Good day. Welcome to the Centene Corporation 2019 second quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll. Please go ahead.
Thank you, Alissa. Good morning, everyone. Thank you for joining us on our second quarter 2019 earnings results conference call. Michael Neidorff, Chairman, President, and Chief Executive Officer, and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com. A replay will be available shortly after the call's completion, also at centene.com, or by dialing 877-344-7529 in the U.S. and Canada, or in other countries by dialing 412-317-0888. The playback number for both dial-ins is 1132753.
Any remarks that Centene may make about future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-Q filing, filed today, July 23rd, and the Form 10-K, dated February 19th of 2019, and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures.
A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2019 press release, which is available on our website at centene.com at the investor section. Finally, a reminder that the Centene third quarter 2019 earnings call will be held on Tuesday, October 22nd, 2019, and our next investor day will be held Friday, December 13th, 2019, in New York City. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?
Thank you, Ed. Good morning, everyone, and thank you for joining Centene's second quarter 2019 earnings call. During the course of this morning's call, we will discuss our second quarter results and provide update on Centene's markets and products. We'll also provide commentary around the healthcare legislative and regulatory environment, as well as an update on the acquisition of WellCare. Let me begin with second quarter 2019 financials. We are pleased to report another solid quarter marked by robust top and bottom line growth and operating cash flows. Membership at quarter end was 15 million recipients. This represents an increase of 2.2 million beneficiaries or 17% over the second quarter of 2018. Second quarter revenues increased 29% year-over-year to $18.4 billion. The HBR increased 100 basis points year-over-year to 86.7%.
This was primarily attributable to the Marketplace business. As expected, margins have normalized from the favorable performance in 2018. The increase was also attributable to the HIF moratorium, as well as the acquisition of Fidelis. We reported adjusted second quarter diluted earnings per share of $1.34. This compares to $0.90 reported in the same period last year, representing a 49% increase year-over-year growth. Lastly, operating cash flows came in at $917 million or 1.9 times net earnings. This is the high end of our previously stated range of 1.5-2 times net earnings. These solid results reflect the benefit of our ongoing diversification strategy, which has led us to become a $74 billion enterprise. We're no longer simply a Medicaid healthcare company.
One has to look at the totality of this enterprise, as the scale and diversity allows us to absorb the ups and downs in rate cycles, markets, and subsidiary performance. This ensures that no one part of the portfolio can jeopardize our total organization. Jeff will provide further financial details, including updated 2019 guidance in his prepared remarks. A quick comment on medical costs. They remain stable and in line with our expectations in the low single digits. Moving on to markets and product updates. First, we'll discuss Medicaid activity. Our Medicaid book of business continues to perform well in the second quarter. At June 30, we had 8.5 million recipients, representing year-over-year growth of 1.3 million or 18%. We continue to win Medicaid RFPs in new and existing states, upholding our industry-leading RFP win rate of 80%. Now on to state updates. Oregon.
In July, Centene successfully re-procured its Oregon Medicaid managed care contract. We expanded our presence under this new contract, adding three additional counties. We will now be operating in six counties, including Metro Portland. Centene currently provides care to 92,000 beneficiaries in the state. The additional three counties will materially increase our membership in Oregon. We look forward to continue to work with the state, demonstrating the value of integrated care, focusing on social determinants of health, and maintaining sustainable cost control. The new contract is expected to commence January 2020 and will run through December 31, 2024. Iowa. On July 1, we began operating Iowa's Medicaid managed care program, a new state for Centene. Operations commenced as expected, and we are now providing healthcare to approximately 254,000 beneficiaries.
Iowa is committed to operating a sustainable Medicaid managed care program, as evidenced by the recent rate increase, which we did anticipate. We expect to achieve a normal margin within a typical ramp-up period for any new Medicaid contract. Iowa marks Centene's 32nd state of operation. New York. It has been just over one year since we closed the Fidelis acquisition, and we could not be more pleased with the performance. The integration of the company is running smoothly, and we are realizing our synergy and accretion targets. North Carolina. As we have pre-previously noted, Centene won two large regions in North Carolina Medicaid RFP and has an active appeal for the balance of the state. We remain cautiously optimistic regarding our appeal. Texas. Texas recently decided to delay the STAR+PLUS procurement announcement until the end of August.
We remain confident in the value we bring to the state. Louisiana has also delayed the announcement of its pre-reprocurement. We now expect to hear late July and remain confident in our prospects there. Medicare. At June 30, we served just under 400,000 Medicare and MMP beneficiaries across 20 states. This represents a year-over-year increase of approximately 55,000 recipients. On a sequential basis, membership increased over 4,500 recipients. As we have previously commented, we expect 2019 MA revenue and membership to be flat compared to 2018. This is net of the actions taken by Fidelis to reestablish their four-star rating, which includes exiting 26 counties in 2019. Next year, we plan to expand into 100 counties in existing states and add one more new state, Nevada. We will begin our joint venture with Ascension in Florida geographies in 2020.
