Earnings Call: Q2 2020

Jul 31, 2020

Good day, and welcome to the Molina Healthcare Second Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Julie Trudell, Senior Vice President, Investor Relations at Molina Healthcare. Please go ahead. Good morning, and welcome to Molina Healthcare's Q2 2020 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky and our CFO, Tom Tran. A press release announcing our Q2 earnings was distributed yesterday after market closed and is available on our Investor Relations website. Shortly after the conclusion of the call, a replay of this call will be available for 30 days. The numbers to access the replay are in the earnings release. For those who are listening to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Friday, July 31, 2020, and have not been updated subsequent to the initial earnings call. In this call, we'll refer to certain non GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our Q2 2020 press release. During our call, we will be making certain forward looking statements, including, but not limited to, statements regarding the COVID-nineteen pandemic and the economic environment, recent acquisitions, 2020 guidance and our longer term outlook. Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10 ks Annual Report for the 2019 year filed with the SEC as well as the risk factors listed in our Form 10 Q and our Form 8 ks filings with the SEC. After the completion of our prepared remarks, we will open up the call to take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zabrzecki. Joe? Thank you, Julie, and good morning. Today, we would like to provide you with updates on a number of topics. First, we will cover the enterprise wide financial results for the Q2. 2nd and relatedly, we will discuss the impacts of the COVID-nineteen pandemic on various aspects of our business. 3rd, we will convey our guidance in the context of our 2nd quarter results and this new but temporary operating environment. And 4th and lastly, we will provide a premium revenue growth outlook for 2021, which is approximately 20%, as we now emerge from pivoting to growth to activating our growth phase. Let me start with specific second quarter highlights. Last night, we reported earnings per diluted share for the Q2 of $4.65 with net income of $276,000,000 This result was supported by an MCR of 82.3%, a G and A ratio of 7.5% and an after tax margin of 6%. Our year to date earnings per diluted share is now $7.54 representing 66% of our full year guidance. The COVID-nineteen pandemic had an impact on many aspects of our quarterly results. Some of these impacts increased earnings, while others serve to decrease earnings. While many of these impacts are known and estimable, others require significant judgment to estimate. Today, we will do our best to quantify the COVID impacts on our results and separate them from the underlying core earnings power of the business. In doing so, two things are clear. Our operating metrics were substantially in line with our expectations, both as reported and as adjusted for COVID impacts, And both our core earnings and the growth trajectory of our business have not been disrupted by the short term impacts of COVID. We estimate that taken together, all COVID impacts on our financial results for the quarter resulted in an increase in net income in a range of $65,000,000 to $100,000,000 equating to an increase in earnings per diluted share in a range of $1.10 to 1 $0.65 Now, I will provide some highlights related to our 2nd quarter results from an enterprise perspective. Beginning with revenue, our premium revenues of $4,400,000,000 increased by 8% over the prior year. Relatedly, our membership increased sequentially by 151,000 members or 4%, primarily in Medicaid. With respect to medical costs, with an 82.3% MCR, our performance was also strong, although significantly augmented by COVID impacts. Although in many cases, we were required to relax our utilization management and payment integrity routines as an accommodation to providers, we continue to effectively manage medical costs while ensuring all of our members receive high quality care. This MCR result was impacted by 2 directionally different factors related to the COVID-nineteen pandemic. We experienced lower than expected medical costs due to COVID related utilization curtailment, a phenomenon that may or may not recur during the balance of the year. And a number of our state Medicaid customers enacted retroactive rate refunds. In the quarter, the lower medical costs and the retroactive rate refunds combined to reduce our reported medical care ratio by an estimated 300 to 400 basis points, which accounts for substantially all of the reduction in the ratio, both year over year and sequentially. All of the COVID impacts on our 2nd quarter results will be described in more detail in a few moments. Next, we continue to effectively manage our administrative costs through productivity gains and fixed cost leverage, producing a G and A ratio of 7.5%. This is despite spending on specific COVID related items, which temporarily increased our administrative spending. Our net investment income, usually not an earnings item with significant variability, was again unusually low at $18,000,000 compared to $34,000,000 a year ago due to the current low interest rate environment. Our line of business results were very much in line with our expectations with strong metrics in both Medicaid and Medicare, while our marketplace results were slightly lower than expected due to a higher than expected member acuity mix. Finally, in the quarter, we continued to improve our capital structure. We issued $800,000,000 of high yield bonds used to retire short term floating rate debt. We also upsized our revolver to $1,000,000,000 from its previous level of $500,000,000 These are more than mere transactions. They are the culmination of a 2 year long and highly successful restructuring and optimization of our capital structure. We are now positioned with well priced debt, nicely laddered maturities, solid credit metrics and ample dry powder to execute on M and A opportunities if and when those opportunities arise. In summary, we continue to perform well across the many fundamentals of managed care, which has been our hallmark and we are continuing to grow revenue as a result of our focus on top line growth. Now I will provide some commentary about the effects of COVID on our 2nd quarter results. The COVID impact on our quarterly results include a decrease in medical costs due to COVID related utilization curtailment offset by direct care related to COVID patients, Retroactive rate refunds to a number of our state Medicaid customers, an increase in our G and A spending on activities related to COVID and a meaningful increase to our Medicaid membership. As previously mentioned, we estimate that taken together, all COVID impacts on our financial results for the quarter have produced an increase in net income in a range of approximately $65,000,000 to $100,000,000 equating to an increase in earnings per diluted share in a range of $1.10 to 1.65 I will now provide more color on the most significant factors contributing to this. With respect to the COVID impacts on medical costs, early in the quarter, we experienced significantly lower utilization in a variety of cost categories. Categories representing approximately 2 thirds of our total spend, with utilization levels increasing slowly as the quarter progressed. By the end of the quarter, utilization of these categories was still approximately 10% lower than we would have normally expected. The medical cost categories most impacted were elective surgeries, services in ambulatory settings, ER visits, behavioral services and wellness and preventive services. We also incurred the direct cost to care for COVID patients with just over 4,100 hospitalizations, an average inpatient episode cost of $9,000 plus the cost of outpatient and other professional services. The cost per COVID episode varies widely depending on the acuity of the patient. We estimate that COVID lowered our 2nd quarter medical costs by $190,000,000 to $240,000,000 As you know, as a general matter, there are fewer elective procedures performed under the Medicaid program than is the case with commercial health insurance. Since our book of business is heavily weighted to Medicaid, the effect on us of elective procedure curtailment is therefore less pronounced. 