offsetting positive impact from our growth initiatives is significant. We ended 2022 with 4.8 million Medicaid members, and we expect to close out 2024 with 5.1 million members, a net 300,000 member growth over a two-year period, despite the losses from redetermination. Moving to Medicaid rates. We now have visibility into rates impacting approximately 80% of our 2024 premium. All but one of our states have now included an acuity adjustment for redetermination for 2024. We continue to work with our state partners to ensure appropriate rates through the normal rate cycle, retroactive or mid-cycle adjustments given the experience to date. We are confident that the requirement for actuarially sound rates will offset trends as they may emerge. Updated rates and trend assumptions have been considered in the 2024 Medicaid MCR that supports our guidance. Turning to our balance sheet. Our capital foundation remains strong. We harvested approximately $280 million of subsidiary dividends in the quarter, and our parent company cash balance was approximately $740 million, a portion of which was used to fund the Bright Medicare acquisition just after the first of the year. Debt at the end of the quarter was 1.4 times trailing 12-month EBITDA with our debt-to-cap ratio at 36.3%. These ratios reflect our low leverage position and ample cash and capital capacity for additional growth and investment. Our reserve approach remains consistent with prior quarters, we are confident in the strength of our reserve position. Days in claims payable at the end of the quarter was 50. Now some additional details on our 2024 guidance, beginning with membership. In Medicaid, we expect new membership from our recent new contract wins to add approximately 650,000 members. We expect to lose 100,000 members over the remainder of the redetermination process in 2024. The net result in 2024 year-end membership of approximately 5.1 million members or 12% growth year-over-year. In Medicare, the Bright acquisition added 109,000 members. Combined with our legacy business, we expect to end 2024 with 270,000 Medicare members, representing 58% growth year-over-year. In Marketplace, based on open enrollment, we expect to begin 2024 with approximately 320,000 members, representing 14% growth from year-end 2023. We expect growth to continue through the year, boosted by the redetermination conversions and ending with approximately 370,000 members, representing 31% growth year-over-year. We are still 75% silver, which bodes well for medical margin stability. Our 2024 premium revenue guidance is approximately $38 billion, representing 17% growth from 2023. Our revenue growth is comprised of several items, $3.3 billion of revenue tied to our recent RFP wins. To this, we add $2.4 billion of revenue from our recently closed acquisitions, including $1.6 billion from Bright and $800 million from a full year of My Choice Wisconsin. And finally, $1.7 billion of organic growth across Medicaid, Medicare and Marketplace. Partially offsetting these growth drivers is a higher estimated full year impact of $1.9 billion in decreased revenue from redeterminations. Moving on to earnings guidance. We expect 2024 full year adjusted earnings of at least $23.50 per share. Our EPS guidance reflects the realization of approximately $2 per share of 2023 new store embedded earnings, approximately $2 for the underlying organic growth across our current Medicaid and Medicare footprints, the realization of $0.75 benefit from the onetime nonrecurring implementation costs incurred in 2023, partially offset by $1.25 impact from redeterminations and $0.50 impact from the Bright acquisitions first year operating and carrying costs and finally, $0.25 from a conservative view of earnings contribution from investment income. Turning to MCR guidance. Our consolidated Medical Care Ratio is expected to be 88.2%. Our Medicaid MCR is expected to be 89%, at the high end of our long-term target range. This guidance reflects the inclusion of our significant new store growth, which runs at a higher MCR in the first year. Our legacy or same-store Medicaid MCR is expected to fall in the middle of our long-term range. We anticipate our Medicare MCR to be 88%, while at the high end of our long-term target range, the MCR reflects our expected success in our 2024 bid strategy adjustments to benefit design and various operational improvements. For Marketplace, we expect the MCR at the low end of the long-term target MCR range of 78% to 80%. Moving on to select P&L guidance metrics. We expect our adjusted G&A ratio to fall to 7% as new business implementation costs subside, and we leverage the increased scale of our business. Effective tax rate of 25.7%. Adjusted pretax margin of 4.6%, well within our long-term target range. Weighted average share count unchanged at 58.1 million shares. And our quarterly EPS will be weighted slightly heavier towards the second half of the year as we drive improved performance in our new business portfolio additions over the course of the year. Turning to embedded earnings. We ended 2023 with $5.50 per share of new store embedded earnings. Our 2024 guidance includes the realization of $2, resulting in a new base of $3.50. To this, we add $0.50 for the impact of Bright acquisitions first year loss, leaving us with $4 remaining at the end of 2024. We expect the majority of this to emerge in 2025 giving us further confidence in our 15% to 18% long-term growth rate for EPS. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator: [Operator Instructions] The first question today comes from A.J. Rice with UBS. Please go ahead.

