Good morning, and welcome to the Centene 2018 4th Quarter and Year End Financial Results Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President of Finance and Investor Relations. Mr.
Kroll, please go ahead.
Thank you, Anita, and good morning, everyone. Thank you for joining us on our 2018 Q4 and full year earnings results conference call. Michael Neidorff, Chairman 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 atcentene.com. A replay will be available shortly after the call's completion also atcentene.com or by dialing 877-344-7529 in the U. S.
And Canada or in other countries by dialing 412 317-0088.
The playback code for both
of those dial ins is 10,120, 7,647. 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 recently filed Form 10 Q, which is dated October 23, 2018, Form 10 ks dated February 20, 2018, 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 may also refer to certain non GAAP, that's generally accepted accounting principles. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our Q4 2018 press release, which is available on the company's website atcentene.com under the Investors section. Finally, a reminder that our next Investor Day will be on Friday, June 14, 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 Q4 and full year 2018 earnings call. During the course of this morning's call, we will discuss our Q4 and full year 2018 financial results and provide updates on Centene's markets and products. We will also bring you up to date on the integration of Fidelis and the regulatory and legislative environment. First, let me provide commentary on healthcare legislation, legal and regulatory environment.
We are hopeful that the divided government leads to greater constructive dialogue from both parties when it comes to healthcare policy. It is clear Medicaid and the services we provide are needed more than ever. Clearly, numerous governors from both parties strongly supported Medicaid Managed Care during the repeal and replace debate. We also have seen Utah, Nebraska and Idaho buy Biod Initiative recently passing Medicaid expansion. It also appears from the most recent marketplace enrollment figures, there continues to be consistent demand for affordable high quality healthcare coverage.
As stated in the 2020 proposed payment notice, we support CMS' goal of maintaining a stable regulatory environment allowing for greater product predictability. The payment notices CMS' annual regulatory and financial guidance for the marketplace. Importantly, we support the administration's continued efforts to give states greater flexibility via 13321115 waivers. This works well with our local operating model where we have strong relationships with providers and regulators. We look forward to working with the states who are on the front lines in making sure all of their citizens have access to affordable high quality healthcare.
Next, I'd like to recap Centene's highlights of 2018. 2018 was another year of strong growth and accomplishment for Centene, capped off by the robust 4th quarter results we reported this morning. In 2018, we added 1,800,000 members, surpassing the 14,000,000 mark. We grew revenues by 24% to $60,100,000,000 and adjusted EPS by 41% to $7.08 The HBR improved 140 basis points year over year to 85.9%. The adjusted net income margin improved 50 basis points to 2.5%.
Cash flows from operations remained strong at 1.4 times net earnings. During the year, we stuck to our business as usual approach. We have not been distracted by ACA legal headlines. As we agree with all the legal experts, it will be reversed. While there has been chatter about possible disruptions in exchanges, individuals like to have an insurance card with comprehensive coverage.
We remain the leader in the AC marketplace. In 2018, Centene successfully entered 3 new exchange markets and expanded in 6 existing Ambetter markets. I remind you, in 2018 year over year, our exchange membership increased by approximately 500,000 members or 52 percent to 1,500,000. Please note this is ahead of our initial expectations. In Medicaid, we successfully reprocured contracts in Arizona, Florida, Washington and Kansas and won 2 new Medicaid contracts in New Mexico and Iowa.
Overall, our win rate in Medicaid RFPs remains an industry leading 80%. Also, our medical management efforts and network initiatives continue to gain traction and help drive the improved HBR I previously noted. In addition, it is our strong organic growth we engaged in strategic M and A and investments throughout the year. In 2018, we closed the acquisition of Fidelis, the only statewide health plan in all 62 counties of New York. During the year, we began integrating Fidelis, now our New York health plan into our enterprise.
We are very pleased with how the integration is going. For example, on January 1, we moved all Fidelis employees to Centene's HR systems without incident. Fidelis has also been on our general ledger since the day we closed the transaction. We remain on track to achieve the accretion and synergy targets. We anticipate high single digit percentage accretion to adjusted EPS in the 1st 12 months following the close and lowtomidteens percentage accretion to adjusted EPS in the 2nd full year following the close.
We are also anticipating generating approximately $25,000,000 in pre tax net synergies in the 1st 12 months following the close and $100,000,000 in total pre tax net synergies in year 2. On a run rate basis, we expect Fidelis to add approximately 12 $1,000,000,000 in revenue and over $550,000,000 in adjusted EBITDA, including net synergies. In addition to Fidelis, we completed the acquisition of MHS Services, a national provider in healthcare and staffing to correctional systems and other government agencies. MHM was previously our joint venture partner in Centrillion. We are now providing correctional services in 15 states with 32 contracts.
We also completed the acquisition of Community Medical Group, CMG, a leading at risk primary care provider in Miami Dade, Florida. CMG has 15 clinics that focus on low income beneficiaries with an expertise in social determinants. We increased our ownership in INTERPRETA, a technology company focused on clinical and genomic data as well as real time analytics. Our total ownership is now 80%. We made an investment in Rx Advanced Technology Based Pharmacy Benefits Management Frac Group.
We support a shift towards a more transparent PBM model that is sustainable with higher quality and lower costs for consumers. Over the past year, we have been advocating for net pricing versus rebates. Lastly, Centene purchased a controlling stake in University Hospital of Tullion in Madrid. This is an important addition to our Ribera Salud model, which sets the standard for successful public private partnerships in healthcare. As a final point, we introduced Centene Forward, a transformative program to enhance key parts of our enterprise.
We expect Centene Forward to realize up to $500,000,000 in savings over a multiyear period. It is important to note that this is not a short term effort to have savings immediately go to the bottom line in 2019. Rather it is a self generating effort to reinvest capital into additional capabilities and technologies that better position Centene for long term growth, increased margins and profitability. Moving on to market product updates. First, we'll discuss Medicaid activity.