6 of our state customers enacted temporary retroactive rate refunds during the quarter, with the intent of recouping the portion of our capitated rates not spent on healthcare services due to the pandemic. In the quarter, these refunds amounted to $75,000,000 pre tax and related to the states of Ohio, Illinois, California, South Carolina, Mississippi and Washington. Some items of note, The refunds in these states took various forms, ranging from simple rate adjustments to a slightly more complex risk sharing corridor around a target medical loss ratio, as well as supplemental payments to providers. In many of our states, however, it was business as usual as we continue to operate on the pre COVID rate structure. Our position on rate adequacy has been consistent. We do not intend nor do we want to keep state Medicaid money that was intended to be spent on medical benefits, but was not due to utilization curtailment caused by COVID. In many of our Medicaid states, there are already mechanisms in place to protect against a surplus margin as there are minimum MLRs in 7 of our states and profit caps in 2 others. The FMAP increase and potential additional FMAP increases should significantly relieve any potential rate pressure in our states and CMS has authority to approve or disapprove proposed rate actions that are not aligned with the definition of actuarial soundness. Once the COVID-nineteen pandemic abates, we believe that the traditional process of establishing prospective actuarially sound rates based on a credible medical cost baseline and cost trend off that baseline will continue. With respect to our G and A expenses, COVID related activity increased our 2nd quarter expenses by approximately $25,000,000 A variety of new operational protocols, technology implementations and benefits for our employees, all related to the COVID pandemic were established or implemented during the quarter. In addition, we have consciously managed our headcount at above optimal levels to ensure we maintain adequate service levels, but also to be socially responsible to our dedicated staff. Medicaid membership increased sequentially by 152,000 members in the quarter, a 5% increase. Much of this was due to the suspension of redeterminations, as we believe that unemployment related enrollment has not yet materially accessed managed Medicaid. It remains unclear how high the membership quickly it will be attained, how quickly it will fall as the economy recovers and where it will ultimately settle. We have invested in many local growth initiatives with providers, in branding and awareness campaigns, and in social media outreach to ensure we obtain our fair share of increased membership. We believe that post COVID Medicaid membership will stabilize at an increased level as the future natural unemployment rate will likely be higher than previously experienced. In summary, as we work through this unprecedented period, we remain focused on executing on the underlying fundamentals of our business, regardless of the short term COVID related impacts on our reported financial results. Now I turn to our guidance for the full year. Our full year earnings guidance range remains at $11.20 to $11.70 per diluted share, with a midpoint of $11.45 Our earnings per share year to date is $7.54 which means through 6 months, we have earned 66% of our revised guidance. Given the environmental uncertainty that we expect to exist through the end of the year, we are not adjusting the range of our previously provided earnings per share guidance. We intend to adjust our full year outlook as appropriate when our 3rd quarter results are reported. The reasons for this cautious approach have already been stated, but bear repeating. The near term outlook for medical costs, the cost of COVID itself and the potential elective procedure rebound are unknown at this time. There is still potential for additional near term rate actions or voluntary company concessions to customers, members and providers. We will fulfill our obligation to make any rebate to a member, CMS or our state customers related to the statutory requirements that exist today. After doing so, if we conclude that there is still a remaining financial imbalance, we will correct that imbalance. Our membership forecast has a wide range of possible outcomes as there are numerous macroeconomic variables in play and relatedly the acuity of any potential membership increase and the cost to service it are also highly variable. And lastly, we believe that any methodology for extrapolating annual earnings estimates by quarter should be suspended in one's thinking. I would now like to turn to the progress we have made in executing our growth strategy, which is having an immediate impact and which allows us to forecast premium revenue growth of approximately 20% for 2021. We have essentially checked the box on at least one initiative across all the revenue growth dimensions outlined in our growth strategy. We have retained all of our existing Medicaid contracts. We have won a new state contract and we have executed meaningful and accretive acquisitions. And with the impact of the recession, organic growth will be much better than expected. Some highlights. Based on announced re procurement schedules, the revenue associated with our current in force Medicaid contracts should be intact through 2021, plus we have significant certainty related to 2022. The new management team has won or defended all of the reprocurements that were under its control. We assumed the YourCare membership on July 1, which will increase membership by 47,000 members in the Q3 and should provide approximately $140,000,000 of revenue for the remainder of 2020 $280,000,000 for the full year of 2021. The Magellan Complete Care regulatory review process is proceeding as planned. Recall that the federal antitrust approval is complete and the state approval processes are progressing. We hope to close the transaction by the end of the year. And if we do, this acquisition will provide the previously announced $2,800,000,000 of revenue in 2021. For every month the closing would be delayed beyond the 1st of the year, that annual revenue estimate would decrease proportionately. Our Kentucky RFP win will have a contract start date of January 1, 2021. Before considering any of the potential benefits of the Passport acquisition, under a conservative set of membership assignment assumptions, the contract should provide at least $850,000,000 of revenue in 2021 with upside potential into 2022 as membership organically builds. Organic same store membership growth, increased product penetration and our nascent Navajo Nation project would also modestly contribute to the 2021 revenue growth rate. Finally, as previously announced, we are exiting the Medicaid business in the Commonwealth of Puerto Rico. We have reached an agreement to execute an orderly transition of our members to an on island competitor. The unwinding will be completed by November 1st and the impact of the transaction itself and the contract exit are not financially material. Under these assumptions, we project 2021 premium revenue of approximately $21,500,000,000 We are very pleased with a 20% increase in premium revenue as we move from pivoting to growth to fully activating our top