Further, Centene will return to a four-star MA parent rating, and the addition of WellCare's high-performing MA portfolio will bolster our MA platform. Going forward, this should accelerate profitable long-term growth in the 2020s and beyond. Health Insurance Marketplace. The marketplace business continues to perform well, consistent with our expectations. At June 30, we served approximately 1.9 million exchange members across 20 states. This represents a sequential decline of 58,000 recipients, which is lower than our historic attrition rate. We continue to see higher member retention than in prior years, which we previously noted. Importantly, the key demographics of our membership remain in line with our previous remarks on this subject. Consistent with our previous comments, our marketplace margins continue to be in the 5%-10% range.
We continue to anticipate another strong year of operations as the national leader of exchange products and expect to continue to grow this business in 2020. Next, international. In late June, we purchased an additional 40% ownership in Ribera Salud from Banco Sabadell, expanding our stake to 90%. We believe our knowledge and skills, along with our leading-edge IT systems, has further enhanced an already strong business in Spain. We continue to look for opportunities to expand our international business. Please note, our growing international business will not distract us or impede our ability to pursue the growth opportunities in the U.S. I'll now provide an update on the healthcare legislative regulatory environment. Although there appears to be little desire in Washington to revisit comprehensive healthcare reform, Congress and the administration continue to explore ways to improve healthcare delivery systems.
We support the administration's decision to withdraw its rebate proposal to eliminate the existing safe harbor protection within Medicare and Medicaid. While the Senate still needs to take up the matter, the House recently voted on a very bipartisan basis to eliminate the Health Insurance Fee. Importantly, there are opportunities in which we can work together to bring down not only pharmaceutical costs, but costs across the entire healthcare delivery system. The administration's approach to dealing with the rebate rule is another example demonstrating how Centene does not focus on short-term headline volatility. We focus on the facts as we know them today. We continue to advocate for greater price transparency, which includes moving towards net pricing in pharmacy.
In this same light, we commend Congress on their bipartisan effort to take steps to reduce the amount of money Americans pay out of pocket for their healthcare costs by ending surprise billing. We continue to see efforts both in Washington state that further stabilize the Health Insurance Marketplace. The administration's final rule, allowing employers to offer HRAs as an option to pay for Health Insurance Marketplace coverage, provides an opportunity to have a positive impact on premiums. Also, pending waivers in Utah and Georgia aim to stabilize the Health Insurance Marketplace to provide affordable, comprehensive coverage to those between 100% and 250% of the federal poverty level. This has the potential to improve affordability for those with and without subsidies. As exemplified by Georgia, states are taking the lead with meaningful discussions on how to improve and expand government healthcare programs.
They are focusing on seeking private sector solutions to enhance quality and lower costs of healthcare. We're well-positioned to be supportive of these efforts. We are encouraged by anything that moves us back from politics to policy. Centene is committed to working with both parties on bipartisan solutions that strengthens the nation's healthcare delivery system. I'd now like to provide an update on the acquisition of WellCare. We were pleased shareholders of both Centene and WellCare voted overwhelmingly to approve the acquisition on June 24th. We appreciate the mandate of our investors as they recognize the value of this transaction. Regulatory discussions are well underway and have been very constructive. Both companies are currently working through the state insurance approval process required for the completion of the transaction. The required Form As and Es have been filed in 27 states.
Additional approvals have been obtained in eight states, which is ahead of schedule. Where applicable, the divestiture process is underway, and we are pleased to be seeing a great deal of interest in potential acquirers. Centene and WellCare have each received a request for additional information and documentary materials from the Department of Justice. This was expected given the size of this transaction. Both companies continue work expeditiously and cooperatively with the DOJ. Integration planning is well underway. Our teams are doing extensive work to ensure a smooth and seamless combination of the companies. Both companies are fully engaged, and integration planning is progressing well. We remind you that the combined company will have estimated pro forma 2019 revenues in excess of $100 billion, an EBITDA of $5 billion. We are comfortable with our previously communicated synergy and accretion targets.
We continue to be comfortable that we will receive all necessary approvals to close the deal in the first half of 2020. Given the progress of activities to date, there may be an opportunity to close earlier in 2020. Shifting gear to our rate outlook, we expect a composite Medicaid rate increase of approximately 1.5%- 2% for 2019. In summary, Centene continues to be a growth company, both organically and through M&A. Our targeted pipeline remains robust. We continue to focus on margin expansion and are already realizing benefits from our Centene Forward transformation project. The pending WellCare acquisition firmly solidifies our 2020 vision of maintaining our industry-leading position in the highly competitive government-sponsored healthcare market. We look forward to leveraging the strength each company brings in terms of providing high-quality healthcare at lower cost to our recipients and state customers.
We thank you for your continued interest in Centene, and I'll now turn it over to Jeff.
Thank you, Michael, and good morning. This morning, we reported solid second quarter 2019 results. Second quarter revenues were $18.4 billion, an increase of 29% over the second quarter of 2018, and adjusted diluted earnings per share was $1.34 this quarter, compared to $0.90 last year. Adjusted diluted earnings per share for the second quarter of 2019 was driven by solid performance across our business segments, the reconciliation of the 2018 Marketplace risk adjustment, which exceeded our expectations by $0.05 per diluted share, and $0.03 per diluted share associated with a gain on the Ribera Salud acquisition. Let me provide additional details for the quarter.