A.J. Rice: Thanks. Hi, everybody. Maybe 2 things. On the Medicare MLR margin, it sounds like you’re attributing your improvements you’re expecting largely to benefit design changes and operational improvements. Any comment on what you’re assuming relative to underlying utilization trends? And then just on the Medicaid, you’re sounding like you’ll be on the legacy business in the middle of your long term MLR targets. How are you thinking about margin profile coming out of redeterminations? Is there an opportunity for further improvement? Is it steady? Any thoughts on that?

Joe Zubretsky: Sure, A.J. With respect to the Medicare MLR question, we have three components of medical costs that ran higher than expectations. One was LTSS hours on the Medicaid side of the MMP business. Second, high-cost drugs. And third, supplemental benefits, vision, dental, cash card, over the counter was a little too richly designed in 2023 to be honest. We pulled back on those benefits in our 2024 product design and bids. We reshaped some of the allowance-based benefits to be more managed, and we’re confident that that cost category will come back into line. On LTSS hours on the Medicaid side of the MMP benefit, we know where, we know why, and those corrective actions are in place. And it’s not unusual in a soft economy for in-home service hours to increase. So we are very confident in the restoration of our MCRs back to the top end of the range in Medicare to 88% in 2024. You also asked about the Medicaid MLR. And let me frame it this way, and then I’ll turn it to Mark. The re-determination process actually unfolded exactly as we had planned and as we had predicted. The acuity shift was noticeable, but it was — it wasn’t dramatic and it wasn’t significant, but it was noticeable. And that began to happen as the redetermination process began. We then said, and it occurred, that the first financial cushion would be the corridors, the payments into the corridors that existed in the latter half of 2023. That acted as a financial buffer. In the meantime, as the acuity shift became noticeable to our state partners, they began to introduce rate adjustments to account for the acuity shift. So going into 2024, the rate actions completely compensated for what we call [poor] (ph) medical trend, completely compensated for any acuity shift, and that’s why we’re able to print an MCR in Medicaid at the high end of the range at 89%, which includes a little bit of pressure from the new business that we put on the books.

Mark Keim: Joe summarized that well. Look, we finished 88.7% in 2023 for Medicaid. And as Joe mentioned, that included a little bit of pressure from the acuity shift from redet, but also as we projected the benefit of some corridors. So really tracking exactly where we expect it. Here in the new year on our legacy book, trend roughly equals the rates that we’re getting from our state partners. So on our legacy book into ‘24, we’re roughly seeing about a flat MLR versus where we finished 2023. Now, why are we at an 89% in guidance? Just as Joe mentioned, we’re adding significant new store business through both our acquisitions and a number of big wins. Whenever we have new store go into our portfolio, it tends to be a little bit hotter in the first year on an MLR. So we’re seeing a pretty much flat carryover on legacy, a little bit of increased pressure on new store. That’s how you get to that 89% that we have in our guidance.

A.J. Rice: Okay, great. Thanks a lot.

Operator: The next question comes from Cal Sternick with JPMorgan. Please go ahead.

Cal Sternick: Yeah, thanks for the question. I wanted to ask about the Marketplace. It sounds like the book is running really well and I think you were a little bit more competitively priced this year than you were previously. So I guess first, is the expectation when we talk about mid-single digit to high single digit margins that you’re within sort of that 5% to 7% range, do you expect to be towards the upper half of that, or maybe a bit above? And then second, how do you think about the market and the positioning for 2025? Do you think you’re still going to maintain the current pricing position or do you expect to, I guess, be more competitive across your total footprint again?