Florida, in December, as part of a successful re procurement, we continue providing physical and behavioral healthcare services to the state's Medicaid program. We are now statewide in all 11 regions. Importantly, this large geographic footprint results in additional membership and revenue that our previous from our previous contracts. Kansas. On January 1, our Kansas health plan renewed its contract to continue providing managed care services for the state's Medicaid program.
This was a successful re procurement of an existing contract. We currently serve approximately 130,000 recipients in the state. New Mexico. Last month, Santene began serving recipients enrolled in New Mexico's Medicaid Managed Care Program. We currently have approximately 65,000 members while still early in the process.
The launch is progressing as expected. Pennsylvania. In January, we began serving over 30 1,000 beneficiaries enrolled in Pennsylvania's long term care program in the Southeast zone. We launched the Southwest zone in January of 2018. We now serve over 50,000 long term members in the state.
The 3rd and final zone will be implemented by January of 2020. Our participation in this major program reinforces our national leadership position in long term care. North Carolina, we are pleased to be selected in 2 regions in the North Carolina Medicaid Managed Care Program. These two regions are among the largest in the state. Our joint venture Carolina Complete Health is the only provider sponsored winner in the RFP.
This will result in better health outcomes for members at a lower cost for the state. The contract is set to commence February 1, 2020. As this was only awarded yesterday, we will provide more details on our Q1 earnings call. I do want to highlight, however, that we believe that the state did not fully understand our innovative approach with providers in North Carolina. However, we believe our partnership with the North Carolina Medical Society and the FQHCs will be proven to be the right model for success in that market.
We are a believer in the provider led entity approach for growth and quality, and we expect to be the best partner the state has in its Medicaid program. We are currently considering an appeal and helping them to understand what this innovative model means and how we can help manage costs and improve quality. Next, Centurion. Florida, in December Centurion began operating under an additional new contract providing comprehensive healthcare services. This new contract covers an average of 1425 detainees in La Lucia County Detention Fair Facilities.
With the addition of this new contract, Centurion is now statewide in Florida. New Mexico. In February, Centurion began providing comprehensive healthcare services to detainees in the Metropolitan Detention Center in Albuquerque. Centurion is providing a wider range of healthcare services to an average detainee population of 1550. Arizona.
In late January, since Troy was notified by the State of Arizona of its intent to award a contract to provide healthcare services to inmates housed in the state's prison system. The contract is expected to begin in July of 2019. Under the agreements, Centurion will provide healthcare services to an average daily population of approximately 34,000. Now health insurance marketplace. Our marketplace business continued to perform well in the 4th quarter.
At year end 2018, we served approximately 1,500,000 exchange members in 16 states. For 2019, our continued focus on providing high quality affordable healthcare led to a very successful open enrollment. In a national market that shrunk almost 3% Ambetter grew approximately 15% and now has approximately 20% national market share. We achieved this while maintaining our pricing discipline. We began offering exchange products in 4 new states in 2019.
We also expanded our footprint in 6 of our existing Ambetter states. In January, we had almost 2,000,000 paid members across 20 states. This represents a year over year increase of 250,000 legacy Ambetter members as well as 80,000 Fidelis members. The 250,000 increase is well ahead of our most recent December Investor Day was 50 to 150,000. The key demographics of these members remain consistent with the comments we made at our December Investor Day.
Excluding Fidelis, approximately 90% are eligible for subsidiaries. Metal tier and other demographics are consistent with prior years. Our retention rate is maintained at 80%. We expect to have another strong year of operations in our industry leading marketplace business. On the Medicare, at year end we served approximately 417,000 Medicare and MMP beneficiaries.
This represents year over year growth of approximately 83,000 or 25%. Consistent with our growth strategy, we have expanded our geographic footprint and are in 21 states in 2019. We continue to take targeted approach to growing our Medicare Advantage business. As we commented on December Investor Day, we priced for margin stability in 2019 recognizing the headwinds that came with a lower start rate. As a reminder, we expect Q1 2019 MA membership to decrease by approximately 20,000 members.
This is due to a repositioning Fidelis to get back its 4 star rating. We continue to expect 2019 MA revenue and membership to be flat compared to 2018. We will return to a 4 star MA parent rating for the 2020 plan year. We expect this will have a positive impact on multiple new plans, including the joint venture we announced with Ascension Healthcare. This should allow us along with other product enhancement efforts to accelerate growth in MA in 2020 beyond.
I remind you, it is not how fast, but how well it grows. Shifting gears to our rate outlook. For 2018, our composite Medicaid rate increase was 1%. We are expecting a composite Medicaid rate increase of 1.5% in 2019. Separately, CMS issued the 2020 advance notice last week and preliminary Medicare advantage rates appear to be in line with our expectations.
We continue to see as well as anticipate overall stable medical cost trends, including flu, consistent with our expectations in the low single digits. In conclusion, 2018 was another successful year for Centene. Our strong 2018 results reaffirmed our growth momentum for 2019 and beyond. Our pipeline of growth opportunities is robust and we remain focused on margin expansion. We are raising our 2019 guidance to reflect the higher than expected open enrollment for marketplace, the Centurion win in Arizona and the win in Madrid or the acquisition of the Madrid Hospital.
Before I turn the call over to Jeff, I would like to remind you that the approved 2 for 1 stock split will be distributed tomorrow, February 6. The split stock enhances liquidity for shareholders in line with Centene's market cap growth. Importantly, it moves our float to a level appropriate for an enterprise of our size. Thank you for your interest in Centene. Jeff will now provide you further details on Q4 and full year 2018 financial results as well as our increased 2019 guidance.
Jeff?
Thank you, Michael, and good morning. This morning, we reported strong 4th quarter and full year 2018 results. 4th quarter revenues were $16,600,000,000 an increase of 29% over the Q4 of 2017 and adjusted diluted earnings per share was $1.38 this quarter compared to $0.97 last year. Both the 4th quarter and full year results include additional costs associated with the marketplace open enrollment period. During the Q4, we invested an additional 0.04 dollars per diluted share into growth related initiatives, including member outreach efforts associated with the marketplace business.