Total revenues grew by approximately $4.2 billion over the second quarter of 2018, primarily as a result of the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, expansions in new programs in many of our states in 2018 and 2019, particularly Arkansas, New Mexico and Pennsylvania. This growth was partially offset by the Health Insurer Fee moratorium in 2019. Moving on to HBR. Our health benefits ratio was 86.7% in the second quarter this year, compared to 85.7% in last year's second quarter, and 85.7% in the first quarter of 2019. The HBR increase was primarily driven by the performance in the Marketplace business, the acquisition of Fidelis, which operates at a higher HBR, and the Health Insurer Fee moratorium. As we have highlighted previously at our Investor Day, we expected a return to more normalized margins in 2019 for our Marketplace business.
Additionally, we continue to experience a higher membership retention rate compared to prior years. As members stay with us longer, it increases medical costs in the HBR. I just want to emphasize that this is a slight increase, and we are still well within our 5%-10% pre-tax margin targets for the product. Sequentially, the 100 basis points increase in HBR from the first quarter of 2019 is primarily due to the performance and seasonality in the Health Insurance Marketplace business. Before I get into SG&A, let me provide an update on the Health Insurance Marketplace business. As expected, and highlighted at our Investor Day, the final risk adjustment was lower than our year-end accrual by $238 million. Additionally, after adjusting for other risk-sharing programs, including minimum MLRs, our estimated RADV adjustment and other programs, the net amount exceeded our expectations by approximately $31 million, or $0.05 per diluted share.
Recall, we had included approximately $100 million in our annual guidance. This benefit was driven by our Centene Forward program, and as highlighted during our Investor Day in June, we are reinvesting this amount in other Centene Forward initiatives in the back half of the year. Now on to SG&A. Our adjusted selling general and administrative expense ratio was 9% in the second quarter this year, compared to 9.6% last year, and 9.5% in the first quarter of 2019. The year-over-year decrease was primarily driven by the acquisition of Fidelis Care, which lowered the ratio by 60 basis points. The sequential decrease is primarily due to the higher selling cost in the first quarter associated with the marketplace in Medicare products. Additionally, we spent $0.04 per diluted share on business expansion costs during the second quarter.
Investment in other income was $120 million during the second quarter, compared to $65 million last year and $99 million last quarter. The increase reflects increased investment balances over 2018 as a result of the Fidelis Care acquisition, higher interest rates, and a gain of $16 million associated with the step-up in basis of our previously held equity investment in Ribera Salud upon acquiring a controlling interest. Sequentially, investment income increased due to the previously mentioned gain on the acquisition of Ribera Salud recognized in the second quarter. Interest expense was $101 million for the second quarter 2019, compared to $80 million last year and $99 million last quarter. The increase year-over-year was driven by the additional debt to fund the Fidelis acquisition and higher interest rates associated with our interest rate swaps.
Our effective tax rate for the second quarter was 25.7%, compared to 36.9% in the second quarter of 2018, which reflects the impact of the Health Insurer Fee moratorium. On to the balance sheet. Cash and investments totaled $15.9 billion at quarter end, including $801 million held by unregulated subsidiaries. Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level. Debt at quarter end was $7.1 billion, which includes $513 million of borrowings on our revolving credit facility. Our debt-to-capital ratio was 36.3%, excluding our non-recourse debt, compared to 36.7% last year and 36.5% at the first quarter of 2019. Our medical claims liability totaled $7.4 billion at quarter end and represents 47 days in claims payable, compared to 48 days in the first quarter of 2019.
We continue to expect the DCP to be in the mid-40 range on a run rate basis with the inclusion of Fidelis. Cash flow provided by operations was $917 million in the second quarter, or 1.9 times earnings. The cash provided by operating activities in the second quarter of 2019 was due to net earnings, collections of premium and trade receivables, and an increase in other long-term liabilities driven by the risk adjustment payable for the Health Insurance Marketplace business in 2019. Lastly, I would like to highlight a few of the changes to our 2019 annual guidance. We are increasing the total revenues guidance at the midpoint by $700 million to reflect the second quarter results and higher membership retention in the Marketplace business.
Additionally, we are increasing our GAAP and adjusted diluted earnings per share guidance at the midpoints by $0.03 and $0.05 per share, respectively, associated with the second quarter performance and the gain from the Ribera Salud acquisition. While risk adjustment delivered an additional $0.05 per diluted share of earnings during the quarter, we are reinvesting the additional earnings in other initiatives to accelerate the Centene Forward program. Overall, the operating metrics for the second quarter were good across all of our business segments. We believe the continued growth in revenue provides opportunity for future earnings growth. That concludes my remarks. Operator, you may now open the line for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Scott Fidel with Stephens Inc. Please go ahead.
Hi. Thanks. Good morning.
Good morning.
Just wanted to start on the exchanges and maybe just update us in terms of on the margin front. I know that you're still within that 5%-10% range. Just interested in terms of are you tracking sort of right to where you had thought previously, and any sense in terms of within that range you may be sort of tracking for the year. Just as a follow-up, just on the exchanges as well, just interested, we've been seeing a lot of the rate filings coming out and the proposed rates for 2020, and just interested in your updated views on how the pricing environment appears to be trending for 2020 in the exchanges and just your views on whether competition is increasing in the marketplace. Thanks.
