Molina Healthcare at UBS Global Healthcare Conference - MOLINA HEALTHCARE INC

All right. I think we'll get going with our next presentation. We're very pleased to have Melina Healthcare with us today, and Mark Klein is going to – the chief financial officer is going to represent the group. Mark, thanks for participating in our conference this year. Coming out of the third quarter, what gives Melina confidence as the company is approaching – that the company is approaching a positive turn, particularly as it relates to Medicaid, and what remains your biggest source of uncertainty, if I could ask you. Well, AJ, thanks for having us here, and it's always great to see you. Thanks so much. We outlined on our third quarter earnings call the building blocks to 950. That's a starting point. That is not guidance. That is also before the impacts of MLR year over year on the Medicaid business. You mentioned uncertainty. I'd put it in the category of cautious optimism. But when we look at next year, the two big drivers, the membership impact of OB3, obviously with work requirements and biannual redeterminations, there is some uncertainty around membership. I think the environment for that's probably improved in the last few weeks. I guess we'll talk more about that later this morning. But the other one is certainly rates versus trend. For Medicaid, we're coming off a 92.6 in our guidance for 2026. The building blocks to 950 assume no change to that for next year. So any benefit on the MLR line is only upside to the 950. Okay. And you've talked about embedded earnings of $9 that you hope to realize over the next few years. How much of that embedded earnings is due to an expectation and improvement of legacy Medicaid and Medicare margins and what components of that are largely in place? And it's just a glide path to get to those and what require future operating performance. Yeah. So thanks for asking that. So the $9 of embedded earnings, just the level set, I don't know how some of our competitors do it, but at Molina, embedded earnings are what we call a new store concept. So it's not about changes to the legacy business. It's about new discrete pieces of business that we bring in, typically RFPs and acquisitions, things like that. So the $9 is truly incremental things, not the legacy business. I mentioned we'd harvest $4 of the $ 9 of embedded earnings in 2027. And what that specifically comes from is the Florida kids contract. In 2026, we expect to lose about $1.50 on Florida kids. We expect to get that to at least break even in 20 27. So that's $1.50. We announced that we'd be leaving our MAPD or general issue Medicare business for 2027. That currently loses $1, so that's a good guy for $1 and then finally, we've become very good at harvesting the leverage in our G&A administration ratios with growth. Next year, we'll grow $3 billion from $42 to $45 billion of premium revenue. Associated with that, will drive $1.50 of G&A efficiencies. So that's the $4 that we'll harvest in 2027. The remaining five is for 28 and 29. Okay. And when you think about, I mean, I know you said you're not giving guidance for next year at this point, but when you Think about first half, second half, or is some of that $4 going to skew more to the back half or you see that sort of evenly allocated over the year. Yeah, that's probably a little in the weeds at the moment. I'm not ready to give guidance, let alone the seasonality. But, AJ, I'll make a more broad comment. Typically at Molina, we're a little front-end loaded in our earnings. We're typically any place between 55% and 70% front-ended loaded across the year That's not commentary on next year, but typically expect us to be a little front-ending loaded. Okay. All right. And so we've got the base of $5.25 this year, $4 of embedded earnings, $9.25, I think you said $950, somewhere in that range. There's sort of natural growth that comes with that number. Any other headwinds or tailwinds to consider? Again, I know you're not giving formal guidance, but to point to? Yeah, so let me walk through explicitly the math to when we say at least $9.50. We start with $5.25, which is guidance for 2026. We add the $4 of embedded earnings I talked about. Now, in addition to that, Marketplace currently loses about $0.75 a share. We expect to at least get that to break even next year, so add another $0,75. You're at $10. Now, when we say at least $9.50, one headwind you have to consider is for 2027, California UIS, or undocumented immigration status members, will go back to fee-for-service due to federal regulation. That'll be a $0.20 to $0,025 headwind for us, so $10 comes on back to about $975. We say at lease $950. Okay, okay. And is there natural growth? Almost every year you're going to get something that you would speak to at this point, or it's too early? Well, the natural growth is in our revenue projections. Remember, we're going 42 to 45. The other thing I just remind everybody, the $9.50 in the building blocks is before improvement on the MLR in our legacy Medicaid business. Remember, where at 92.6 in guidance this year, anything better than 92.7 accrues something better to the building block. Okay. Okay. And so to pivot and specifically talk about Medicaid framework a little bit, you're saying you're looking at roughly a 6% rate growth against a 5.5% and 6% medical cost trend. Is that enough to start to recapture some of the margin pressure