Joe Zubretsky: Our strategy in marketplace until we were satisfied that the risk pool was stabilized is to keep it as we say small, silver, and stable. But as the risk pool has stabilized, irrational pricing has pretty much left the market. We will allocate more capital to this business and we’ll grow it at a rate that allows us to earn mid to high single-digit margins. That’s the key for us. The risk pool can have inherent volatility and we believe that a margin target of 5% to 7% as you suggested is the right target margin and we will grow the business at a rate that allows us to achieve that target margin. We’re very competitively positioned this year. We are in our silver product. We were number one and two in 30% of our counties this year as compared to 20% last year. 75% of the book is still silver. 50% of the book is renewal, which gives us good insight to capture appropriate risk scoring. The book is very well positioned to grow. 31% membership growth, 17% revenue growth just this year, and hopefully we’ll be able to grow it at this rate in the future, all with the goal of achieving mid to high single-digit margins.

Cal Sternick: All right, great. Thanks.

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

Kevin Fischbeck: All right, great. Thanks. Maybe two questions as I get in. I guess the first one on the Medicare side, I just want to make sure I understand your commentary around MLR because you’re bringing in Bright with a PDR, but you’re still saying you are going to be at the overall target margin. You’re talking about the core business being at target margin, or even with Bright losing money you’ll be at target margin on the consolidated book. And then thinking about the exchanges, I guess there was potentially some issue about redetermination to kick people off and then the sickest part of that population comes onto the exchanges. Are you seeing any of that or does the risk pool benefit of lower subsidies just kind of make that not really an issue? Thanks.

Joe Zubretsky: Thanks, Kevin. I’m going to kick it to Mark for detailed commentary on the Medicare MLR, but I think it’s really important to frame the Medicare business and its component parts. They’re somewhat different and situationally, they are quite different. You have $6 billion of revenue forecasted for 2024 in Medicare. $1.6 billion is Bright newly acquired, subject to the premium deficiency reserve, as you suggested, and Mark will explain that in a minute. $2.4 billion is our legacy [indiscernible] business, and $2 billion are the MMP demonstrations, where rates are received from CMS. You’re not [bidding] (ph) against the benchmark. So the dynamics in the book of business are quite different. You need to look at the three components in order to develop your view of the various profitability components. But with that as the backdrop and the context, I’ll kick it to Mark for detailed commentary and how you build the Medicare MLR, particularly with respect to Bright and the premium deficiency reserves. Mark?

Mark Keim: Yeah, fantastic. Good morning, Kevin. So Bright comes to us with a PDR in place. With that PDR, the benefit goes into the MLR line and effectively reduces the MLR. So on the bright component, which is a third of our book, you’ll see an MLR that’s below our target range at the moment. On the DSNP, which is another third of our business, we’re seeing a trend of probably around 4%. But overall, we’re able to offset that and pull that into our target range. And of course, on MMP, which is the third component of the book, the rates that we’re getting from our state and CMS partners, we feel are quite adequate to bring us all told to that ADA in our MLR guidance.

Joe Zubretsky: With respect to your second question, if I remember correctly, it had to do with the exchanges and members coming off of the Medicaid roles into the exchanges. If you look at the last couple of years, membership has already always started the year at a higher point and ended the year at a lower point due to the natural attrition in the book. This year, we’re starting the year at 320,000 members and plan to grow it to 370,000 by the end of the year. The natural attrition rate is still 2% or 3% inside that number, but we do plan to pick up more members from not only our own Medicaid plans, but competitors’ Medicaid plans. I think we’re seeing a penetration rate of people coming off Medicaid of about 10% of members lost. Mark, anything to add?

Mark Keim: Yeah, in the past, when we picked up SEP members, they put a little pressure on our MLR. What we’re seeing in the third and fourth quarter in ‘23, and what I expect into ‘24 is they’ll come over at more sustaining and normalized levels. That is, they won’t put pressure on, because they’re coming off normal using services. There’s not pent-up demand. They’re not new to the product. So I’m expecting to see a good pickup on SEP, as we did in Q3 and Q4, and not pressure on the MLR.

Operator: The next question comes from Josh Raskin with Nephron. Please go ahead.

Josh Raskin: Hi. Thanks. Good morning. Two for me as well. The health insurance exchange membership up 31%, but revenues up 17%. Is that state geography mix-related or is that reductions in prices and what’s driving that versus a market that’s generally raising prices? And then I’m still confused on Bright, how the target — how the MLR for Bright that you’re booking this year is below the target range, but you’re actually increasing the embedded earnings by $0.50 to $1.50? Maybe just help us understand those two parts.