This was above our forecast and previous business expansion cost guidance range. The strong 4th quarter caps off a very successful year for the company. Total revenues grew 24% in 2018 to $60,100,000,000 driven by the acquisition of Fidelis Care, continued growth in the health insurance marketplace business, product and market expansions and the return of the health insurer fee in 2018. This growth led to record adjusted earnings in 2018 with adjusted diluted earnings per share of $7.08 an increase of 41% over 2017. The growth in earnings year over year was driven by the Fidelis acquisition and the growth in the marketplace business.
Before I get into the details, I want to remind everyone of the upcoming stock split. The split was declared by the Board of Directors on December 12, 2018, to be distributed on February 6, 2019, to stockholders of record as of December 24, 2018. The split is not reflected in this morning's earnings release unless otherwise noted. Now let me provide some more details for the Q4. Total revenues grew by approximately $3,800,000,000 year over year, primarily as a result of the acquisition of Fidelis Care, growth in the health insurance marketplace business, the expansions in new programs in many of our states in 2018, including the Illinois contract expansion and the Pennsylvania LTSS program, other acquisitions, including MHM and CMG and the return of the health insurer fee in 2018.
This growth was partially offset by lower revenues in California associated with a reduction in pass through payments and the impact of the removal of the in home support services program from managed care, which took effect in January 2018. Moving on to HBR. Our health benefits ratio was 86.8% in the 4th quarter this year compared to 87.3% in last year's 4th quarter and 86.3% in the Q3 of 2018. The decrease year over year is primarily driven by growth in the health insurance marketplace business and the reinstatement of the health insurer fee in 2018. These decreases were partially offset by the acquisition of Fidelis Care, which operates at a higher HBR.
Sequentially, the 50 basis point increase in HBR from the Q3 of 2018 is primarily attributable to the impact of the IHSS reconciliation in the Q3 of 2018 and normal seasonality in the health insurance marketplace business. These HBR increases were partially offset by improved Medicaid performance over the Q3 of 2018. The marketplace business continues to perform well and membership remains strong as we ended the year with 1,500,000 members. We had a successful open enrollment season, adding approximately 250,000 members from our peak enrollment last year, excluding Fidelis. This growth, with the addition of the Fidelis membership, is expected to give us almost 2,000,000 members for 2019 peak membership.
The demographics of our membership remain consistent, and we ended 2018 with approximately $930,000,000 of risk adjustment payable and over $260,000,000 associated with minimum MLR rebates. Now on to SG and A. Our adjusted selling, general and administrative expense ratio was 9.9% in the Q4 this year compared to 10.5% last year and 10% in the Q3 of 2018. The year over year decrease was primarily due to the acquisition of Fidelis Care, which operates at a lower SG and A expense ratio. This decrease was partially offset by growth in the health insurance marketplace business, which operates at a higher SG and A expense ratio and the impact of the removal of the IHSS program from California's Medicaid contract.
The sequential decrease is primarily due to the cost associated with the end of our contract with the U. S. Department of Veterans Affairs and the contribution to our charitable foundation recognized in the Q3 of 2018. Additionally, as commented on earlier, we spent $0.20 per diluted share on business expansion costs during the 4th quarter, which was $0.04 higher than our previous expectations. For the full year 2018, we spent $0.38 per diluted share on business expansion costs compared to our previous guidance range of $0.30 to $0.34 per diluted share.
Invested income was $67,000,000 during the 4th quarter compared to $53,000,000 last year and $80,000,000 last quarter. The increase year over year is due to higher investment balances mainly associated with Fidelis acquisition as well as higher interest rates on short term investments. Sequentially, investment income decreased due to lower investable balances associated with the payment of the health insurer fee, risk adjustment and the California Medicaid expansion minimum MLR rebate payments. Interest expense was $98,000,000 in the Q4 2018 compared to $66,000,000 last year and $97,000,000 last quarter. The increase year over year was driven by additional debt to fund the Fidelis acquisition and higher interest rates on our debt associated with our interest rate swaps.
Our effective tax rate for the 4th quarter was 32.5% and in line with our expectations. The 4th quarter tax rate is lower than the full year driven by the vesting of our employee stock awards, which lowers the rate in the 4th quarter. Now on to the balance sheet. Cash and investments totaled $13,500,000,000 at quarter end, including 4.78 $1,000,000 held by unregulated subsidiaries. Our risk based capital percentage for NAIC filers continues to be in excess of 3 50% of the authorized control level.
Debt at quarter end was $6,700,000,000 which includes $284,000,000 of borrowings on our revolving credit facility. Our debt to capital ratio was 37.4 percent excluding our non recourse mortgage note and construction loan compared to 40.3% at 4th quarter last year and 36.9% at the Q3 of 2018. Our medical claims liability totaled $6,800,000,000 at quarter end and represents 48 days in claims payable compared to 51 days for the Q3 of 2018. As expected and highlighted on our Q3 earnings call and Investor Day in December, the DCP decreased during the quarter associated with timing items and the Fidelis acquisition from the Q3. We continue to expect days and claims payable to be in the mid-40s range on a long term basis.
Cash flow used in operations was $634,000,000 in the 4th quarter and cash flow provided by operations was $1,200,000,000 for the full year 2018 or 1.4x net earnings. Cash flow for the quarter was negatively impacted by the payment of the 2018 health fee of approximately $700,000,000 and the repayment of approximately $370,000,000 of Medicaid expansion MLR rebate payments in California, which was previously accrued. Before we discuss 2019 guidance, let me provide an update on the Fidelis acquisition. Through the 1st 6 months, Fidelis has performed in line with expectations, including the realization of anticipated synergies. The integration continues to go well, and we expect to achieve our previously communicated synergy targets for the 1st and second years post acquisition.