of the last few years? So here's the way to think about it. If we're jumping off a 92.6, if rates and trend are exactly equal, you would probably be a 92 six next year. If there is an imbalance between rates and trend, it will improve or reduce the MOR. So right now we're saying 6% in our rate outlook, not 100% complete, but that's our best guess at the moment. And we're seeing 5.5% to 6% on trend. If trend comes in at the lower end of that range, obviously you've got a 50-bit benefit to the MOR line. Okay. Okay. Okay. And you have said on the cost side that you're seeing stabilization in Medicaid. Is that across the board, or there's particular pockets that are moderating in terms of pressure points? Any comment there? Good. When we talk about trend, we think about it really in two categories. We're saying 5.5% trend for 2026. We're seeing 5.25% to 6% for 2027. But within that are two categories. There's what we call core trend, which is just utilization rates, regular trend. But on top of that is acuity mix shift. As membership declines, there is an impact sometimes on MOR. That's the acuity mixed shift. We're seeing about a stable 4.5% on core. Now, that's higher than it used to be. Years ago, core trend in Medicaid was a much lower number. But, AJ, what we're seeing on that 4.5, it appears to be a very stable number now. It's higher than it used to be, but stable. Higher is okay if it's stable, because it will get caught up in rates. And what's driving a lot of that is LTSS, it's the usual subjects, AJ. LTSSS, BH, professional office visits, and of course, high-cost drugs. But I'm not really seeing much fluctuation. They continue to run at a higher rate. Stable is good. Okay. And when you talk about, that's interesting, the core at four and a half, and then the acuity shift on top of that is what's getting you to five and a have to six and a haves. Is the debate between the industry and the states around the four and half pretty settled? Do the states understand that, and it's really trying to gauge how much of an acuity shifts, or is there still some catching up to be done on the four and a half even? Okay, every state's a little bit different, but across the boards, there is catching up to do on the 4.5%. We've been very clear that across the country, most markets are underfunded by about 300 basis points. So before you even consider new trend, you have to consider something for catching up on the underfunding that's currently in the market. We believe the markets are underfunded By 300. So rates should pick up some of that as well as anticipate new core trend. Okay. And in speaking about some of the implementation of new eligibility requirements, work rules, et cetera, I think you've talked about a 6% membership headwind for next year with some follow-on potentially in 28. How are you translating that membership headwin and other factors around work rule implementations into sort of an earnings framework? Yeah, absolutely. So, as always, too soon to give guidance, but we like to be pretty transparent in laying out the building blocks. A lot of you make the models. You need to think constructively in a framework how to do that. So, on the revenue impact of OB3, we laid out a view next year where $42 billion of 2026 premium revenue grows to $45 billion. Within that, we fully contemplated the loss of 6% of the members. So, there's the revenue component. And as I just mentioned on Medicaid MLR, we're thinking 5.5% to 6% next year. 4.5 % is core, but the potential headwind from that membership loss is the 1% to 1.5%. So just placeholders at the moment, you can imagine we'll be a lot more explicit when we give our earnings guidance in February. But I think at this early stage, that's a helpful framework. Okay. Okay. And the medical frailty rule proposed by CMS was struck down. That was generally viewed as a little more onerous definition than the original definition put forward by Congress. What's your perspective on that? Does that give you more optimism that the likely potential disenrollment under the work rules won't be as difficult as thought? Yeah, AJ, it's a very timely question. I'm not ready to change our initial assumption of 6% membership decline for next year. We'll revisit that when we do guidance in February. But I think the events of the last couple of weeks are particularly helpful when you think about work requirements. And the big thing I'd point to is Massachusetts versus Oz. Several big things came out of that, one of which states now have a lot more autonomy in how they administer and define frailty. So you can imagine states will be much more flexible in how they do that, that probably creates a softer landing for members with frailty. Second, members who do have frailty will now have six months to document it as opposed to immediately be terminated, which delays any implication and also lets folks fully get prepared. And the last one I'd point out is the states in the plaintiff case now have until May 1st to start the implementation of work requirements, which is a delay. So, A.J., what do you take away from that? Implementation's delayed, and I think the requirements are a lot softer. It sets one to think that it's probably a softer landing on at least the initial impacts, if not the ultimate impacts. Okay. Okay. And you had said even in the last quarter that some of the states are prospectively making adjustments to rates and looking