Mark Keim: So a couple of things, and good morning, Josh. Our metallic mix has remained unchanged. So what you’re seeing in Marketplace is not at all metallic or mix related. That’s state footprint related. As you know, we’re in 14 states, and our mix among the states, as we’re more competitive in some, maybe not so much in others, our mix does shift a little bit. So that’d be the driver there. On Bright, on the PDR, with the PDR that was booked before we bought the business, that benefits the MLR and pulls it down to a level that’s actually a little bit below our target range. Now remember, our target range is largely DSNP and MMP because that’s our legacy Medicare book. On the bright with the PDR in the MLR line, it does pull it down a little bit below our target range.

Josh Raskin: So how does that impact — I’m just trying to — so it feels like with the PDR, you guys will sort of reverse that through the year. How does the embedded earnings go up? Right. I’m confused with how is Bright, MLR low, but they’re losing more money?

Mark Keim: It’s a good question and thanks for raising that. I knew we were going to get that sooner or later. So with the PDR, as you know, the PDR should largely normalize expected operating losses on a contract year. PDR accounting doesn’t allow you to put all of the losses into the PDR. There are certain accounting matters that are still held out. So even with the PDR, I’ll have a very small operating loss, Josh. But the other thing is when we talk about embedded earnings, we always include the carrying costs. The embedded earnings are essentially fully capitalized or fully funded for their carrying costs. So when I say I have about $0.50 of dilution this year, it’s about half operating costs that aren’t covered by the PDR and about half carrying costs. Remember we paid about a half billion. The opportunity cost or interest on that is maybe the other half of the $0.50. So as a result, I’m carrying a $0.50 hole in this year’s EPS bridge. Since that’s a $0.50 hole, I said I’d have $1 of ultimate benefit from this property. The dollar now goes to $1.50 because I’m going to crawl out of that hole over the next couple of years.

Josh Raskin: Okay. Got it. Thanks.

Operator: The next question comes from Justin Lake with Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. I just want to follow up on Bright. So a few things here. First, can you give me the PDR number that you put through there for 2024?

Mark Keim: Sure, we acquired the business with a $75 million PDR on the balance sheet.

Justin Lake: Okay, and so you’re saying the — I understand the PDR getting it to normal levels potentially, but how does the PDR get it below normal MLR levels?

Mark Keim: The PDR books all of the losses. It picks up a little bit of the G&A losses, with the medical cost losses, and books them into the medical cost line. So to the extent that there were some G&A items, it’ll get picked up in the MLR line. It’s just an accounting convention where the net of losses get picked up in one line item or the other.

Justin Lake: Okay, so your point is that just thinking about the math of this, the MLR is going to go up next year because it’s actually below normal and you’re saying the SG&A will come down.

Mark Keim: There will be a little bit of that, Justin.

Justin Lake: Okay. And you expect to get this full dollar back plus in 2025?

Joe Zubretsky: And that’s the important point. The important point here, first of all, the first year losses were fully contemplated in the value we paid. So there was no surprise there. The business is running at a 92% MCR and a 14% G&A ratio. We plan to get the 92% down to 88% to 89% and the 14% down to 9% to 10%. So half to two thirds of the turn is G&A related and we have very, very clear line of sight to how to take their cost burden down from 14% to 9% or 10% where it should be. That dollar of accretion is expected to emerge in the third full year of ownership. First year protected by — mostly protected by a PDR. Second year, breakeven to probably slightly profitable. Full dollar of accretion in the third full year of ownership. Getting the MCR from 92% down to 88% or 89%, getting the 14% G&A ratio down to 9% or 10%.

Justin Lake: Got it. And then lastly, just on, there’s a big RP as you know in Florida, I think a lot of anticipation there around when that might be communicated. My understanding is we’re kind of into the second round in negotiations. I assume you can’t tell us whether you’re still kind of in the running there, but any idea given that given where you are today, any idea when you think that under normal conditions that MLR would be announced? Or should the RFP would be announced, not the MLR?