Okay. I'm going to start off with the margins, make a little comment on competition, and then let Jeff and Kevin, others comment. The margins are well within a 5%-10% targeted range. I cannot emphasize enough to everybody that in this business, and I've said this historically at investor days and other times, you will see movement up and down within that range. In this instance, we commented our retention of membership has been longer than what we have typically seen. That means we're going to get increased revenue because we're retaining that membership. They will reach their maximum out-of-pockets, and so some of the costs will go up, but we'll still have increased revenue and increased earnings from that increase. It's the nature of this insurance business, and it's really what one expects.
The longer we retain a member, the better it is, because over time, we have demonstrated we keep them for a long period of time, we bring the cost down for that person. As I said, it's a little frustrating to see people concerned about a margin, and a movement of margin, which is doing so well within the range, is normal health insurance performance and shows that this business is really growing and performing as we expect it to. We've commented earlier to expect this. From a margin standpoint, it's doing just what we want it to do and what we expect it to do. We see that continuing.
The longer you keep the member, the higher the MLR might go, but also you get all that incremental revenue, which gives you actual dollar earnings increases, and the shareholders and everybody benefit from it. I'll start off a little bit from the competitive standpoint, but we like competition, and we think it's important we have it. It just makes us better. We've also commented that in our segment, which is 400% the federal poverty level and below, that it's fully subsidized, highly subsidized, and therefore price and those types of issues do not give somebody trying to come in on price an advantage. I think this is a solid business. The actions we took in building it and becoming a leader in it, I think is going to pay a lot of dividends for our shareholders going forward. Jeff, anything you want to add?
I think Michael addressed the members staying longer comment. I think the only thing I would like to bifurcate is we did talk previously about margin normalization, and that marketplace margins would be consistent with 2017, 2016, and 2015, and that 2018 was a very good year. That piece was completely expected in our forecast. The second piece I think that Michael mentioned here was the members staying longer, which just to highlight, we've increased our revenue guidance over $1.4 billion for the first and second quarters here, really due to the member retention and them staying longer, and I completely agree with the comments you stated about that.
I want to make one more comment, that when you have a $75 billion business, it's different when you have a $20 billion, $30 billion business. You have more complexity, you have more products, you have more states. There's going to be some variability, but it's really a very strong position to be in that it really affords us the offsets. With that size business and now growing internationally, you're going to have a market that may have an issue. It's no different than investors that have funds that have a stock that maybe is not performing. They have others that offset it. Marketplace is one of our key strengths, and I can't emphasize that enough, Scott.
It sounds like Michael, just to clarify on 2020, with what you're seeing the pricing at this point, it sounds like you're still comfortable with the growth rates that you've been targeting in that market for next year.
Yeah. I think I commented in my prepared remarks that I expect it to grow next year. I still feel that way.
Okay. Thanks for the call.
The next question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.
Morning, Kevin.
Good morning. Thanks. I guess maybe two questions. First question being, when you think about the guidance update, there's a few items in there. You had the $0.03 gain, and then you had the $0.05 that came in, but now that you're spending $0.05 away. When you think about the components of the guidance raise, because I think they raised a little bit less than what the beat was, at least versus consensus in the quarter, how do you think about that guidance raise? How much of that is kind of core operational earnings versus kind of one-time things versus potential offsets as far as reinvestments?
I want to make one comment, then Jeff can go into all the detail you want. Okay? What we tried to say is that we have this Centene Forward, which is really working well. It's freeing up funds to invest in technology, the things that are going to pay big dividends going forward. Couldn't be more pleased with it. What happened is we started to realize results in this quarter, and the shovel-ready projects won't be ready till next quarter. We had to take the earnings, but in effect said, we've taken the earnings this quarter, but next quarter, we're going to have the expense. Jeff, you might just further
A couple of things I would say is that if you're comparing to, I think, the consensus number, I think that was around $1.24. That's $0.10. We were at $1.34, so that's a $0.10-cent beat. $0.05 is really driven by what Michael mentioned, the Centene Forward, which we're reinvesting in the back half of the year. You would have another, call it $0.05, $0.03 from the Ribera Salud gain, and call it $0.02 from operations if you're comparing to consensus. I would say the guidance raise was in line with that. It's the $0.03 from the Ribera Salud gain, plus $0.02 from operations, again, if you're comparing against consensus that we increased the guidance by.
Okay, that's helpful. I guess just the second question being, it looks like you raised the MLR guidance by 10 basis points. Can you talk a little bit about what was driving that? I would have thought that the better exchange enrollment and retention might have helped bring that MLR down a little bit.
I think if you're comparing to year-over-year, and specifically for this year, I think Michael commented on the higher member retention. What we did have in the forecast was the margin normalization, and we talked about that at our December and probably Q1 earnings calls that we anticipated that exchange margins would be similar to 2017 and prior, and that 2018 was a very good year. Michael commented on the membership retention and that members are staying longer, and so it's increased in the HBR at the margins just a little bit, and that's why we did the tenth on the increase in the HBR guidance.