ahead to potential acuity shifts. Can you frame how widespread that is and what you're actually seeing? Yeah, I'll repeat most of what I said on the third quarter earnings call. 55% of our revenues come up on January 1st. We know 80% of those rates, either in draft form or final form. A handful of them have already included rate cell adjustments explicitly for acuity shift. A few of the others have said they haven't put it in yet, but as draft rates go to final, they expect to put something in for that. I'm not going to get into ticking and tying on particular states or the exact impact, but you can imagine states are conceding this is there already, and it's a part of our rate cycle. Okay. And is there any comment about the natural drag that you expect on MLR that you need to overcome from what's happening with the work rules specifically? Well, on the loss of members in particular, in our trend assumption, we said one to one and a half percent on top of core. So from our early estimates, that's what you'd need to jump over. So that is mostly driven by the implementation of the work rules. Okay. Right. Obviously, there's this. There's just been some attrition in Medicaid generally. Talk about the administrative cost burden and what you're doing to keep that right size and appropriate and what if enrollment trends as you expect? We do a pretty disciplined job at Molina of looking at fixed costs and variable costs. Almost every cost center in the company knows it's split between fixed and variable and we manage the company that way. Just to lay out the result of that process, we're going to grow $3 billion in revenue next year from $42 to $45 billion. And in the presence of that, I mentioned we'd take $1.50 out of G&A costs. So even in a shrinking legacy book, the company is still growing, and we're still harvesting leverage out of that. Okay. I'm going to ask you in a minute specifically about Florida, but just in general over the last few years, we've seen some volatility in the way people forecast membership projections on new contracts, the ramp up in profitability, even the timing on when those contracts actually begin. Out of those factors or considerations, have they led Lena to make any changes in the way they approach new RFPs or in the way they invest ahead of a formal launch? Yeah, I would say largely no change. Our RFP machine has been pretty successful, AJ. We've retained 90 percent of our re-procurements and we've won 80 percent of our new procurements. We are always sympathetic to states' particular needs, whether it's social determinants of health, substance use disorder, whatever their main focus is. We'll continue to do that. There are protests in the market on some of our wins, but honestly, that's business as usual, AJ. The folks on the way out generally protest. So I wouldn't say there's a meaningful change here. Okay. With awards delayed in Georgia and Texas, how do you manage readiness costs and capital commitments in the face of uncertainty about the timing of those launches. Are these delays impacting the way states approach procurements in any way? Yeah, I'd say on both of those, they're under protest, but again, that's business as usual. Just a reminder, we originally had Georgia and Texas as implementing in 2027. They may be delayed. To be conservative, we've taken them out of the 2027 revenue build and pushed them into 28. But the good news is we're never caught by surprise on the timing of an implementation. So we know what the readiness cost is. We know what The Capital Commitment is. Both are easily in our numbers, just a matter of when. And the states give enough lead time on implementation once contracts are completely certified that we have more than enough time to ramp up, the expense isn't really a problem. Okay. And you've talked about new RFP activity that you're involved in and tracking. Is there anything changing, A, given the demands and asks in these RFPs that are interesting and worth calling out on? And how's the OB3 rollout? Our Census and State Medicaid directors are facing a lot these days. Has that affected the timing on any of the RFPs that are out there? Every state's a little bit different, but across the boards, I wouldn't say so. You know, AJ, the big thing that I do see changing over the last year or two is referenceability. It's not enough just to write that you can do something really well. Increasingly, states are checking how your performance is in other states. They actually call other states and check references. So as Joe Z says, it's not enough just to be good at writing essays. You've actually got to be able to do the performance, and they check. That bodes really well here at Molina, so we like that a lot. That's interesting. Specifically on Florida, such a big contract for you. What are the two or three operational milestones that matter to move the business from the initial startup losses, which were expected to sustain profitability. Can you remind us of the expected pacing on those? Yeah, so let me set the stage on that. We just implemented Florida CMS Kids in October, so we're just a month into it. In the fourth quarter, though, I expect to lose a dollar. It's not unusual for a startup, especially a $6 billion contract. So what are the components of the fourth-quarter performance? I'm expecting about a 99% MOR, and I'm expecting a 5% pre-tax loss. Now, how does that turn around? Because next