line growth strategy. Another major development in activating our growth strategy was our recently announced transaction to purchase certain Passport assets. The transaction is expected to close before the end of 2020, providing us with a well known brand in Kentucky, a turnkey operation and the opportunity to gain additional membership. Passport represents potential upside to our 2020 2021 revenue guidance. The purchase price for Passport is approximately $20,000,000 plus contingent consideration payable in 2021 based on the level of enrollment retained above a certain threshold. A few words about the Passport transaction and its benefits. We will acquire the Passport brand name, all its operating infrastructure and we will assume approximately 500 highly trained Kentucky based Passport and Evolent employees. The acquisition allows us to enhance operational readiness in advance of our new contract award in Kentucky and enables continuity of care for Passport's members. The acquisition allows us to avoid startup losses inevitably associated with building a Greenfield health plan and the early lack of scale. The acquisition allows us to compete more effectively for additional membership above what we might have ordinarily received from the standard auto assignment process related to our own contract award. And from a financial perspective, we expect to recover the purchase price from positive cash flow in less than 1 year as the plan would be immediately profitable and is likely to produce membership well above what we might have achieved organically. It is also important to note that the membership, revenue and earnings related to Passport could all commence and begin to impact our results on or about September 1, if the Commonwealth of Kentucky approves our joint request for an early contract novation. This would be a very positive outcome, although it would impact the year over year revenue growth rate calculation. As I conclude my remarks, I take a pause from discussing our operating and financial performance and instead comment on our compassion, our humanity. During this unprecedented time, our company made many significant contributions to charitable and community causes. We offered financial assistance to distressed providers and worked with our state customers to understand where they saw human tragedies unfold and offered our financial and operational assistance. We will continue to do so. And in fact, we are developing plans to deepen our social commitment to build stronger communities, one life at a time. I offer another heartfelt thank you our management team and our 10,000 associates who are executing well while dealing with their own stresses and issues related to the pandemic and racial strife. Even when facing these challenges, our associates are inspired and motivated by the opportunity to make positive change by delivering high quality healthcare to the disadvantaged. Our associates continue to excel and I stand in admiration of their dedication and their will to sacrifice in the face of all types of adversity. In conclusion, this was a meaningful quarter for the company. Our results met our expectations despite the turbulence caused by the COVID pandemic. We took major steps forward in our transformation. We sustained our margins, but did right by our members and customers. We fully activated our revenue growth strategy and continued to deploy excess capital in strategic acquisitions. This level of performance provides an insightful glimpse into our very bright future. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom? Thank you, Joe, and good morning. First, I will comment on our balance sheet, cash flow and capital. Our reserve approach remains consistent with prior quarters and our reserve positions remain strong. Days in claim payable represent 52 days of medical cost expense compared to 49 days in the Q1 of 2020 48 days in the Q2 of 2019. The sequential increase was driven by lower medical expense in the current quarter due to the impact of COVID. Reserve development for the 1st 6 months of 2020 was negligible compared to favorable development, which decreased our MCR by 110 basis points in the comparable period in 2019. Operating cash flow for the Q2 of 2020 was $613,000,000 reflecting the strong operating results and the timing of government receipts and payments. We extract $185,000,000 of subsidiary dividends in the quarter, which brought our parent company cash balance to $1,200,000,000 and give us ample flexibility to fund our recent acquisitions and organic growth initiatives. Debt at the end of the quarter is merely 1.6x trailing 12 months EBITDA. Our leverage ratio is 50.7%. However, on a net debt basis, net of parent company cash, the leverage ratio is only 30.7%. Taken together, these metrics reflect a conservative leverage position. Our $800,000,000 high yield offering was priced at 4% and 3.8%, indicating that the debt markets view our credit quality at a level that should provide a path for a ratings upgrade in the near future. As of June 30, 2020, our health plans had total statutory capital and surplus of approximately $2,100,000,000 which equates to approximately 3.50 percent of risk based capital. Now turning to our 2020 guidance. Our full year's earnings guidance range is $11.20 to $11.70 per diluted share. We increased our full year 2020 total revenue outlook to approximately $18,800,000,000 from $18,300,000,000 mainly due to higher Medicaid enrollment through the first half of the year, as well as revenue from YourCare membership that is effective July 1, 2020. In taking this cautious approach to providing earnings guidance for the balance of the year, we have considered a wide range of potential outcomes from the factors that Joe previously described. Now, I and its drag on investment income should persist in the second half. We are likely to incur additional administrative expenses for COVID related operating protocols. We are also going to incur costs associated with the launch of our new Kentucky contract and integration costs associated with the Magellan Complete Care acquisition. And lastly, as a reminder, consistent with our historical practice, previously announced acquisitions that have not yet closed are excluded from our guidance. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank The first question today comes from Justin Lake of Wolfe Research. Please go ahead. Thanks. Good morning. First question just on how you're thinking about the progression of Medicaid membership through the year. I think you added you said about 4% for membership in the quarter on the Medicaid side. How do you expect to end the year on Medicaid? And specifically, can you delineate how much of that membership you expect to come from this lack of disenrollment? And how are you treating that going into 2021 in terms of how you think that kind of that how long that lasts given the FMAP and the NEP emergency status uncertainty? Sure, Justin. It's Joe. We grew membership sequentially in Medicaid by 152,000 members or 5 percent. We believe with really good information that most of that was the result of the suspension of redetermination that the unemployment surge that is likely to come to managed Medicaid has not yet occurred due to a variety of reasons spousal coverage, COBRA and backlogs in the various states. Certainly, we expect that membership to be on the books for a while. We know it will hit a peak and we also know that as the economy recovers, it will begin to a trip. We do not yet we have various forecasts of how much membership we're likely to have at the end of the year as a result of all this. But I think we're comfortable in saying that our Medicaid membership will be higher than previously forecasted as a result of COVID, but we have not put a point estimate on that. It's still way too many variables to put a point estimate