Joe Zubretsky: Sure, sure. And we appreciate your sensitivity to the situation. Yeah, we observe the sanctity of all these bidding processes, including the ITN process, so we can’t comment specifically on it. But look, as we — yet we run a nice business in Florida. It’s smaller than it used to be to regions. We used to be statewide back in 2017. It runs really well. We’re the only four-star plant in Florida. And the same team that works on all our successful bids, our $12 billion of re-procured revenue and our $7 billion of new contract wins, that is the same team that worked on this. So we go into it with a great deal of confidence and we would hope to expand our footprint in Florida. There’s $14 billion of Medicaid revenue in Florida regions where we are not currently represented. But let’s see how the process plays out and hopefully something will be announced, awards will be announced sometime later this spring.

Justin Lake: Thanks for the color.

Operator: The next question comes from Stephen Baxter (NYSE:) with Wells Fargo. Please go ahead.

Stephen Baxter: Hi, thanks. I appreciate all the commentary on your Medicaid expectations for the year. I was hoping you could help us think about the bridge from your Medicaid MLR exit in the year to your same-store Medicaid MLR in 2024, around the midpoint of the range. I’m curious if you think that the [core] (ph) could kind of get there earlier in the year because some of the one-one rate adjustments that we’ve been focused on, or do you think that’ll take some time to work through the business and then other seasonal factors play out? Thanks.

Joe Zubretsky: As a general framework for how we stay within our long-term range year-over-year, in fact, on the same story basis, almost equivalent, we talk about the redetermination process, which late in 2023 began to put pressure on the MLR until rates caught up with it. As Mark commented in his prepared remarks, we know about Medicaid rates on 80% of our revenue for 2024. That rate increase came in at 4%. So that blends to about 3.2%. We forecasted the other 20% at less than half that. So we have a 3.5% rate increase built into our 2024 guidance. And that was exactly commensurate with trend, trend even as influenced by the modest acuity shift that we and our state customers have observed. So pretty much business as usual. There’s nothing, no medical cost category that needed to be accounted for or accommodated. It’s actuarially sound rates impacted by acuity adjustments that 20 of 21 of our states included. And it was completely in line with our contemplated medical cost trend, even as influenced by an acuity shift. Mark, anything to add?

Mark Keim: No, I think that’s exactly right. As we look at the rates and the trend being roughly equal, our legacy book pretty much holds flat. As you know, we’re bringing in a bunch of additional new business that puts a little more pressure in the first year, which rounds us out at the 89% that we have in guidance.

Operator: The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.

Nathan Rich: Hi, good morning and thanks for the questions. I wanted to ask on the Marketplace MCR, I guess moving back to the low end of the long-term range. So up about 300 basis points year-over-year. Can you just talk about what’s driving that increase year-over-year? Is that just a function of the membership growth that you saw? And then have you thought of — how, I guess, are you thinking about maybe the long-term target for that business? Is 78% to 80% still the right range to use? And then just one clarifying question for Mark. I think you said quarterly EPS is weighted towards the back half of the year. I think usually the back half is about 45% of the total year. So does that mean this year will be over 50% or is that not the right way to interpret the comment that you made? Thank you.

Joe Zubretsky: David, I’ll take the Marketplace question first. We were running really well in the middle of the 2023. Our experience was quite positive. So we consciously, consciously bid to grow the business modestly and moderately, as we suggested we would. And so we priced somewhat below the observed trend, not usually below the observed trend, but slightly below the observed trend, to essentially invest some of the excess margin. We earned nearly 10% pre-tax in that business in 2023. So in a sense, we invested some of the excess margin in growth, hence the 31% membership growth and 17% revenue growth. Mark, on the phasing — quarterly phasing?

Mark Keim: Yeah, absolutely. Nathan, and good morning. Yeah, you got it right. We’re normally 55-45 on the front half versus the second half of the year. I’d almost flip that around this year because the dynamics are a little bit different. One, we put on a lot of new business this year. As you can see in our revenue bridge, we got $5.7 billion of new revenue coming into the company, which always comes in just a little bit warmer in the first year, but in the first quarters in particular. So I’m expecting to get some momentum on MLRs in Medicaid and Medicare as we kind of grow into our new footprint there. So that’ll change the dynamic a little bit. The other thing is, and I think Joe touched on this, very often, Marketplace has attrition throughout the year such that Marketplace declines during the year. This year is a little bit different. With all the members rolling off on redet and us expecting to pick up our fair share of them in Marketplace as they convert, we’ll see a growing book in Marketplace. And as you know, we’ve got some confidence on the margins given that we really prioritize margin over volume in Marketplace. So for those two reasons, you’re going to see a little bit more of a back-end loaded EPS trajectory this year. I think that should address your question.