year, we're going to get the break-even, at least. So, in the fourth quarter, that 99% MLR is burdened by 2% of one-time costs. Those of you who are kind of insurance accountants will know that when you hang up new revenue in insurance, you have to book one-etime reserves, PFAD, LAE, things like that. So the report at 99 is really a 97. The report at 5% loss, forecast at 5%, loss is really a 3% loss. So to get the break even, I need to pick up about 300 bps next year. Now, whenever you implement a new business, your first quarter is usually pretty inefficient. On the medical cost side, you haven't fully implemented all the things that managed care does to constrain costs. On G&A side, usually run a little less efficiently right out of the gate. You can imagine a transition, the phones ring more than they otherwise would as people move from plant to plant. Picking up that 300 bps, I think, is well in our view next year. If I had to pick, most of it will come from the medical cost line. Some of it'll come from G&A. Okay. All right. I don't know if it's a fair question, but one of your peers... You're going to ask it anyway? Of course. One of your pairs talked about heavier utilization in Florida as it relates to this kid's contract as they transition out of that contract. To the extent you have any visibility on that early on, did you see anything like that? Is there anything worth calling out there? So a couple of things on that. We're only a month in. So to talk about actual performance at this point would be inappropriate. Most of my views at this point are from an actuarial perspective. The program's different than the one the incumbent ran, both from a G&A perspective, a member mix perspective, and a benefits perspective. So from an actuarial perspective, the rates that we got for the October 1 rate cycle, we're very comfortable with. The only other thing I'd mention, AJ, is we've proven time and time again, Molina makes money where others don't. We outperform the market typically by 300 basis points. I can't comment on other folks' cost structures, but we feel pretty good about this going in. Okay. When you think about the path to profitability in Florida, what would make it happen faster? What would make it take longer? What is the big variable when you go into a big new contract like that? I'd go back to the framework I just laid out. If we need to pick up 300 basis points next year just to get the break-even, I think a little bit more than half is on the medical cost side than G&A. The items that drive both of those are obviously the drivers, but I think most of the tools to get where we need to get are well within our sight. Okay. Okay, and is there a big skew between first half and second half on how you're thinking that progresses, or is it pretty steady all over the course of the year? I think we'll give you a better view on that when we do guidance in February. You have two things. One, we're growing into a new footprint, which will mean we get better over time, but you also have a rate cycle, which is October 1st to October 1th. That'll kind of affect things through the year, so I'll reserve judgment on that, but we feel pretty good about the overall path to break even for the year. Okay. Maybe pivot over to Medicare for a minute. With the Medicare business increasingly focused on the dual eligible members, how does the company view its differentiated advantage versus others that are competing? Yeah, let's talk about that. Next year, our Medicare business will be strictly a duals business. EAE, which is exclusively aligned enrollment is a really big deal in the duals environment. The strong form of EAE says that if you serve as duals members, you must be the MCO on the Medicare side and the Medicaid side. That bodes really well for players with strong Medicaid footprints. Put another way, if you have a Medicaid footprint, you probably already have a Medicare contract or it's easy to get one very quickly. If you're on the Medicare side and you don't have a Medicaid contract, these are hard to get. They come up every four to six years and you have to compete for them. So in markets that enforce strong form EAE, we have a significant advantage. I also like the idea that not only can we drive market share because of that, the underlying fundamentals of organic growth in duals are strong. It grows quicker than the Medicare market. It growths quicker than the Medicaid market. So we're excited about the outlook for duals. Interesting. I probably should know this, but when you look at your markets in which you're in Medicare, are most of them strong EA markets, or is it sort of a mix? Many are strong, and my personal expectation is states will increasingly move to strong. So even weak form today will eventually move to strong. And AJ, the reason it's compelling to have the same member in two different MCOs means a lot of inefficiency for the member and a lot of ineiciency for medical costs. Putting everything together in an integrated fashion just makes for a better member experience and certainly reduces costs. So I think you're going to see a lot more movement there. And when I think about trying to grow that business, what's the main constraint on growing and scaling that business? Can you leverage the existing Medicaid enrollment to drive growth here, or how should we think about that? Well, definitely being a major Medicaid player in these markets is