on how many members we're likely to get. I will say this, through the 1st 3 weeks of July, the Medicaid membership continued to grow by about 30,000 members organically in the 1st 3 weeks of July. That's helpful. Thanks for that. And then just last question on the exchange performance. You noted a little bit higher cost due to higher acuity. Can you push that out a little bit for us? And then should we assume that you were able to catch that early enough for 2021 bids? And any color you can give us in terms of how you're thinking about where you bid for margins in 2021 in that exchange business might be helpful? Thanks. Sure. In our marketplace business, our silver bronze mix didn't change all that much, but we did have a churn in the bronze membership we took on. So we had many new members in our bronze product. The MOR ran higher on those members than we had expected. It's either higher medical if you're attracting the right risk score, it's either mismanagement of your medical cost line. But if you're managing medical costs effectively, which we think we are, then the risk scores just haven't been commensurate. So we'll catch up. We'll get the risk scores in line with the acuity of the membership, but that's the reason for the small shortfall in our marketplace business for the quarter. With respect to the business, yes, we projected a medical cost baseline, un COVID impacted, use 2019 as the medical cost baseline and then trended forward without any COVID impacts. So we believe that the rates we filed for 2021 are solid, fully contemplated, all the costs related to medical services for our members and risk scores that we will attain. Great. Thanks. The next question comes from Kevin Fischbeck of Bank of America. Please go ahead. Great. Thanks. Wanted to ask about the rate environment. How should we think about the $75,000,000 number? You characterized it as retroactive. Does that mean that there's not expected to be a go forward impact or is there also a go forward impact from these initiatives in your guidance? Well, the retroactive refunds that we recorded in the quarter really are a reflection of exactly how the rate apparatus should work. Obviously, rates never contemplated this rather dramatic curtailment in utilization. So whether states enact refunds themselves or whether the minimum MLRs in 7 of our states get triggered, the money is rightfully going back to the states because it wasn't spent on benefits for their beneficiaries. So we recorded the retroactive component, either back to in some cases, back to March, in some cases, back to March, in some cases back to the beginning of the year. And certainly, we contemplated the forward looking aspects of those rate decreases and refunds as we provided our very cautious outlook to the balance of the year. So the $75,000,000 was truly the retroactive component that takes us through June 30, but we certainly contemplated the continuation of those refunds that have already been enacted and obviously the potential for more actions to be enacted by our state customers. Okay. That's helpful. And then I guess it was a little bit confusing. It sounded, Joe, like you were saying that MCC is in your revenue guidance for 2021, but then Tom mentioned that you don't include deals until they're closed. I just wanted to make sure I understood the treatment of MCC in that 2021. That's a fair point. I think I'm going to use that as the opportunity to make sure we clarify the outlook we're giving for premium revenue in 2021. First thing I would say is, our revised forecast for 2020 is $17,800,000,000 of premium revenue, which is a 10% increase over 2019. That's a pretty strong pivot. Now as we really activate the growth strategy, projecting a 20% growth rate off of 2020 is certainly something we're pleased with. And yes, it does contemplate the Magellan Complete Care acquisition closing on January 1. For every month it would be delayed, you can proportionately reduce that. But we expect it to close at the earliest by the end of the year, but no later than the end of the Q1. We also included the organic component of our Kentucky contract, meaning an amount of revenue in Kentucky that we estimate we would get through the normal auto assignment process. We did not include any potential benefits of additional membership that we'll get through the ownership of the Passport brand and the potential innovation of that contract early in the fall. Also, it's important to note that we've decided to exit Puerto Rico, which needs $400,000,000 of revenue in 2019 will not be in the 2020 rate. And of course, a modest very modest and cautious forecast of organic growth. So that's sort of how we compiled our rather conservative outlook for 2021. And we really wanted to just begin framing the story as we really activate our growth strategy. We want to give a forward look, a leading indicator, an outlook of where our revenue line is headed. That's helpful. Just to clarify that last point, it's my last question here. When you say for next year modest organic growth, I mean, what are you assuming as far as unemployment next year versus this year? Yes. We have various forecasts on where, as I said in the previous question that was asked of where the Medicaid membership will go. And as I said, we're just we're taking it week by week. We membership grew again in the month of July. We expect it to grow again in August and perhaps through September as that unemployment surge comes through. But it's just so really hard to project. The way I would think about it is and what I'm holding my team accountable to, we should do no worse than our market share in those markets. Hopefully, we'll gain market share in this process. But if you take our market share, that would be a good proxy for Medicaid enrollment grows by a certain percent, we should at least get our market share. Great. Thank you. The next question comes from Matthew Borsch of BMO Capital Markets. Please go ahead. Yes. Hi. I was hoping maybe you could just elaborate a little bit further on your outlook for Medicaid and the rate actions. I understand you're saying that when we get past COVID-nineteen that you expect we'll continue to have rates set according to actuarial soundness. And I also recognize you're referring to a number of states where already existing risk sharing mechanisms have kicked in where you have exceeded or I should say come in well under the medical budget target. But what are you have to, if anything, defend off at this point? And how are you doing that in terms of states under fiscal pressures saying, well, you guys clearly are doing too well with this rate right here, the proposals to cut and so forth? Sure. Well, Matt, the conversations with our various state customers have been very balanced and very rational. And they do understand the principle, in fact, it has the force of federal law of actuarial soundness, which in the CMS approval process, they take very seriously as well. Clearly, the actions that have been taken are related to COVID. That has occupied the conversation. We clearly understand that there are other budget pressures in the states that are causing them to look at Medicaid with a very, very sharp pencil. But you can't recoup money in Medicaid rates to balance your budget. That violates the concept of actuarial soundness. The rates have to reflect the services that we intend to allow members to have. And I think the rate environment will persist through all this. As I said, we'll go back to a point where on a prospective basis, we agree to a statistically credible medical cost baseline, a reasonable trend off that baseline. And that has served managed Medicaid well over many, many years. Understood. And I realized that the timing is in different places for different states, but when would you expect to get in to the most intense period of discussions