In other words, Kevin, they stay longer, they reach their maximum out-of-pocket sooner. It doesn't mean that their health conditions have deteriorated. If anything, over time, we'll see improvement the longer we keep them. That's really why you see that jump. It's a normalization of the business. The good news is, I like the fact we're retaining people. It says longer term, we're going to have a very strong base there.
Well, yeah, I'm actually to see why the higher MLR versus a normal exchange person. I thought a normal exchange person had below average MLR. Even if it was higher than an average exchange person, it might be lower than your consolidated MLR. You're saying that if you keep them longer, it's actually higher than your consolidated MLR, which pulls up your consolidated MLR?
No, no. It's just higher than our previous expectations, Kevin.
Okay.
If you look at the Q1 and Q2, how we've raised guidance at the top line, that's over almost $1.4 Billion of additional revenue. What we're saying is that MLR is higher than our expectations that we originally had. The members are staying longer, which is outside of our expectations as well, and we're adjusting the forecast for that.
All right. Thanks.
Actually, Kristen-
Next question comes from Josh Raskin with Nephron Research. Please go ahead.
Hi. Thanks. Good morning. Just want to ask on the $0.05 that gets reinvested, I guess the first question is just that $0.05, that reinvestment in Centene Forward, does any of that go into the MLR line, or is that all G&A?
The bulk of that would have been in the G&A line.
Okay. Got it.
It is, Josh. It's a lot of investments. In other words, we will continue to update our systems. We said way back when we're going to be investing in that, and that's going to deliver longer term real efficiencies. This whole effort on reducing our G&A costs and reinvesting that money without affecting our earnings stream, that's expected. That's what it's all about.
Okay.
It's recognizing that growth.
No, that makes sense. Then my real question is just from a strategic standpoint, Michael, you alluded to the potential to close WellCare slightly earlier than it sounded like, by the end of the first half of next year. It sounds like you're seeing some progress on the regulatory front that gives you some comfort there. My question on that is, does that do anything strategically? As you think about the Medicare Advantage line, or any other investments or branding or your M&A strategy or anything along those lines that change based on your ability to potentially close the transaction faster?
Well, I think that, okay, one, your first statement was right. We're seeing a lot of success with the states. They understand it. We've had good discussions with Justice. We understand their role and what they have to do, and providing them all the material on an expeditious basis. I want to just cautiously let people know it's going well enough that it could close earlier. Now, the sooner it closes and we get the company integrated, the sooner we're prepared to move ahead with some accelerated activity we have in mind. We're going to be patient and manage it through carefully after we've demonstrated this is fully integrated. We're not going to bite off more than we can chew. We know how to integrate companies. We've demonstrated that. Anything that picks up that speed just puts us in a position to do something sooner.
Perfect. Thank you, Michael.
The next question comes from Sarah James with Piper Jaffray. Please go ahead.
Thank you. The DoD's talked about TRICARE moving to risk on the next RFP. Can you help size what that would mean for Centene if you retain the same region? Are there any quality metrics for that contract you can share with us that give us insight onto how Centene is performing from the DoD's viewpoint?
Kevin, you want to take that?
Sure. Hi, good morning. We've been working very closely with DoD for a while about this potential new arrangement and also with House and Senate Armed Services Committees. To your point, there's a variety of different thinking going on within DHA, as well as in House and Senate Armed Services Committees about what that final new benefits plan might look like. The risk arrangement that you're talking about is one of the things that they're considering, but there's a lot of different things they're considering, too, with respect to care management, with respect to value-based contracting, with respect to network design. We're very pleased to be at the table and providing a lot of different recommendations and ideas to them.
Got it. When do you think that you'll know how the contract will evolve and potential difference in size of the new contract versus what it's contributing to Centene now?
Well, as you're probably aware, there's a leadership change that's going to be taking place over the next couple of months. Our thinking is probably after that takes place, which is probably in the late summer, early fall, we'll probably know more. I would imagine within the next three-six months.
Thank you.
The next question comes from Lance Wilkes with Bernstein. Please go ahead.
Yeah, good morning.
Good morning.
Could you just talk a little bit about Medicaid medical cost trend and the components of that? And was interested in what the implications are for Iowa in the latter part of the year and maybe as a contributor to MLR guidance, just given the withdrawal of one of the competitors in that market?
This is Jeff, Lance. I think what Michael said, we continue to see stable cost trends in the Medicaid business. As far as Iowa, nothing has changed. I would say our commentary around Iowa has been that we don't have that forecasted or projected to be a contributor to earnings in the first six months of operation for this year. I think Michael had reiterated in his commentary, his prepared remarks, that we do see kind of a normal, what I would call Medicaid margin profile on a going forward basis.
Yeah, we typically have said that we always book at a higher level for the first three quarters or so, sometimes four. It doesn't mean it's losing. It's just it may be break even. A new business, we work with our providers on evolution, not revolution. It is an educational process as we work through and they learn our systems and things. We see it performing normally as all new markets do.