a big benefit. Folks on Medicaid know the Molina name. In fact, some people don't think they're on Medicaid. They think they are on Molina, which is a strong statement about our brand. So EAE is certainly very helpful in driving members to us. Brand recognition is certainly a great tailwind for us. Okay. um there's a lot of discussion about competing special needs products and uh and the proliferation of c-snip products etc um is that changing this market in any way changing the competitive landscape for you it's a really good question aj 2027 is the first year of eae be it strong form or weak form. EAE applies to duals products. CSNPs are not a duals product. So they're kind of a workaround. Plans that don't have Medicaid that would otherwise be forced out try to use a CSNP to still be relevant in the market. Now, we're seeing that in a few states, but I have to think states that are truly looking for an integrated experience or members that are truly looking for an integrated experience. We'll see through that. I'll be curious what the future on C-SNPs as a workaround really is, because it a little bit flies in the face of integrated tools. Are we expecting anything specific from the administration on that? I'm not sure I can comment. What will be interesting is this year is the first year where that C-SNP workaround is kind of a relevant strategy. So let's see how folks react to that. Right. And I know it's less relevant when you're going and focused on duals, but open enrollment, any early comment about that and what you're seeing? I wouldn't want to get ahead of myself on that. We're encouraged by the products we put in the market. And so far, we're encouraged bei what we're seeing. Okay. Melina's marketplace, pivoting over to the marketplace, ACA exchanges, et cetera, has been shrinking substantially over the last few years. I think you're down seven states heading into next year. We've seen other players exit the market. What does management need to see to make this a segment where the company will begin again to invest for growth? Yeah. Marketplace, the ACA, could be a really good product. It could be a great segment. The problem with Marketplace and the ACa is there's too much risk pool volatility. It seems like they change the rules every year. CSRs are in, CSR's are out. Subsidies enhanced in, subsidies enhanced out. Open enrollment rules change. Special enrollment period rules change, Program integrity rules change. There's just so much volatility in the market. You know, what we say at Molina is we can underwrite any risk, whether it's high or low, but we need a stable risk pool. And what we've seen is a lot of instability in marketplace. So our exposure is relatively low at the moment. If we can see some stability in that risk pool, we'd love to play in it. Yeah, you probably partially answered it in that answer. But when you think about the markets you're exiting versus the markets you're staying in, what are the principal points of difference? I think you had the data point. We're going to be on exchange in seven markets for 2027, probably five with meaningful local scale. And how we pick that reduced footprint is partially where are the market fundamentals attractive that we think we have a stable risk pool? And secondly, where can we achieve local scale? Because when we think about any of our businesses, national scale is a relevant factor, but local scale is very important, especially when you get to the risk pool. Okay. So thinking about this going forward, is success in the marketplace business mostly about just getting pricing right, or is there other things that need to change to make this an attractive and viable space? So stable risk pool. If you have a stable risk pool, you can get pricing right. But the other thing is local scale. If your subscale, you wind up having performance skews because you're on the tail of a normal curve. Local scale, you need a proper representative view of the market, which gives you a proper exposure. So we need all those things to really have a good strategy. Okay. On capital allocation and deployment. How do you balance investing in the existing business recovery, pursuing acquisitions and returning capital to shareholders while earnings are still below the level you believe the business can generate? Are capital deployment decisions different when the business is in an earnings recovery mode? Yeah, AJ, the quick answer is from a capital allocation perspective, nothing's changed. This market, I believe, is in a trough in 2026. Looks like things are getting better for 2027. Our margins are far from historically where we've enjoyed, but still, they're positive. We're making roughly 1% to 1.5% on our businesses for the most part, and that is still a positive net income compared to the market, which in many cases is losing money. So even in depressed earnings environment, our balance sheet is super strong. Cash at the parent is very strong. When I think about capital allocation, I'll give you the usual pecking order, AJ. We love organic growth. Nothing's better than the returns on organic growth for us. 50% ROEs on organic growth. M&A is very attractive for us because we tend to buy properties so close to organic growth multiples that the returns are just super. And then lastly, share repurchases. Anytime I have excess capital, we'll look to redeploy capital in that direction. But it's the third on the