Now on to our 2019 annual guidance. Our updated 2019 annual guidance is included in our press release issued this morning. We have provided our earnings per share guidance on a split adjusted basis for convenience. In summary, we have increased both our 2019 total revenues guidance at the midpoint by $600,000,000 and adjusted earnings per share by $0.04 at the midpoint on a split adjusted basis to reflect the additional membership growth in the marketplace business, which came in above our expectations, the acquisition of Torrejon in Spain and the new contract win for Centurion in Arizona. In summary, our full year 2019 guidance on a split adjusted basis is as follows: total revenues of $70,300,000,000 to $71,100,000,000 GAAP diluted earnings per share of 3 $0.65 to $3.83 adjusted diluted earnings per share of $4.11 to $4.31 an HBR of 86.5 percent to 87 percent and SG and A ratio of 9.3% to 9.8 percent and adjusted SG and A ratio of 9.3percentto9.8percentandeffective tax rate of 25% to 27% and diluted shares outstanding of 421,500,000 to 422,500,000 shares split adjusted.
In conclusion, 2018 was a successful year for the company, led by strong top and bottom line growth. The performance in the 4th quarter and continued growth That concludes my remarks. And operator, you may now open the line for questions.
Thank you.
We will now begin the question and answer session. The first question today comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.
Great. Thanks. I wanted to focus on the exchanges. I guess the first question there is, you mentioned retention is similar and the demographic is similar. Any markets in particular that you would highlight as kind of faster growing than average?
No, I think we have a very balanced approach to our markets. It's because the different markets have different sizes, so we have different penetration, but it's very balanced across our markets. And the demographics across markets are the same, the metal tiers, everything about it, Kevin, it's just consistent with what we have historically seen.
I was going to ask also, Jeff, your comment there where you said that at the very end, you said the growth in the marketplace business provides tailwinds for 2019 and you expect to drive long term growth and margin expansion. I wasn't sure if you were saying you expect additional margin expansion in the exchanges or whether that was a broader comment about the overall business seeing margin expansion?
No, that was an overall broader comment. I mean, I think the tailwinds comment is evident by obviously, we haven't even closed the books for January and we're raising guidance, right? So membership came in higher than we expected and we have obviously the new win in Centurion in Arizona and the acquisition and we're updating guidance for those items.
All right, great. Thank you.
The next question comes from Josh Raskin with Nephron. Please go ahead.
Hi, thanks. Good morning.
I want
to stick with the exchanges as well. Good morning, Michael. Two questions, I guess, related to the exchanges.
One is, could we get an
updated revenue contribution in terms of your total top line of that $70,000,000,000 ish or so? How much of that is actually exchanges? And then is there any assumed margin reset? It doesn't sound like there's any reason to think that. I know you've talked about conservatism traction from the Oscars or even new competitors in any of your markets?
So sorry for a bunch of questions on exchanges, but that's it.
Go ahead, Jeff. Yes. So Josh, a couple of things. I think you could probably bridge our Investor Day slides to get there. But for 2019, I would say around the $10,000,000,000 to $1,000,000,000 mark would be for the exchange product.
And as far as margins, I think what we mentioned at our Investor Day in December was kind of the what we're projecting margins for 2019 to be similar to 2017, 2016, 2015, which was between the 5% 10% range. And I think that's exactly what we're expecting for 2019.
From a competitive standpoint, we're not seeing activity that in any way affects us.
Okay. You're not seeing any pockets of growth from some new entrants or anything like that in any of the specific markets?
No. If anything, I mean, we like to see more people out there because it creates more noise and more activity. And in a competitive environment, we tend to do very well.
Got you. And then just one last one. I just want to ask on North Carolina. Could you size sort of the start up and development cost? I know you guys have been in the state.
You guys were one of the earliest in there. I know you've entered the exchanges as well. Any way to size what that total cost of kind of market entry was in the North Carolina?
We recognize that we just got the information yesterday. I'd like to suggest that we delay that comment to the next quarter to the Q1 call, if I may, Josh. I mean, we have some ballpark numbers, but we would like to and something like that, we want to be fairly specific. We are talking about an appeal of this. So I don't want to put anything out there that can in any way mislead.
Do you agree with that?
Yes. No,
I would agree on the specific number. I would say that included in our guidance that we gave today are our costs. We're refining those estimates obviously based on what we learned yesterday.
The next question comes from Scott Fidel with Stephens. Please go ahead.
Hi. Thanks. Good morning. I just wanted to follow-up on North Carolina and just as you continue to do the postmortem today on the results yesterday, Just interested in as you evaluate the awards, what you think were the key reasons why the state didn't award Centene a statewide contract? And then Michael, as you mentioned, you're considering the appeal.
Maybe help us think about some of the key sort of substantive points that you think that Centene can raise around the appeal?
Yes, I think, one, I want to back off. I mean, we're not unhappy. When you win the largest service region and the 3rd largest, it's meaningful numbers and I have them here somewhere I could quote. So it's not a I don't see this as a loss, I see it as a win. I think as I said in my comments that the state did not fully understand the innovative approach we had working with providers, which I personally done before.
And I think as they understand that, this was something that was in the legislation that they wanted and we have worked very hard and we do believe that the partnership when they understand it with the FQHCs, the Medical Society and others will prove to be a very successful model in North Carolina when you look at the history of what their models have looked like. So I think we're going to be a strong provider in those two regions. We're going to take them through what happened and we're going to understand their decision making because you win 2, you say if it works there, this model, maybe they're trying to understand it more and they didn't want to go too far with it until they do. I can see lots of reasons. But so we'll work with them, we'll appeal it.
But regardless of what happens, we believe in being a strong partner with states and work with them. And I think it's going to have a short and longer term very positive outlook for quality and cost effectiveness in their state.
Got it.