Nathan Rich: Great. Thank you.

Operator: The next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Sarah James: Thank you. Can you clarify for us what you guys contemplated in for two midnights and V28 into your 2024 plan design and also for Bright? And when you mentioned the pressures that you were seeing on Medicare, you guys didn’t flag outpatient or some of the inpatient trends that the rest of the group is seeing. So I wanted to clarify if you are seeing this?

Joe Zubretsky: Hi, Sarah. I’ll kick it to Mark for we have very detailed analysis of the changes in the risk adjustment rules and what it meant for our book. In answer to your second question, one of the reasons I articulated earlier the configuration of our book of business being somewhat different than what I call mainstream Medicare Advantage is that we have a low income, high acuity population. Our members are using services from the first day of the year to the last day of the year. They’re chronic. They have comorbidities and are polychronic. And so the notion of discretionary utilization means far less to our business based on its mix than it might be to a mainstream population where discretionary or the pedic procedures are being done, screenings are taking place, perhaps, and up demand from the pandemic. In our book of highly chronic patients, high acuity members, that’s less of a dynamic. And so the three cost categories that I articulated previously, LTSS hours, high cost drugs, GLP-1s, and the supplemental benefits were really the drivers in our book. Mark, do you want to take the risk adjustment question?

Mark Keim: Sure. And I think, Sarah, it’s important, as Joe mentioned, when we talk about Medicare, it’s in fact three things. Your probably question is most aimed at the DSNP, or high acuity component of our Medicare, which is a third of the book. Obviously, it’s less relevant to MMP. On the two things you mentioned, on the two midnight rule, I’ve seen a little bit of buzz about that lately, and we’re a little bit surprised because it’s certainly not new. And many of us have factored this in for quite some time. And what I always remind folks is even though there’s a two midnight rule, providers still have to prove medical necessity, so there’s really not a big window there for a change in trend or a change in risk adjustment issues as we can see it. On V28, it’s got some interesting dynamics. It is certainly a drag in many places for folks, but there’s an interesting dynamic around V28 and high acuity. On single-chronic, people use the example of diabetes, where there’s diabetes, but there’s some other conditions that kind of correlate or are highly associated with diabetes. V28 will be a reduction on risk adjustment for those kind of situations. But when there’s polychronics where there’s different comorbidities that are in fact quite different than each other, V28 is actually helpful. And in our high acuity chronic book, we actually have many of those polychronics. So we don’t quite see the same dynamic that maybe some of the other folks do out there.

Sarah James: That’s helpful. And one more clarification if I could, just on your comment with the exchanges, I know you guys are guiding to a really favorable MLR for this year, but is there still a step-up in earnings as you mature this new book? I guess in other words, your year one is still slightly below target range, right, on new members? And then there would be an implied earnings lift as that book moves into the second year of operations?

Joe Zubretsky: I’m not quite sure I’ve captured the essence of your question, but we are forecasting a 78% MCR for the year, which is at the low end of our long-term target range, which means we’ll be operating high single-digit margins, certainly not the 10% pre-tax we achieved in 2023. But look, if you grow the book more aggressively, more of your members are going to be new to the book. And so you have to — in our view, you have to strike a balance about how fast you’re going to grow it and how many new members you want. Every new member that comes in, you need to find risk adjustment. If they come in during SEP, if they’re chronic, you better find risk adjustment quickly or they won’t get the profitability in the near term. So there’s a — very much a balance between what you get in annual enrollment, what you pick up in SEP, and how one thinks about how fast do I grow the book to achieve mid-single-digit margins when the maturity of the membership and the duration of the membership is pretty important to the stability of the risk pool. You have to balance those two factors.

Sarah James: Thank you.

Operator: The next question comes from George Hill with Deutsche Bank. Please go ahead.