Is the membership you're getting there kind of above what your original expectations were, or is it in line with those original expectations?
Chris, you want to comment on that?
Sure. Thanks, Michael. As I think Michael mentioned in his remarks, we're at about 254,000. We do expect to come in close to our anticipated membership of 300,000 by the end of the year.
We do see it growing and being a very effective market for us.
Great. Thanks.
Thank you.
The next question comes from Matt Borsch with BMO. Please go ahead.
Yeah, if I could just ask a first question on the Texas RFP, the Texas contract awards. Is it any visibility on the timing at this point?
They've indicated the end of August, but I've said historically, I think my quote is, I don't put my hand in fire for any state and their timings.
Okay.
It's just that they do what they want. We're still confident that it's going to continue to be a good opportunity for us.
Oh, okay. If I could also ask, because you talked about supporting price transparency. Should we take that to mean that you would support the initiative to have hospitals and insurers essentially open up their books, in terms of their negotiated rates? If so, do you think that would be something good for pricing and good for Centene?
I don't think that everything I've read about it, historically, where they've tried those kinds of things, it tends to have a negative impact on pricing. All prices seem to rise to the highest level, not drop to the lowest level.
Okay.
I don't think that would be good. What I'm talking about is particularly in pharmacy. I think there's been an absence because of rebates and things on transparency there, and we are working aggressively to move to net pricing on the pharmacy products.
Okay. I'm sorry, just one last one, which is, do you think that you'll see a substantial impact from the, you touched on the HRA, the ability of employers to use HRAs for employees to pay ACA premiums? Do you think that's going to have significant follow-through?
I think that there's an opportunity there, but I have not quantified it yet. The team hasn't, but I think we see it as potential upside, having no downside risk to us. It's only good, but we have to wait to see how it's reacted, and hopefully in future calls, we'll be able to give you more guidance on it.
All right. Thank you.
The next question comes from Steve Pannell with Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for the question.
Good morning.
I just wanted to dig into some of the specifics as much as you're willing to share on risk adjustments. In the Q, it sounds like a $238 million favorable reduction in payables, but a net pre-tax benefit of $131 million. Two questions. First, the offsets sound like minimum MLRs and RADV, would love if you could quantify those. Getting back to the $0.05, sounds like that number could have been a lot higher, and I want to understand if there's been a change that's sort of permanent in nature in the way you'll accrue for this going forward. Does this mean that the Marketplace business is more profitable essentially now than you had been accruing for it? Just how should we think about all that? Thanks.
I'm going to turn that over to our resident expert on risk adjustment. Jeff?
Yeah. Thanks. We previewed this obviously at the Investor Day, said we thought at the time it was going to be more than $200 million, $238 is the number. I would say, I would size the minimum MLR and the RADV as the two largest components of the offsets, and primarily of equal magnitude. One thing to highlight just about RADV specifically is it gets finalized in August of this year, and this is the first year that they're doing the RADV adjustment for the Marketplace. They decided not to collect the funds with the RADV adjustment until 2021. As a result, there was no ability for us to offset the RADV adjustment in our minimum MLR calculation. Meaning, usually, the MLR calculation's the last, right? You would have a RADV adjustment that would then be calculated into the minimum MLR.
As this was the first year for the RADV adjustment, we were unable to do that. Some of the RADV adjustment would've been mitigated in our minimum MLR calculations, but it wasn't for this quarter because of the unique circumstance. I guess what I would say is, the Centene Forward program delivered good value and continues to do that on the risk adjustment side, and I think that's a good thing long term.
I just want to add, I want to remind everybody that there's two elements to risk adjustments. One that we control, and that's how well we do in our medical expense and others. If somebody else has a negative or has a different than expected result, that impacts us, and that's outside our control. When you look at this, it's not just how we're doing, but what the total market in a particular product's doing. I'm telling you what you already know.
Yeah, absolutely. I guess just the 238, though, it's pretty sizable on a percentage basis. Just the last sort of follow-up piece is, do you guys expect to make any changes to the way you accrue, or is it going to be consistent going forward?
Again, we're following GAAP, right? Our job is to make the best estimate at the end of each quarter and at the end of each year, and that's what we'll continue to do. Yes, if we have historical information that indicates that we're performing better, then we would absolutely include that information into our estimates.
Okay. Thanks a lot, guys.
Thank you.
The next question comes from Dave Windley with Jefferies. Please go ahead.
Hi, good morning.
Good morning.
Thanks for taking my question. Wanted to follow up on MLR just with a cadence question. I think the first half MLR is up about 120 basis points year-over-year. The guidance implies that the second half would be up a little less than that. Your update on Exchange sounds like that drags the back half of the year up a little bit. I wondered kind of what's the offset that makes that year-over-year change smaller in the second half? Is it Fidelis? Is that it exclusively, or are there other factors? Thanks.
Well, I think if you're comparing year-over-year, first half to second half, obviously, Fidelis is a change, meaning we did not have that in the first half of last year. Right? We do have Fidelis in the first half of this year. As we've commented, they were running a higher HBR than the Centene base business when we did the acquisition. That is definitely a driver.