If I could just
ask a related follow-up to just on I know you're not ready to size the revenue impact from North Carolina, but I think from all of our end, we're trying to sort of sort out just what the margin profile of the North Carolina business can look like because you've got some different dynamics in terms of the JV with providers and the minimum MLRs in North Carolina and some other factors. Just sort of, I guess, conceptually, how do you
guys think about sort of
the margin profile of North Carolina more broadly relative to, let's say, sort of the more broader normalized margins that you target in the Medicaid book?
I expect our margins over time because as you know, we have always taken conservatism and said that for the 1st 3, 4 quarters as an investment period in the MLR, we booked high until we see that the system is understanding what's involved in the managed care profile and system that we use. And so I mean, I don't expect great, great margins in the 1st 3, 4 quarters. But I do believe that these margins will be consistent to better. And I think working with the providers effectively and you have to keep in mind, we have some pretty good systems with interpreter and CaseNet and other things that will help make these providers particularly successful. And so I see an opportunity for in 2020 because I mean we're not going to start immediately.
I do see over as the year unfolds some opportunity for some upside on it. So and I think we're going to be putting together a model here that others will want to emulate over time.
Okay. Thanks.
The next question comes from Michael Newshel with Evercore ISI. Please go ahead.
Thanks. Michael, can you address the contract extension disclosed last night and what it means for succession planning? Did the Board ask you to stay longer or did the impetus come from you?
No, I would say, when succession planning continues as originally planned with the Board, we continue to work through that. And as we were talking about succession planning, the Board asked me if I'd be willing to extend it. And I said that I would. I mean, we're having fun, we're having success. I don't want to jinx it, but we're blessed with good health.
And so we have a great team here that it's fund the lead that's taking on more and more of the load. So I can continue what I'm doing and maybe even add a couple rounds of golf.
So succession planning still like continues in the meantime?
No, no. The succession planning can be a point in time, but it can also be a process that could be implemented at any time one feels it's appropriate to do so. So I'd rather take that approach and it's business as usual. And they it was their idea to extend it, so because I've had a lot of questions about it. And to give a sense to all of you and everyone and the people in the company, there is there will be continuity.
And we'll continue down the line.
Got it. And maybe if
I can just squeeze one more in. And can you just also confirm whether you're buying the QualChoice health plan in Arkansas from CHI and what the financial impact and timing might be?
Yes. We have the terms decided. We have not closed on it yet. And now we have closed Jesse when later this month next month.
Yes. So we have executed the contract on that, Mike. So we would expect to close in the Q2. And I would just say, I mean, this is an end market transaction. So we tend to like those and look for those.
So not material in the macro scheme, but certainly Arkansas has been a good market and we're excited to expand our presence there.
Great. Thank you very much.
The next question comes from Peter Costa with Wells Fargo Securities. Please go ahead.
Thanks and congratulations on the quarter. I wanted to ask about going forward. First off, in North Carolina, what do you expect the start up costs will be in 2019 2020? And then because your business doesn't start till 2020. And then also on 2020, can you talk about what's going to happen with silver loading and the cost sharing subsidies and what might change there?
Yes. So Pete, this is Jeff. I'll handle the first question on the cost. I think what we said was we have some costs in for our 2019 guidance. But since we just got this information yesterday, it's a little early and we're reevaluating those costs, I guess is what I would say.
So early for us to give a pinpoint number on that, given the information that came out yesterday. And on the second, I mean, we're not talking about 2020 guidance here today. So And I don't know, Kevin.
Curious if you want to talk about what might happen in Washington this year regarding the cost sharing subsidies and the way silver loading works and if that may change for 2020 relative to HHS is allowing it for 2019, but it seems to be more up in the air for 2020.
Hey, Peter, it's Kevin. Yes, you're right. If you look at the 2019 payment notice, they make illusion to that. I think, again, it's premature to think about what that might actually look like into 2020. We're going to be prepared to pivot irrespective of what the policy decides.
And again, as you know, within CMS, a year is a long time. So we'll see what happens.
Yes, I think also we do have 2 sides to the government now looking at these issues. And our feeling is that that can be positive and if we get some good constructive discussion going. And so I am trying we're going to play every part we can to move it to policy versus politics. Then there may be some real opportunities there, Peter.
Okay. Thank you.
Next question comes from Sarah James with Piper Jaffray. Please go ahead.
Thank you. In North Carolina, did Centene submit a bid as a health plan also or only a PLE? And I'm wondering since the provider led entities could be awarded regions and health plans statewide, can you speak a little bit to the strategy around deciding to submit a bid as a PLE?
Well, we actually did submit on both sides of it, but we emphasize the PLE. You have to go back and look at the historic programs they've had in the state and the role providers have had. And I think working with the State Medical Society and they've been great constructive partners and they really want to deliver high quality care. They understand the cost issues and they want to work with us because of our systems and how we can support them doing a better job and everybody doing well, we decided that's a good place to be. And I still believe that, Sarah.
And I think over time, it's going to prove to be a very effective model in markets like North Carolina with the history they had. So this is one of those things that I think time will prove to be on our side. And so it's going to be business as usual. We did do both, but we found a real need to emphasize this side of it. And I think the state just I think they understood some value in it and that's why they did give us the largest and 3rd largest regions as opposed to saying, no, we're not going to do any of this provider led organizations, but we're going to go back and talk to them and see if that can be expanded some through the appeal process.
If not, we'll still be a good partner no matter how it comes out with. So it's going to be a sizable business, which will size for you on the Q1 call.
Got it. That makes a lot of sense. And one more question, if I can. If I look back at 2018, there were points of 2Q to 3Q where consensus didn't really get seasonality right on a couple of different lines and that caused some confusion. So I'm wondering if there's any commentary you can offer around 2019 seasonality or cadence and how you see that differing from 2018?
I want to make an opening comment and let Jeff take it up. Of course, we don't look at consensus. We look at the business and how it's developing. But Jeff, do you want to talk about seasonality? Yes.