George Hill: Yeah, good morning guys. And I think Nate and Sarah kind of covered everything I wanted to hit on the exchange, but I’ll try to bring up one more topic, which is I guess, can you talk about underlying utilization trends and kind of cost growth trends there because it sounds like you guys priced the book for growth in 2024 but the utilization is going to kind of continue to remain low. So I guess I’m trying to parse the spread between utilization trends and price growth for the margin expansion. Kind of any color on that would be helpful?

Mark Keim: And, George, your question is focused on Marketplace?

George Hill: Yeah, Marketplace.

Mark Keim: Yeah, look, as Joe has been very clear, we’re prioritizing margin over volume in this business, and the way we do that is we keep it silver, which we believe is the best product for both the member and the payor. But we keep it stable, which means we continue to have really good renewals. As we look at our pricing objectives here, we’re putting price into the market to make sure that we can defend reasonable margins here. We did concede a little bit of margin in our pricing for 2024 just because we were well below our target range. Remember our target range is 78% to 80% and we printed something a little bit south of that in ‘23. So there’s no reason to leave volume on the table if we can put a little bit of price back, drive some volume and still hit our margin targets. Hope that helps.

George Hill: It does. And maybe if I can just sneak in a quick follow-up. I know it’s a tiny piece of the business. Could you talk about kind of the expected disruption in PDP in 2025 given the changes from IRA?

Joe Zubretsky: I’m sorry, we had trouble hearing the last part of your question, George. PDP?

George Hill: Yeah, but like I said, I know it’s a tiny part of the business, but we’re expecting kind of PDP to be pretty disruptive or disrupted in 2025 because of the IRA changes. I know it’s a tiny part of the book, but if you guys have any commentary on what you’re saying would be helpful.

Mark Keim: Yeah. So on PDP, as you know, we don’t price a PDP product and the IRA or the Inflation Reduction Act, as you’re pointing out, is certainly a headwind for that sector, but that’s not too relevant to our business, George.

George Hill: Thank you.

Operator: The last question today will come from Scott Fidel with Stephens. Please go ahead.

Scott Fidel: Thanks. Right before the bell here. I just was interested if you could walk us through your preliminary analysis on the 2025 MA advance notice and whether you’re able to parse that down between the legacy business impact and then what you’re projecting will be the preliminary impact on the Bright book? Thanks.

Joe Zubretsky: Sure, Scott. I mean, on balance, our view is the same view that you’ve heard from others, is that the advance notice does not appear to be adequate to compensate for trends that we’re all observing. I think in our book, if you take the CMS advance notice and project it to our book, I think we’re projecting about a 50 basis point, 0.5 point of rate increase, which we believe is, along with others, is insufficient, and we’ll see where the final notice comes out. It usually comes out, as you know, better than that. But our view is not any different from anybody else’s.

Mark Keim: Yeah, just to build on that, and a lot of this data is in the public domain at this point. On the effective benchmark rates in the advance notice and then risk or normalization, most folks are seeing across the entire market, the net of those at about zero, right? As Joe mentioned, we see a net of about a positive 50 bps. So we’re a little bit better on the benchmark rate, and we’re a little bit not so bad on the risk score normalization for some reasons I alluded to earlier. So we’re seeing about a 50 BP (NYSE:) benefit there, and obviously the rest of STARS impact and what ultimately everyone does with risk scores has yet to play out. But that’s our initial point on the legacy book.

Scott Fidel: Thanks. And then just to clarify, so the 50 bps, that’s for the overall book, right? And then I would assume that, [directionally] (ph) the legacy book probably better in the Bright book, a little worse than the legacy in that? Is that a fair assumption?

Mark Keim: We’re still working our way through that. There will be a couple things going on there. As I mentioned earlier, we’re six weeks into owning it. We’re working through those issues with the team there. There will also be a bunch of dynamics that happen this year. There are actually two entities there. One is Community Health (NYSE:) Plan, and the other one, Brand New Day. There will be some issues between them on exactly how we balance the effects of all this between those two entities. So a little bit of work there and not ready to comment on that one.

Joe Zubretsky: But I would say that we’re not anticipating in any analysis when completed on rates that would move us off of achieving the $1 accretion in the third full year of ownership. We’re pretty confident in that trajectory.

Scott Fidel: Okay. All right. Thank you.

Operator: This concludes the question-and-answer session and also concludes the conference call. Thank you for attending today’s presentation. You may now disconnect.

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