list. I'd say that pecking order doesn't change at all, AJ. Even in this depressed environment, if you believe that margins are returning, and we do, you'll invest for the future. And the company has done a number of acquisitions over the years of troubled plans and states or turnaround situations. Any comment on the pipeline and your appetite for that in this environment? So in a trough year like 2026, you can imagine many players are struggling, particularly not-for-profit players. Our M&A pipeline is at any point staying close to many of those potential players. Sometimes it's years in development. Mission-based companies often don't want to abandon the mission until the capital is in a tough spot. And we've done a very good job over the past of capitalizing on those kind of positions, giving a nice transition to those plans, and growing our business at the same time. So, AJ, I can't comment on particular acquisition targets, but the pipeline is always there, and we're hopeful we'll have something to announce soon. Okay. With the balance sheet and subsidiary capital, any comment on what matters most? Is there any – given where we're at in the turnaround and the challenge of the last couple years, is there any issues where that's being a constraint on your ability to grow? The balance sheet? Not at all. We have, at the moment, $600 of cash at the parent, and that's only growing with more subsidiary dividends into next year. Debt-to-cap is under 45%. We have ample capital for growth. At this point, it's about the M&A pipeline, it's the RFP pipeline, and organic growth. We are not capital-constrained. The biggest issue for our business and the industry is the return of margins. We are very optimistic that we get to two and a half percent target margins in the strategic planning period that we talked about at Investor Day. And with that optimism, AJ, we'll deploy capital. Okay. I'd probably be remiss if I didn't ask you something about last week's events and the election and so forth and the way that played out. Obviously, we're all trying to still figure it out. Is there, I think the initial reaction is things will be more favorable potentially on Medicaid and funding of that and so forth, and maybe some relief on the work rules. I'm not sure what the industry would even ask for there. That would be a question to potentially ask. And then also I think there's some favorability around – percept and favorability – around marketplace and revisiting the enhanced subsidies, et cetera. Any early read, reaction, what you think you or the industry might ask for? And, yeah, that's probably – leave it at that. Yeah, so a couple things. What everyone has commented was not only was last week a blue wave. It was a blue tidal wave, right? It was quite incredible. Senate, now very Democratic. House, very Democratic, the majority in both. And at least five governors have swung from Republican to Democrat. So there's a tidal wave. Now, practically, what does it mean? In the Senate, they need 60 seats to avoid the filibuster. They don't have that. They've got something short of it. somewhat helpful for our businesses, but you might see gridlock for the next couple of years, just because of that dynamic and the president's veto, likely some gridlock. I think the Democratic agenda would most likely see some relaxation on some of the OB-3. Maybe the subsidies come back in place. With gridlock, I'm not sure you'll see that. There are some things, though, that probably have bipartisan support, both sides of the aisle. You have to think the IDR, the No Surprises Act, is in everyone's crosshairs these days just because of the economic consequences it's produced. Pharmacy transparency seems to have bipartisan support. So, A.J., I think at the margin, it's helpful federally. Within the states, I have to think that a swing to Democratic governors and the implementation of work requirements and increasing flexibility by the states on how they enforce that, I think that's only a good thing for frailty and the general disenrollment of work requirements. So looking forward to seeing how that plays out. Any thoughts on state-level Medicaid expansion, whether any of the states that have, there's 10, I guess, that haven't moved forward, whether many of those might revisit it? Yeah, I think it's a great and relevant question. I think some of these governors will make some of their intentions more clear as January 1st approaches. I Think the things you have to think about, the sentiment is probably there to do it, right, to go to an expansion. On the flip side, where's the funding come from? States are still constrained on funding. With OB3, there are increasing funding constraints going forward. I think the other thing states probably have to think about is if you don't have expansion, but you do have a large marketplace population, how do you think about maybe the movement of marketplace subsidized members back over to expansion? And does that work in the state's favor or not? That's probably a little bit of a different dynamic at every state, but these are the things they have to think about. Let's see how that plays out. Okay. Well, with that, I think I'll wrap it up. That was a great discussion. Thanks so much, Mark, for participating in the conference this year. And next up in this room, I think is Acadia, and that'll start at about 11 o'clock. So thanks so much. AJ, thanks so much. All right.