Then, just quick follow-up on a separate topic. There are, Michael, some enrollment moving parts sequentially in both your TANF and CHIP and ABD, LTSS categories. Could you describe what some of the moving parts are there? Then, is the international line now just the change in the ownership base in Ribera Salud? Is that what drives that addition? Thanks.
Yeah. I'll start, then let Jeff pick up on it. Obviously, on our TANF, our LTSS, long-term care, et cetera, we've added new business in the east side of Pennsylvania and other things. There are moving parts affected by new businesses coming in in all these categories. That's going to move it up, down, around, but over time, will smooth out. Jeff, do you want to pick up on the second part of that?
Yeah. On the second piece, you're spot on. When we took control of the Ribera Salud, we've included those members now in our membership reporting table. That's the change there.
Okay. Thank you.
The next question comes from Peter Costa with Wells Fargo. Please go ahead.
Thanks for taking my question. Most of my questions were asked and answered.
Sure.
I might like to understand a couple of details. First off, what are the incremental startup costs in the fourth quarter from Oregon? Second, what are the changes to your reported earnings, revenues, MLR, and minority interest line for Ribera Salud and the change in ownership there?
Yeah. First question, there are costs obviously associated with the Oregon startup, and we had a placeholder in our original startup cost guidance, so it fits well within what we'd already previously communicated. The second thing, when you're talking about the consolidation now, obviously, the net earnings impact is in theory the same, other than we have more share of those earnings. Now we will include the revenue, and we'd had that in the guidance because we knew this acquisition was coming. We'd already had that in the previous guidance.
Okay. Thank you.
The next question comes from A.J. Rice with Credit Suisse. Please go ahead.
Hi, everybody. First off, just to ask about an update on the PBM side of the business. I think Mississippi and Nebraska are rolling out RxAdvance. Any learnings from that? Maybe talk about the cadence of further rollouts there. I know RxAdvance is talking about additional capabilities that they have, care management help, operating efficiency help. Are you exploring any of that, what kind of opportunity might that be?
I'll ask Brandy and Kevin to pick up on that. Brandy?
Hi, A.J. It's Brandy Burkhalter. We are currently live in six states with just over 1 million lives on the RxAdvance platform and very pleased with our progress and what we're seeing to date. We look forward to, I guess, exploring the new things that the RxAdvance platform allows us to do. We'll have more to come in future calls, but very pleased with the progress to date.
If I could just amplify a little bit what Brandy had said. This is Kevin. I think one of the core learnings that we've had is the importance of engaging independent pharmacies very early on in the process. We get out to the IPA, the Independent Practice Association, early. We talk about what we're doing, why we're doing it, what the new website is going to look like, get in their newsletter, things of that sort. That's been a core learning.
Okay, great. Now, you're coming up on a year with Fidelis. I know when that deal was originally struck, there was an expectation of improving the medical loss ratio trend, but also maybe giving a little bit back in the G&A area, but net positive. Can you talk maybe, as you look back over the last year, has it developed as you expected? Are you ahead of plan, but a little bit behind? How much is there still further things to do once you anniversary this?
Yeah, this is Jeff. I think Michael has mentioned this previously, but it's been a very good deal for the company. It's performing in line with expectations. We're capturing the synergies that we thought we would. I would say the initiatives and what we expected at the beginning, where we were going to invest more G&A dollars to lower the medical costs have occurred. We're pleased with the performance, and I think there's still more opportunity for continued improvement, and we're working on those actions as we speak.
Okay.
I think I've commented before that if we could find more Fidelis I'd do one in the morning and one in the afternoon.
Okay.
Absolutely.
Just the last question, this got raised by one of your larger competitors that already reported the question of prior period development. You don't specifically put that in the press release, at least overtly. Any comment about a normal quarter prior period development, and that you realized this quarter relative to last year or first quarter?
It's been normal, but Jeff, you can.
Yeah, it's been normal. I mean, A.J., we've talked about this before. I mean, what we really focus on is the consistency, right, of development. Meaning we have a consistent process. We use claims received, we use an inpatient validation methodology. Our methodology is a little unique compared to others in the industry, but we look for consistency, and I think ours has been consistent for a long time.
Okay, great. Thanks a lot.
The next question comes from Gary Taylor with JPMorgan. Please go ahead.
Hi. Good morning. Most of my questions answered, so just two quick follow-ups. It sounds like from the commentary this is correct, but I just wanted to confirm it. In Spain, it was 50% ownership before, but it was not consolidated in the financials, and now.
That's correct.
90% or wherever you are, it will be. Is that correct?
Yes, that's correct.
That is correct, yes.
Okay. Then just my other one, just going back to the exchanges and certainly acknowledging your commentary that you thought margins would normalize to some degree after 2018. We saw in the first quarter, when we look at the stat filings, that the loss ratios and exchanges up about 300 basis points. When we get a chance to see that again for the 2Q, is that going to be a pretty consistent trajectory, or should we anticipate, based on some of your retention comments, that maybe that's up a little more?
Jeff?
I guess what I would say is, I think it will be up. The other thing you have to realize is when you're looking at there's a difference between the statutory and the GAAP HBRs that we talk about. That's all I would highlight, but yes, it will be up on a year-over-year basis.