I think what we said in our December Investor Day, we kind of gave we've been trying to give more insight, I guess, to the seasonality of the business, giving a first half, second half view as far as how earnings progression goes. And I would say that the comment we made there, I think, were consistent. So over 60% in the first half of the year. And again, as we continue to grow the marketplace business, that shift continues to happen. I mean, the real driver of our change in seasonality is really the product mix.
It's the diversification of the product mix. And so to the extent you have a higher mix of exchange, then you will pull more earnings forward to the first half of the year because of the number 1, that's when we have the highest level of membership and number 2, that's when we have the lowest HBR as
a result of deductibles.
Okay. So even though you guys are
sixty-forty 6040 mix is an appropriate way to think about the year?
Yes, yes. I would think that's a good place to start.
Thank you.
Thank you.
The next question comes from A. J. Rice with Credit Suisse. Please go ahead.
Thanks. Hi, everybody. Hi. First of all, just to ask about Fidelis a little more. It sounds like generally on a broad sense everything is tracking.
Are there any pockets as you drill down where you've seen new opportunities now that you've had it for a while? Are there any areas where you're seeing challenges or that weren't anticipated?
I'll start off and I was going to add to Zafe. I think it's incredibly well run company. We're pleased with what we've had. Father Farley will continue to work with us in social responsibility for some obvious appoints a new CEO, appoints a new CEO, we did and great continuity there, the whole team is in place. In fact, he commented to me the other not too long when he was in that the turnover rate since we announced the acquisition has been the lowest they've seen historically.
So people are very pleased with it. I think the opportunity there are opportunities to continue to grow. There's opportunities to help them with their medical loss ratio using our systems. So it's but it's but they're hitting all the numbers. They're functioning on all 8 or 12 cylinders depending how many you have in your automobile.
And so I think from every aspect of it, we're I made a comment one day that if we could find more businesses like that, I just want to do 1 in the morning and 1 in the afternoon. They're really a well run company.
Okay. I was going to also ask about in Mississippi in the press release you highlighted that you completed the implementation of the new PBM model. Can you update us on your thought about rolling it out to other markets? And will you wait for sort of proof of concept in Mississippi
to play out for a
little while or how should we think about that?
No, we're actively rolling it out now and I'd like to roll it out as fast as we can. But once again, I want to make sure it's well proof of concepts there. It's working incredibly well in Mississippi and we're confident we're going to roll it out into additional markets. We are right now as we speak and by the end of 2020 we will be in all the markets. And if I can pick it up in some way, we will.
But once again, I'm not going to overload it. But it's a great system. It's going to prove to be I think, where pharmacy benefits should be headed.
Okay. What's this most significant economic benefit of making that transition that you're seeing in Mississippi?
Well, there's administrative expenses, it's cloud based. We can reduce the admin costs significantly. And we're working with, I mean, John, Scott and Robbie and the people there are really innovative and creative and I'm working with them now because I have a commitment to figure out is there some way to move to net pricing as opposed to rebates. And I think they have the systems, skills and capabilities that we can start talking about those kinds. We are talking about those kinds of things with them.
It's not going to be instant, but so there's a lot of significance in what they're doing. It's very innovative and as we're able to demonstrate more and more of it, you'll see it.
Okay. All right. Thanks a lot.
The next question comes from Lance Wilkes with Sanford Bernstein.
Could you talk a little bit about in the Medicaid book, medical cost trend and management? In particular, if you could just kind of hit upon some color on what's doing better than expected, what's doing worse, how important steerage and restricted networks are? And what's going on with risk profile at the state level with some of the reenrollment efforts that are taking place at those levels?
Jeff, do you want to comment on that? Yes, yes.
A couple of things. We did see the Medicaid improvement over the Q3. Really, it's a combination of many things. A combination of the med management, network initiatives, premium rate adjustments, combined with I think what we saw was stable cost trends in the Q4. So your comment about risk profile, I mean, you really have to go on a state by state basis.
So if you aggregate the business, I mean, that's one of the benefits of diversification. If you aggregate the business, I would say that the risk profile has remained relatively consistent.
I'd like to add that if you look at the scale and size we have in most markets, albeit in the newest markets, 65,000 in Mexico and Elgrew. But when you have the size we do, you get a balanced book of business. And we were expecting to have some that are acutely ill and some that are healthier. And if we look across the whole book and we're seeing that and that's really the law of large numbers as much as anything else coming into play. So that's part of the benefit of our size, being the largest Medicaid provider.
And but also as Jeff highlighted, you have 31 states, it puts you in a strong position because as I tell investors, it's no different in their portfolios. At any given time, they might have one stock that's not performing well or 2. Well, we can have a market that has a couple of issues, but we have others doing well, they offset while we correct the one that has an issue. So it's a balance that gives us a certain comfort.
And can you just talk to the or just clarify on the behavioral membership for the quarter? What was the decrease in that and did it go into an integrated medical offering?
Yes, it's moving and we're moving more and more to the integrated medical. And I want to do that as quickly as we can. I really believe that's an important place to be. I have used publicly the example that somebody is diagnosed as a new diabetic, I sure want them to talk to a behavioral person as quickly as they can. It gives you more control of the total medical condition.
Yes, the membership decrease, we previewed this at our Investor Day. It was really a behavioral health only program in Arizona that was integrated with the traditional Medicaid program. And so while the membership decreased quite a bit, the revenues are up on a consolidated basis. So lower membership, higher revenue because it's been integrated with the physical health.
Got you. Thanks.
The next question comes from Steve Tanal with Goldman Sachs. Please go ahead.
Good morning, guys. Thanks for the question.
Good morning.
Just one quick one on the marketplace. I missed the minimum MLR accrual number. If you could just give us that once more and then maybe just let us know where 2018 margins ended for the business?
Yes. So I think $260,000,000 approximately $260,000,000 And as I said in our December Investor Day, we're not going to give it it's a competitively priced product. We're not going to give a specific margin number.