over new rate proposals? Well, as you know, our rates contract years span from January 1 to July to September. So we're always in some type of discussion with our customers about rates. And as we emerge through this COVID period, we have to adjust for the effects of COVID. Are the effects of COVID going to last into the 2021 baseline? Right now, they could, but we just don't know. So I wouldn't want to divulge any particular conversation we're having with state, but the discussion about how long COVID will last and what that medical cost baseline needs to reflect is just an ongoing state by state discussion. Okay. Thank you. The next question comes from Stephen Tanal of SVB Leerink. Please go ahead. Good morning, guys. Thanks for the question and all the color today. I guess one thing I wanted to follow-up on was just, Joe, the $21,500,000,000 outlook, the greater than and as it relates to Kentucky, just wanted to get a sense of first, I guess, maybe confirm the math. I think if the state approved that you guys can keep Passports 315,000 members, I would probably add another $1,000,000,000 of premium revenue on top of this outlook based on how you guys have assumed it right now. So first, I want to understand if I have that right and maybe if there's anything else you can tell us about what Kentucky said so far with respect to whether they'll allow you to keep those numbers in place? Your math is precisely correct. We assumed through an auto assignment process that we'd likely get 140,000 members, which is why we put an estimate of $850,000,000 into our forecast. And we just didn't want to be presumptuous. We're buying the Passport operating assets and the brand name. The membership has to be assigned to us through the state approval process. You're absolutely right. If we obtained all 315,000 members that would represent a little over $1,000,000,000 of upside to the $21,500,000,000 estimate that we've given you. I will say this, while we're still in the approval process, so I don't want to go into any particular conversations we've had, continuity of care is really, really important to our customers. Stability of the network, continuity to care plans, particularly for the high acuity population is really, really important to our customer. So we believe, one of the potential for this transaction is to keep either all or many of the 315,000 members that are now in the Passport plan. That was certainly the intention that we had in mind when we bought the Passport assets. So continuity of care really, really important to the customer and stability of network. And if we were able to keep many of those members, those objectives will have been met. Great. That's really helpful. And then I guess just as a follow-up on this point, it sounds like Magellan Complete Care, at least inside this initial target, is good for about $2,800,000,000 Obviously, it can move around a little depending on the close, but we can use that and back into, I think, that level of organic growth you spoke to and framed as conservative. I think it's about 5%. Correct me if I'm wrong, but how do you think about that 5 percent? I mean, what is the potential for upside there? And how conservative do you think that is? Maybe talk about where it comes from Medicaid, Medicare, etcetera? We continue to believe that we'll grow our marketplace product. Our D SNP product is doing really, really well. We clearly have plans to grow market share. As I outlined redetermination than we've had in the past. And that through additional branding and awareness campaigns at the local level, we attract more membership through the voluntary process improving our risk scores and our quality scores, I should say, to move up higher in the auto assignment algorithms. So we have plans to grow organically. I would call small bolt on acquisitions as good as organic, particularly at the prices we're paying. So I'd stay at the cautious and conservative estimate, and that's the way I would think about it. Awesome. Maybe if I could just slip in one more. I was just curious to know how much minimum medical loss ratio rebate accruals may have dampened the sort of downside of the year on year decline in MCR? And maybe same question on premium refunds. And I guess prior year development from the roll forward table on a gross basis, looks like it was negative in the quarter. So wondering if minimum MLRs were a factor there as well. So maybe any color there would be helpful, then I'll yield. Thanks. Now after we recorded the premium refunds, the minimum MLRs did not have any impact in the quarter, no material impact on our financial results. Now going forward, again, depends where COVID takes the medical cost line. It depends where the retroactive rate refunds kick in. But we again, through whatever mechanism there is, we actually prefer and intend to make sure that we don't keep state money that was paid to us for servicing members that wasn't due to the pandemic. So whether it's through the retroactive rate refund, whether it's through the minimum MLR mechanism or whether it's just voluntary, working with our state customer to make directed payments to providers, to add value added benefits for members or just to give them the money back, we think that's the responsible way to behave in a global pandemic with our Medicaid customers. Helpful. Thank you. The next question is from Dave Windley of Jefferies. Please go ahead. Hi. Good morning. Thanks taking my question. Joe, a little bit of a follow-up to the last answer that you just gave. Trying to get a sense, you've named, I believe, 6 states that enacted retros, 7 have MLRs, 2 more have profit caps. I guess I'm wondering how much of those overlap or kind of complement to that question would be how many states are naked on this issue? How many states do not have a mechanism or have not enacted a mechanism yet to recoup money in this environment? I would say that the states that haven't yet are Washington and Washington had directed payments, but no Washington and Texas, no Florida and Michigan have not New York hasn't. So those are the states Wisconsin hasn't. Those are the states that haven't yet. And I don't have the list in front of me of where the MLRs are, but the MLRs are at 85% or 86%. And those could get flipped and probably in a marginal way. But those are the states that haven't enacted anything yet. And as I said, we'll wait and see when something is enacted, how they're enacted, what retro period they apply to, etcetera. Sure. But that's the outlook. Got it. I appreciate that. And just thinking, I guess, wondering how states' fiscal years and their budget balancing activity come into play in their thinking, in your negotiations? If they don't have or don't enact a mechanism to recoup that money in the 2020 fiscal year, does that increase the likelihood that they try to take that out in rates in 2021? Understanding your comments about actuarial soundness, not sure how those would is that explicitly a year by year thing or could that take into account kind of a 2 year forecast in the way they're looking at that actuarial soundness level? Well, certainly we have we follow very, very closely all of the budget and legislative activity with our state customers. Obviously, it gives you a sense of how replete their budgets are with tax revenues or not. So we certainly follow it. Many of our states have already passed budgets. Many of them passed budgets a year ago that are 2 years in duration, where we haven't had any conversations about rates. But many are in the process. Certain of them are in process. So we certainly keep our eye on it. But as I said before, you can't use Medicaid rates to recoup tax revenues. They have to reflect the services that you intend to pay for members. And as I said on the last earnings call, there's no question that as the economy moves up and down and