Okay. Thank you.
Go ahead.
Go ahead. Sorry.
No, that's it. Fine.
The next-
Next.
Question comes from Justin Lake with Wolfe Research. Please go ahead.
Morning.
Thanks. Morning.
Morning.
First, just a question on exchanges. Appreciate the comment on the 2020 membership growth. Wanted to ask about margins. Should we expect margins to normalize lower again in 2020, or do you see the current margin as sustainable into next year?
I think when you look at margins, it's going to be a function of the business you continue to attract, how long you retain your existing membership. There's multiple variables there. What's important to me, and I've said this, though, we talk about a 5%-10% range. We see nothing that's going to change that. It's going to move up and down within that range based on retention, on the membership you attract, a series of things. That's to be expected in any insurance business. Now, as it grows, and as you keep people longer, you'll see some leveling off of it, because they're being managed, they're under control. The law of larger numbers starts to apply.
I guess going into as we look at 2020, we'll give more guidance in December, which is our standard practice, versus trying to get into too much at this stage. We'll have more history at that point to understand what our retention is, what the membership is. I remind you, every year we've retained 80% of the previous year's membership. All those factors come into play, Justin.
Sure. That makes sense. Maybe another way to ask it is just if you're saying 5%-10% is a reasonable range for margins, and obviously we could pick the midpoint of 7.5. If we think about 7.5 as the kind of midpoint of normal, would this year be below or above that midpoint?
I'm not going to get into that level of detail because, once again, it's a very large business and it's a growing business, and if we start getting that finite, we're losing sight of what this total $75 billion, soon to be a $100+ billion company is. You have to look at it in a totality, and we don't look at it and say, "Is it going to be 8%, 8.2%, 8.1%?" We look at the totality of all our businesses, and we beat from operations by $0.02.
Right.
That's kind of the way we look at it, Justin.
Totally reasonable. Okay. If I could just ask a quick follow-up on the MLR. You took up the guidance, as you mentioned, by 10 basis points. Just trying to figure out where that is coming from. The consensus was 86.3 this quarter, but I know you don't guide quarterly, so we could have clearly gotten it wrong. I'm just curious how the quarter that MLR looked versus your internal expectations. Was the 86.7 in line, or was it a little bit higher, or are you taking up the back half of the year because of the higher retention rate and really the second quarter was fine relative to your expectation?
Yeah, I mean, versus our expectations, it was in line. I mean, the Marketplace business was in line. That's our view.
86.7 is pretty much where you had expected it, and the 10 basis points guide up for the year is really just taking up the back half of the year for higher retention. Is that the way we should think about this?
Yes. That's correct.
Okay.
Remember, Michael explained this at the beginning. Remember, there's deductibles and maximum out-of-pockets, right? The longer You can do the math there.
Sure. Maybe you could just tell us, the member that drops off in the middle of the year, that you typically see. What's the MLR on that member versus the MLR of someone that's been here?
Justin, we have 1.9 million members. You want to tell me which one you're thinking about? I mean, seriously, I'm being a little bit of a smartass here, Alex, excuse me. I mean, you think about it, you have 1.9 million members. One could have an MLR of 72%, one could have an MLR of 85%. I mean, there's no way of doing that.
All right, I'll leave it there. Thanks, guys.
Thank you.
The next question comes from Val Diakov with Citi. Please go ahead.
Thanks. Good morning. Just wanted to clarify quickly, the incremental benefit from risk adjustment comes through the MLR, right? It benefited the ratio by about 20 basis points this quarter. Is that fair?
You're correct. It does come through the MLR as a component of revenue, right? It's a revenue adjustment.
Right. Okay.
Yeah.
All right, fair enough. Second question, maybe just back to the exchanges here, but a little bit of a different angle. Can you talk about the provider networks on the exchange at this point, how it's kind of evolved over time, of you sort of adding or narrowing offerings? I guess more importantly, can you help us on in terms of the annual rate bump to providers? Is that similar to kind of a composite Medicaid rate that you typically see in that low single-digit range? Or is it more like a pure commercial rate bump that may be more in the CPI plus level? Maybe more importantly, how has that trended over time? Can you give us a sense for that as you've obviously entered into new markets? Thanks.
Yeah, that's a lot there. First, we're not going to get into the provider-specific rate increases for providers, right? The other thing is I would say is we've continued to manage our provider network to offer a competitive product and be successful and grow the business. That's what we continue to focus on, that's what we continue to do, and make sure that our members have access to the highest quality care.
I just might add that I've commented we're moving more and more to these risk-based contracts, and providers that manage the business, and it goes back to the old fashion of managing the patient, can do incredibly well with that because it puts them in control of how they're practicing medicine. We think there's real opportunities for providers to do very well in our business.
Okay. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Michael Neidorff for any closing remarks.
Thank you. I just want to emphasize that as we sit here as a group today, we feel very good about the business and where it is. It's performing well. It's firing on all 12 cylinders. On balance, as you can see, there's the growth, there's a beat of operations. We're dealing with all the issues. We look forward to continuing to report what we consider to be very successful quarters. Thank you for your time and look forward to seeing you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.