Okay. All right. Fair enough. And then the other question that I had, we're hearing a little bit more sort of anecdotally around the eligibility redeterminations in Medicaid potentially affecting risk pools and making for a bit of a short term blip as some of the MCOs go back to the states for better rates. What are your views on whether or not that's happening?
And if it is, maybe is this part of sort of the uptick in Medicaid rates where you're looking for a 1.5 composite increase in 2019 versus 1 in 2018? Or how should we think about that if that's not really behind that?
Again, I think you have to go on a state by state basis. We have seen where redeterminations have changed the risk pool and states have been relatively quick to react. I wouldn't necessarily call that meaningful. It's certainly helpful, but it's not a meaningful driver of the medical costs if you look at the actual volume of redeterminations. But we actually have had states do adjustments, I would say, relatively quickly after the redeterminations.
And when you look at acuity mix, it's different by state. Some states have had redeterminations that had no effect on acuity. Yes. So it's
once again, it's the law of large numbers, large number of states and the mix.
That's helpful. And then the acceleration in the rate, is there anything specific we could sort of think about is driving that?
The acceleration in what rate, the composite?
The composite rate going to 1.5% versus 1% in 2018.
I think I mentioned at our December Investor Day, we do have certain states which aren't performing at the long term margin. Some of that is a rating issue. So we have seen and are projecting some improvement in rates into 2019. Perfect. Thank you.
The next question comes from Dave Windley with Jefferies. Please go ahead.
Hi, good morning. It's Dave Styblo in for Dave Windley. First question I had was just on the Medicaid business. It seems like that that's driving the MLR moving to the bottom end of your 2018 guidance range. I'd be curious just to get a better sense of where the margins are at this point and we're hearing peers obviously talk about net margins getting close to 3% over the next couple of years.
Do you think that's something possible for Centene or is there some business mix or other structural considerations that might make it hard for you guys to replicate that type of profile?
Yes, I commented on this in our December Investor Day where we've also grown faster than anybody else in the industry on the Medicaid side. And as Michael mentioned before, when you're starting up these new markets, you have compressed margins versus what you would say is your long term margin target. So I think from our standpoint, we still think 3% to 5% is a good margin target. And just because of the mix and the growth that we've had, it's probably different than our competitors.
And I would add something else. If you look at it, I know we showed the net margin up 50 basis points with what we gave you today. It's easy to say what you think is going to happen in the future. We prefer to say we have a continued focus on margin expansion and growing the business. And we tend to deliver against it versus saying I'm going to get it to X number I mean, that's easy.
I used to learn that they used to say in Brazil and other that paper will accept anything. I'm going to simply say that we're going to continue to grow this business and it's dramatic in my opinion. And we're going to work hard at margin expansion using systems and other capabilities we have to improve outcomes and reduce costs.
Sure. And Jeff, I think I heard you mention that the risk adjustment payables was at $930,000,000 at the 4th quarter. I think that's up about 37% year over year compared to exchange enrollment that's up a little bit over 50%. Can you just help us understand maybe the delta there why those don't look a little bit more comparable in terms of growth?
Yes. I mean, you have to look at member months, I think, is the one of the first things, so in total. But I mean it wasn't out of line with our expectations. So and I did give you it's 930,000,000 dollars And the reason I'm giving those is because typically what we file in the quarters, we file the 10 Q and you can pull those from the 10 Q. Obviously, here the annual report comes later.
So I'm just giving this to you now.
Sure. Thanks.
The next question comes from Matt Borsch with BMO. Please go ahead.
Thanks for fitting me in. So a question about as you look out with your the various providers that you're working with, Do you anticipate shortages as you look ahead the next 5 years or maybe even beyond that? And I'll ask a question in the context of a hypothetical that if you had one of the big drug retailers, let's say, with sort of ancillary personnel providing primary care services, would that be something that would be an attractive model for Centene to contract with?
I think we tend to kind of march our own drum and we work well with primary care. We work well with specialists. And sometimes when some of you have a chance to come to the office, we'll take you through our case net and our interpreter. We've shown some of it in the Investor Days. But there are systems that help physicians become very successful in treating their patients.
And give them the data and give them real time heated scores and things that they can get on. We're moving to where they can get on their iPhone. And so I believe that there are effective contracts in equity. You can have equity in contracts is what I'm trying to say.
And that's
kind of that tends to be the direction. If we see and I said this in Investor Day, if we saw an area where there's not enough positions for access and we're working with some governmental agencies in just that issue, well, we have CMG now that has the capability to open up a very successful clinics that deal with this population, social determinants, etcetera. And we'd ask Louise who runs it to move into region X and put together a little multi specialty clinic. So we think we have the capability to meet our members' needs. And once again, we all know who you're thinking of.
That's a big it's a big operation, but they also have a lot of commercial and other membership. And we're very focused in the government services area.
Great. Thank you.
The next question comes from Ana Gupte with SVB Leerink. Please go ahead.
Hi, thanks. Good morning. Thanks for fitting me in. Just wanted some color as you go into 2020 on a couple of drivers, growth drivers. Firstly, on exchanges, can you talk about what your growth profile might be there as you look at the demand and then the under penetration, the moves to short term plans and anything else in the competitive environment as you go into the selling season?
I'll start and Jeff, you can pick up. But the short term plans, I mean short term plans to manufacturer association have been around forever. The benefits are materially less. The majority of our membership has subsidies. So why jump out of something else that gives them a lot less benefits to go into it.
And those things still have to be proven out and they are just at the short term. And I think over time cost of short term plans go up because you have such a turnover that you have different disease states. And they have they've tried to overcome that by being able to underwrite health risk. And that itself, I think, is going to long term be a problem, not for us, but just for health states in general. So I think it's a long way.