state budgets are either very strong or on the weaker side, then rates would be on the stronger side of actuarial soundness when the economy is really robust. It might be on the weaker side of actuarial soundness when the economy is flat. Then again, there's the offsetting impact of more membership or fewer members. So it modulates and it's all manageable. But as I said, actuarial sound has to reflect the cost of healthcare services for your members and you can't recoup budget deficits with Medicaid money. Right, understood. Last question here. You've alluded to even voluntary givebacks in or that that's something that you would contemplate. Are those actions I guess I'm wondering how formalized are some of those actions in your plans and have you taken those into account in the reconfirmed guidance that you're making today? I'm just wondering if you do decide to make voluntary payments, how might we account for those or learn of those? It certainly was contemplated in the very cautious outlook we gave for the second half. I would state it this way. A state might decide that they will take the action to recoup the money that wasn't paid in benefits through these rate refunds. If they don't do that and we trigger a minimum MLR, then we have to pay it back by regulation. If neither of those two things exist or happen and we still think that we inappropriately or inadvertently or unexpectedly benefited by this curtailment of utilization, we would work with our state customer and work on a program of either additional value added benefits for members, directed payments to stressed or distressed providers or just giving the money back. We just don't think it's helpful for the managed care industry to sort of have a surplus margin related to curtailed utilization in a pandemic. And we'll report that as we report our 3rd and 4th quarters. We'll report to the extent we trigger minimum MLRs, we have retroactive rate refunds or we voluntarily granted money back to our customer. Very clear. Thank you. The next question comes from Charles Rhyee of Cowen. Please go ahead. Yes. Thanks for taking the questions. Joe, obviously, it seems like a lot of this when you guys gave your outlook last quarter, you gave yourself a lot of room for a lot of this uncertainty and we're seeing some of that a little bit play out and obviously at the same time being to maintain your earnings outlook for the full year here. But within that, were you surprised at all though with some of how some of these adjustments came? Or was this sort of what you were already in discussions with states at the time that you kind of reported last quarter, so it was sort of within the range of what you're expecting? And then sort of to follow-up on the last question here, obviously there's several other states here that you're saying that you really don't have mechanisms in place. Are those discussions are there discussions ongoing with them currently? So it's a question of whether they make a decision to do something or not? Or is this are these situations where sort of no discussions have started? Yes, Charles. I mean, we knew we were headed into a very uncertain and unclear environment. I mean, it's a pandemic and it's healthcare. And we saw the utilization suppression. We knew that whatever the numbers are, we knew that we were benefiting or at least our P and L temporarily is benefiting materially by suppressed utilization. So yes, we expected our state customers to contact the industry to figure out a way to recoup some of those funds, which is entirely almost the embodiment of actuarial soundness. The rates were super adequate for the COVID declared emergency period, and therefore, the money should be given back. So this environment was entirely contemplated. Now at the beginning of the quarter, did I know that healthcare costs would be down between $190,000,000 $240,000,000 No. But when utilization was down 20% to 40% in healthcare categories representing 2 thirds of our spend, you knew that there would be some large distortions related to COVID. So yes, we anticipated this environment as the quarter progressed. We certainly monitored it. And this is the result we produced. And I'll say the reason we gave you those numbers is we really did want to highlight, and I'll make this comment, that when you take all the distortions, significant distortions related to COVID out of our numbers, it's a very, very strong quarter with good metrics. I mean, if you take out the 110 to 165 estimate of what COVID increased our earnings per share by, we produced at a minimum $3 per share for the quarter, maybe as high as $3.55 for the quarter. And that 82% MCR that we printed for the quarter had 400 basis points of COVID benefit in it. So bang square on our 86% result that we've been consistently and routinely producing. So we try to be clear. We try to separate and isolate those COVID distortions as clear as we could. And yes, we knew we were going to an unclear environment, which is one of the reasons why we again gave cautious guidance for the back half of the year. Tell us where the pandemic is going and we'll give you a clearer picture, but the range of outcomes for the second half of the year is so varied and so wide, holding our guidance and giving you some qualitative factors rather than quantitative factors, we thought was the most responsible approach. And are you having discussions with states like Texas, Washington, Florida? Are those when you kind of mention them, are they ones that they're just kind of outstanding, but nothing's really started? Texas and Washington have actually expressed their interest in increasing Medicaid spending during this period of time. We had some early on, I think it was even in the Q1. Washington, as you know, was one of the first states to get hit with the pandemic. And a lot of the behavioral providers in Washington who were on fee for service were really, really getting crushed. And so the state asked us asked the industry to make some directed payments to providers, which we gladly did. So we're having discussions. That's just an example. We're having discussions with all our states. Washington and Texas yet have expressed more interest in infusing more money into Medicaid than extracting it from Medicaid. That's helpful. And one last just clarify, you said additional FMAP could offset further rate headwinds. Are you assuming anything above the 6% FMAP in the guidance either for this year or when you think about next year? No. As you know, there's all kinds of jousting that's going on between the in Congress related to this. But no, we did not whether it's 12 whether it ends up being 12% or 14%, we did not include any of that outlook as potential upside to what might happen in rates. If it happens, it would be great. I think the states will be relieved. And I think it will take a lot of pressure off. But no, we did not assume that would happen. Great. Thanks a lot. The next question comes from Josh Raskin of Nephron Research. Please go ahead. Hi, thanks. Good morning. Appreciate you taking the question. I apologize for coming back to this voluntary actions or this correcting imbalances. But I just want to understand this in the context of Molina overall, right? So if you're trying to sort of keep things flat, let's call it on the medical cost side, right? So a lot of it gets tripped from a regulatory perspective, but you're going to kind of it sounds like give back any upside on the medical cost side as a result of COVID. But York and the enterprise has other headwinds, right, higher G and A costs and investment income coming in lower, etcetera. So I'm just trying to understand, there's a confirmation of guidance. It sounds like none of that upside is on the medical cost side, but you've got other costs. I'm just trying to understand sort of how you think about progressing through the year. Should we just think of if there is any potential upside again, it gets absorbed and the guidance is the guidance? Or is there some variability? And is it crazy to think additional costs on the G and A side or lower investment income could actually be a headwind? Well, Josh, you certainly captured the essence of the difficulty of providing a point estimate forecast in this environment. And I want to make sure it's clear what we meant. If a refund is enacted, the state is therefore recouping what they consider to be the excess capitation rate through an active temporary rate refund. If it triggers a minimum MLR, then there's already an existing regulatory mechanism. And all we're saying is if we still felt there was a financial imbalance, we feel that imbalance should be corrected. I'm not defining what an imbalance means, whether it's 100 basis points or 200 or 300, it's going to be state by state, situation by situation. I'm not going to go into exactly what we mean by that. But I do think as a philosophy, our company and I think managed care generally has taken the approach that we do not intend to benefit by the suppression or the curtailment of utilization due to a global pandemic. Yes, I mean, we contemplated the headwind. Tom spoke to it. We contemplated the investment income headwind going into the back half of the year. We contemplated that we'd be spending SG and A as we gave you our cautious approach. So if they know, I wouldn't say they're headwinds, they were already contemplated in our comfort level and reestablishing the guidance we previously gave. Okay. And I don't think anyone is going to argue with strategic value of working with your partners in a period where you benefit. So I think that's an obvious one. Just one quick follow-up on the developments or sort of the lack thereof and sort of how that compares to last year. Were there any typically you guys have seen conservative reporting over the last couple of years, reserving, I'm sorry, and that's less favorable development sort of lack thereof this year. Were there some countervailing forces? Is was there something else in there? I heard Tom say, same methodology, etcetera. Hey, Tom, would you like to take Josh's question about development, please? Yes. Thanks, Joe. You're right, Josh. Our reserve methodology remains the same. We said that for months, the development is negligible. On a PPD basis, it's slightly favorable, but it's not material. That's why we don't want to call it out. Okay. But any historically, you had been seeing more. I guess, is it just getting better at the estimation process or curious why you wouldn't see the same level of development if the methodology is the same? Yes. I would say that within anything you do relating to reserve, there's always judgment factor, there's range. And you can always argue, you come pretty close to it. In prior years, we had a lot more development. We tend to be a lot more cautious. We still are very conservative in our reserve methodology. So I wouldn't say there's anything inherently different. It's just the outcome is a little bit closer to our estimate. Perfect. The next question comes from George Hill of Deutsche Bank. Please go ahead. Good morning, guys, and thanks for taking the question. You guys have clearly positioned the balance sheet and the kind of the debt covenants to be active in the M and A market, and you guys are performing well. I guess what I'm interested in hearing about is the other side of the discussions. Do you feel like the current environment is giving kind of smaller plans more breathing room and more room to run and set themselves up for growth or do you feel like this is accelerating M and A discussions? Hi, George. It's Joe. Now, I think COVID has not, in our opinion, changed the attitude of how people think about managed care or managed Medicaid. It's a tough business. It's hard. You have to have the infrastructure. You have to have the scale. You have to have deep skills and knowledge, a lot of esoteric knowledge. It's not it shouldn't be a hobby and it shouldn't be an adjunct. You need to be highly skilled in this. So no, it hasn't caused us to think any differently about it. Although I would say that a small Medicaid plan somewhere might be enjoying some additional profitability, it certainly hasn't changed. In the discussions we've had with many plants across the country, it certainly hasn't emboldened them to think differently about the long term nature of this business. I mean, if it may if it takes a pandemic to put you on the right course to profitability, then you're making the wrong call. So no, we still have a really, really bullish outlook on small discrete bolt on and tuck in acquisitions. That's helpful. Thank you. The next question comes from Scott Fidel of Stephens. Please go ahead. Hi, thanks. Good morning. Joe, first question just interested, I know that obviously there's a lot of moving pieces here, but when thinking about the 3 segments and the guidance that you had previously given for after tax margins across the segments, Maybe even directionally, can you help us think about in the current guidance how each of those business lines may have evolved, whether HICs is a little bit lower and Medicaid is a little bit higher or just interested in your thoughts around the three segments in terms of after tax margins in the 2020 guide? Sure. Well, certainly, Scott, this wouldn't be the quarter with all of the distortions caused by COVID. This wouldn't be the quarter to reset your long term expectations on margin attainability in any line of business. There's just way too many distorted impacts. And you think you have those distorted impacts captured appropriately, and I think we do. But no, I think we still think that Medicaid is a 3%, 4% contributor. We've been routinely producing mid to high single digits in Medicaid Medicare. And I would say the one where we still have a desire and a hope and a strategy to drive growth in the marketplace business at mid to high single digit margins as a growth engine for the business, it's still in our long term strategy. But this wouldn't be the quarter to sort of reset your expectations. And I would just answer the question that way. Yes, understood. And then just I had a follow-up question just MCC and how you had laid out when you announced the deal the thoughts on accretion. And just interested if you look at MCC and Magellan's reporting for them, they've had a big first half. They've already exceeded their full year segment profit guidance just in the first half. But obviously, there was a lot of benefit in the Q2 from COVID just like other health plans. So just interested whether you think that initial 1st year target of the $0.50 to 0 point $5 of cash EPS accretion, in your view, is that still the right way to think about it? Or do you think that just given general trajectory Magellan's had in improving MCC recently that you can end up capturing a bit more of that multiyear accretion in the 1st year? Well, we're always pretty cautious forecasters. So I would say that there is a fair bit of caution built in to the 0.50 dollars to $0.75 to begin with on a cash EPS basis. And yes, I mean, I obviously can't comment on anything I know through the integration process, but I certainly can respond to your comment on what was reported publicly. And yes, the first half looked like the businesses were doing very, very well. And you hit the question, how much of it's COVID related and how much of it is sustainable. But certainly, we're pleased with what we saw in the public report. And it certainly gives you as much or even more confidence that the accretion numbers we put out there are attainable. Okay. Thank you. The next question comes from Ricky Goldwasser of Morgan Stanley. Please go ahead. Yes. Hi, good morning. Question on Magellan and Passport. Magellan