It's an attempt to be disruptive, but I'm not sure how disruptive will be of our particular model. So I think that's it. So looking forward, I mean, I'll just remind, not you, but others just talked about our growth rate as we got bigger well, we're still maintaining a significant growth rate. They talked about the exchanges and all the disruption and how it is and we're up 15% this year when the market is declining. So we're just going to continue to business as usual and deal with the facts as we have them now.
And the facts say it's a good business, it's a strong business, and we know how to manage it. We have the systems to manage it. Does that help?
That's helpful. Yes. Thanks, Mike. On the MA side then for 2020, and I think it's really thought leading on the Ascension JV, but you do also have the 4 star contract at this point. Are you planning to do 2 different products, one that's co branded and then one that's with Ascension and then one Centene?
Or how are you thinking about 2020 as an opportunity for growth?
I think that's going to depend by market. It depends on the size of the market where we are, our network. We're going to work we're going to first work effectively with our partners at Ascension. And they we're not the only health plan they work with. So I mean, so it's it will be a mix depending on the size of market scale and what makes sense.
I mean, we have some markets we've had historically more than one product. So that's not a bad thing. I go back to my consumer packaged goods space. There was a time in Canada, we had 3 different soap pads and it worked very well.
Make sense.
Pardon me?
No, I think that makes sense. They're not customized. I mean, you'll be more customized by local market and depending.
I think what's key is I think what's key, Ann, is
you have the you have to have the systems and the overall capability to manage that multiplicity of opportunities. And that's where we're focused and I made comments we're going to continue to invest in technology. And I think we've demonstrated that we have the wherewithal to do it in a very meaningful way. It goes back to the $500,000,000 we're going to generate internally. So as to be able to invest in new technologies and new opportunities without affecting margins and the overall growth of the business.
Yes, truly that's a competitive advantage. That makes a lot of sense on the systems.
Thank you.
The next question comes from Steven Valiquette with Barclays. Please go ahead.
Great. Thanks. Good morning, everybody. Good morning. So there were some moving parts in Medicaid costs throughout 2018 for really Centene and really a lot of companies in the overall MCO sector.
But just given all the drivers you mentioned earlier that led to your sequential improvement in Medicare cost trends in 4Q 2018 and also just exiting the year. And guess when you add it all up, is there any extra color you can provide just on your expected Medicaid MLR assumptions for 2019 overall versus 2018 overall, just when comparing on an apples to apples basis? Thanks.
Yes. No, I commented on this at our Investor Day. I mean, we do expect Medicaid margins to improve in 2019 over 2018. And a lot of that's driven by a lot of actions that we've taken this year, which will have a full year run rate heading into 2019. But we do anticipate improvement in the Medicaid margins in 2019.
Yes. The bottom line is that the trends in 4Q 2018 are certainly very suggestive as you're on track to achieve that. So that's I guess the kind of the key takeaway,
at least from my perspective. Yes, it was a good quarter.
Yes, got it. Okay, all right. Thanks guys.
The next question comes from Gary Taylor with JPMorgan. Please go ahead.
Hi, good morning. Just a couple of questions left. The first is on the 2019 exchange enrollment. Have you guys disclosed or be willing to help us with on the 4 new states, how much does that contribute to the $250,000 increase ex Fidelis?
Jeff?
Yes. I guess what
I would say is consistent with what we've done historically, it's not the largest driver of membership growth. Typically, when we go into new markets, it's a test and learn approach. And I think we've followed that for the new markets this year. So it's not the majority of the driver of the membership growth. It really is coming from existing markets that we've had.
Okay. And then my second question is cash from ops for 2018 was weighed by about $1,000,000,000 I think with some of these California accruals that you ended up paying this year. If you normalize that, free cash flow looks quite good compared to earnings. As we head into 2019, just remind us, I don't recall from Investor Day you called out anything, but versus kind of your long term guidance of 1.5x to 2x cash from ops versus earnings, are there any material variances that for 2019?
No. I mean, I think the 1.5 to 2 times would apply. There is always timing issues, right? There can always be a timing of a state payment that you don't get at the end of the quarter or the end of the year that is subsequently paid within the next few days. And so and given our size in some states, those can be meaningful.
So you always have timing items that come up, but nothing that I can think of, similar to what we experienced in the over $1,000,000,000 of MLR payables in California.
Okay. Thank you very much.
The next question comes from Ralph Giacobbe with Citi. Please go ahead. Thanks.
Good morning. So you ended with 1,460,000 HICS members. You mentioned the 2,000,000 which I understand is sort of the peak number. And I think you also said $250,000 year over year. So just want to clarify that sort of year end membership on the Hicks somewhere in that kind of 1.7 to 1.8.
Is that the right way to think about it?
We don't actually provide the year end. Obviously, there's attrition from the peak membership. So what we're talking about is if you go back to our Investor Day slides, we would have said 2018 peak was 1,650, you're growing 250,000 on top of that, plus the addition of 80,000 with Fidelis gets you close to the 2,000,000 right? But we don't we're not providing a year end 2019 number.
Okay. Is there any reason to think that it wouldn't just be similar to prior years in terms of ending versus peak?
Yes. I would expect a normal attrition rate. That's certainly what we have forecasted.
Okay. That's helpful. And then just real quick, just effective tax rate we should use for 2019?
It's in the guidance. I provided that in the guidance this morning.
Okay. I missed that.
Yes, yes. It's in the press release.
Okay. And one more if I could. Can you just remind us of the level of incremental maybe strategic investment that you called out and just framing on sort of the ongoing expense or if you
see that pace slowing? Thanks.
Strategic investment for which year, 2018 or 2019? What specifically are you?
2019.
Yes. I think we said start what we call business expansion, business expansion costs. I think what we said on now this is on a split adjusted basis, obviously, dollars 0.12 to 0.14
dollars Okay. All right. 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.
Well, I just want to thank everybody for the questions, the time, and we look forward to continuing the record year after year. So have a good Q1. We'll talk to you soon.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.