is into guidance, Passport is not. What's the rationale for that? The rationale is we did not feel it appropriate. We want to be deferential to our regulator customer in the state of Kentucky. We're buying the Passport brand and the assets, but the membership actually needs to be assigned to us. If we get more than $140,000 we projected we get about $140,000 in an auto assignment process, which I think is a reasonable estimate. But we did not want to be presumptuous that we would get all or most of the 350,000 and we're trying to be deferential to the regulatory approval process. And the Magellan acquisition, which still needs regulatory approval, once it's approved and we take over the legal entities, we will have the membership, Ox, Bakken, Barrow. That was the reason. Okay. And then just on the Bolden acquisition, I understand you're bullish on the opportunities there. But just going back to one of the earlier comments, so our Bolden acquisition, I think you referred to as sort of part of organic growth. So should we assume that they are included in the guidance? Well, it's an interesting question. I believe in a quasi organic way, if you want to point a term, that anything done with generating cash flow is as good as organic, particularly the prices we're paying. When you can recover the purchase price of an acquisition in the 1st year of positive cash flow at a purchase price of what is likely to be somewhere around 4% of premium, that's as good as organic, even though it's technically an inorganic play in the case of Passport. So to me, if you're buying bolt on tuck in acquisitions, particularly membership migrations where you're paying per member or for the members retained, even though you're outweighing a modest amount of capital, it's as good as organic. Got it. And then lastly, when we think about the new Medicaid members that are onboarding, how do you see kind of like that margin profile compared to existing population? Since many of them are coming either through or staying on through the redetermination process, The way I would describe it is those members are an average acuity of our existing population, not materially more acute, not materially less acute. Now when the unemployment surge happens, I think you might get a slightly different story since people that need healthcare generally seek it. So you could have a slight acuity shift there, which is one of the reasons why when we gave our cost guidance, we said, A, we don't know how many members we're getting and B, we don't know their level of acuity or the cost to service them. So it's clearly just another factor of uncertainty for the back half of the year. Thank you. The next question comes from Sarah James of Piper Sandler. Please go ahead. Thank you. Can you walk us through how pricing actions would have impacted the HICS margins ex COVID and what long term margins are? What your goals are for that product? And then the comment I just wanted to clarify your comment on risk scores being off from what you expected. How much of that is really related to industry trends of challenges because of COVID and getting new members evaluated and scored versus the population that Molina holds having a difference in the health of the population? Thanks. Sure. I'm going to answer your last question first and ask you to repeat the first one. I'm not sure I understood it, but we clearly think this is a case where the new bronze membership we took on, we did not either have or get quickly enough the risk scores that we needed to service that population. And there could be just a lag by when you get all your coding done, when you get all your interventions done, we'll catch it up. We have a very good operation when it comes to risk scoring. So it was the churn in that bronze population that caused us to have risk scores that lag. It will catch up and it's not a long term concern. I think I need for you to repeat the first part of your question. It was about marketplace rates, but I didn't follow it. Yes. So I just wanted to understand with the marketplace margins, I mean, some of the change there was the pricing actions and some was related to COVID. So just trying to understand, ex COVID, how do you think margins would have ended up given your pricing actions? And how do you think about your margin goals for that product long term? We haven't changed our margin outlook for the product and we still have a strategy of growing the profit pool. And as I've said many times, on a year by year basis, me and my management team will make the call on whether we ease up on margin to grow membership or whether we pull back to ease up on membership to grow margin. And we'll make that decision geography by geography with a thorough analysis of the competitive landscape. With respect to the performance of the business, the COVID pandemic utilization curtailment did not have as significant impact on marketplace as it did our other businesses. Initially, utilization was down in late March early April, but it bounced back very, very quickly through May June. So it did not have as steep an impact on marketplace as it did on Medicare and Medicaid. Thank you. The next question is a follow-up from Stephen Tanal of SVB Leerink. I guess I just in part wanted to clarify a point I made that I think is now wrong. I hadn't factored in Puerto Rico when I looked at organic growth. And so I just wanted to walk through the math of the bridge to 'twenty one revenue. So if you have $17,800,000 of premium revenue in 'twenty $21,500,000,000 in 'twenty one, obviously there's a $3,700,000,000 increase. The Gently Complete Care, good for $2,800,000,000 Your Care steps up $100,000,000 And then you've divested Puerto Rico, which is $400,000,000 So I'd call all those non organic. And so M and A seems to be contributing about 2.5%, which implies about 1.2% net organic, which I think is organic growth of about 6.6%, which still looks a little conservative. But just wanted to say, is that math right? And is that kind of how you guys are thinking about it? Or is there anything else you'd want to steer us there? No. You have the right model in your thinking. That is the model we've used. And again, it's an outlook. It's not a pinpoint estimate. We believe, not believe, we couched it as conservative. We wanted to give you and our investors a very clear indication of where the trajectory of our top line is going. We will refine this estimate as we go forward. When we go to the 3rd and 4th quarters, who knows where our Medicaid membership will be. We could have another 150 1,000 members by the end of next quarter. We just don't know. So we'll refine the organic aspects of this, but the inorganic aspects are pretty clear. And you're right, you have to factor in the $400,000,000 Puerto Rico exit as an offset to some modestly calibrated organic growth. Yes, I missed that. And I guess just lastly, when might we learn about Kentucky and whether they're going to let you keep Passport's enrollment? Well, there's a I don't want to comment on the regulatory process, but we're working through the regulatory process on the contract novation and on the actual process of getting approval to buy the Passport infrastructure. Open enrollment starts, I think it's mid October. So we're hoping to have this whole thing concluded either by the end of December or early in September, but I can't predict when that will actually happen. But we're working hard on it. And the earlier it can get done, the more stable that membership will be. Those members love the Passport brand. They like being in that plan. The state understands that. So, I think we're all aligned in our intention to want to keep those members in the Passport brand, in the Passport care plan and in the Passport network. Great. Thank you again. Appreciate it. This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.