Earnings Call: Q4 2019

Feb 11, 2020

Good day, and welcome to the Molina Healthcare 4th Quarter 2019 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Julie Trudell, Senior Vice President of Investor Relations. Please go ahead. Good morning, and thank you for joining Molina Healthcare's Q4 2019 earnings call. With me today are Molina's President and CEO, Joe Zabrzebski and our CFO, Tom Tran. The press release announcing our Q4 and full year 2019 earnings was distributed yesterday after the market closed, and the release is now posted for viewing on our Investor Relations website. A replay of this call will be available shortly after the conclusion of this call through February 17. 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 are made herein as of today, Tuesday, February 11, 2020, and have not been updated subsequent to the initial earnings call. In this call, we will refer to certain non GAAP measures. A reconciliation of these measures with the most direct comparable GAAP measures can be found in our Q4 2019 press release. During our call, we will be making forward looking statements, including statements relating to our growth prospects, our 2020 guidance and our long term outlook. Listeners are cautioned that all of our forward looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review our risk factors discussed in our Form 10 ks Annual Report for 2019 filed with the SEC as well as the risk factors listed in our other reports and filings with the SEC. After the completion of our prepared remarks, we will open the call and 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. On the call today, I will provide highlights from the Q4 and full year 2019, discuss our growth initiatives, review our capital allocation priorities and provide our full year 2020 earnings guidance with detail on each of our three lines of business. Yesterday, we reported earnings per diluted share for the Q4 of $2.67 with net income of $168,000,000 and an after tax margin of 3.9%. I am pleased with our Q4 and full year results. For the full year, we met or exceeded our expectations. Premium revenue was $16,200,000,000 and in line with our expectations. The medical care ratio was 85.8% as our cost containment efforts continue to control medical costs while ensuring the highest quality of care for our members. The G and A ratio was 7.7% as we leveraged our fixed cost base while beginning to invest in growth. We improved our Medicaid and Medicare margins and earned exceptionally high margins in our marketplace business. The 2019 total company after tax margin of 4.4% was supported by 3.2% in Medicaid, 6.7% in Medicare and 10.3% in marketplace. All in, this performance resulted in net income of $737,000,000 and earnings per diluted share of $11.47 In a year when premium revenue decreased by 8% due to legacy contract losses, we were able to deliver 4.4% after tax margins and earnings per share growth of 8%, a testament to our early stage focus on margins. During the year, we improved an already strong balance sheet and capital structure, while the business continued to generate significant excess cash flow. In the Q4, we harvested an additional $300,000,000 of dividends from our operating subsidiaries, bringing the total for the year to $1,400,000,000 As of December 2019, unrestricted cash at the parent company was $1,000,000,000 In early December 2019, our board authorized a share repurchase program of up to $500,000,000 Through February 7th, under a 10b5-1 trading plan, we repurchased 1,900,000 shares for $257,000,000 I will now comment on the progress we made in the second half of twenty nineteen on our pivot to growth strategy. During the past few months, we announced 2 acquisitions, YourCare in upstate New York and Next Level Health in Illinois. These acquisitions of financially underperforming health plans have stable membership and revenue, but provide opportunity for margin improvement, operating leverage and membership growth. As a result of the YourCare acquisition, we will serve approximately 46,000 Medicaid members in 7 counties in Western New York with annual revenues of approximately $285,000,000 The purchase price is approximately $40,000,000 In the Next Level transaction, we will serve over 50,000 Medicaid and LTSS members in Cook County, Illinois, with annual revenue of approximately $270,000,000 The purchase price is approximately $50,000,000 We will fund these acquisitions with available cash and both are expected to close in the first half of the year, enhancing our premium revenue growth rate for 2020. In New Mexico, we have been working on a special situation, which is a discrete program filling an unmet need. The Navajo Nation in New Mexico has passed legislation to create the 1st Native American managed care entity and further the legislation stipulates that the Navajo Nation partner with Molina to operate the plan. Pursuant to that legislation, the business arm of the Navajo Nation will contract with us to develop a fully capitated healthcare offering under the umbrella of New Mexico's traditional Medicaid program. The new entity will be designed to improve access and quality of healthcare for the largest Native American reservation, as there are approximately 75,000 Navajos in New Mexico who are eligible for Medicaid. The program is expected to be operational by 2021. Turning now to an update on our Medicaid RFPs. In Kentucky, we submitted a high quality proposal in 2019 in response to the state's Medicaid RFP and were selected as one of the winning bids. In December 2019, the new administration canceled the awards and rebid the contracts. We have already submitted the updated proposal that details our capabilities and local community commitments that were originally successful and therefore we are hopeful that we will be successful again. In Texas, the STAR plus RFP awards announced in October were disappointing to us. While we believe we have an excellent track record of service in this program and submitted a high quality proposal, we also believe the scoring process was severely flawed. Therefore, we are pursuing our administrative rights. Our team filed a detailed protest, which points out a number of fundamental flaws in the scoring process. We have not been given a timeline for a ruling on the protest. We believe that the effective date of the new contract would be no earlier than January 1, 2021, so we expect to operate under our existing contract for the full year 2020. These and our other growth initiatives are anchored by our capital allocation priorities. 1st, organic growth of our core businesses. 2nd, inorganic growth through accretive acquisitions. And 3rd, programmatically returning excess capital to shareholders via share repurchases. Now turning to our 2020 guidance. 2020 is the 1st full year in our pivot to growth strategy. It is a year in which we expect meaningful top line revenue growth while continuing to produce attractive margins. In that context, some highlights of our guidance are as follows. We expect to grow premium revenues by 7.4% organically and 9% assuming our announced acquisitions close by June 30. For the total company, we expect to produce strong after tax margins of 3.7% to 3.8%. We expect to continue to improve our performance in the Medicaid business as we benefit from a stable rate and cost trend environment. In Medicare, we expect to grow revenues and maintain our attractive margin position despite the industry specific headwind of the reinstatement of the health insurer fee. However, we now expect a decline in the marketplace profit pool for 2020 as the extraordinary 2019 margin performance presents a challenging jump off point into 2020 and it is clear to us now that our membership growth expectations were too optimistic relative to our pricing strategy. We have enhanced our earnings profile by a measured deployment of excess capital. And finally, as a result of all of this, for the full year 2020, we expect GAAP earnings per diluted share in the range of $11.20 to $11.70 Our premium revenue for the full year 2020 is expected to be approximately $17,400,000,000 an increase of 7.4% over 2019. This growth is within the 7% to 9% guidance range we gave previously, which assumed a steady state in Texas and no acquisitions. Assuming the YourCare and Next Level acquisitions closed by June 30, premium revenue would increase approximately 9% year over year and 11% increase on an annualized basis. 40% of our premium growth is attributed to member volume and 60% is attributed to rate increases and mix of business. We have a strong and balanced business portfolio, which produces a solid baseline for 2020 and supports our future growth. Now I will provide some details underlying our guidance by line of business. In our Medicaid business, we expect 2020 premium revenue to grow approximately 6.4%. This reflects the annualized impact of the RFP awards that we implemented this past year, market share growth in underpenetrated markets and net rate increases. Our expected 2020 year end membership is an increase of approximately 3% over 2019 6% when including the membership of our 2 acquisitions. From an earnings perspective, we expect to produce Medicaid after tax margins in the range of 3.2% to 3.4%, a slight improvement over 2019. The rate environment is rational and our rate advocacy efforts are working well. We continue to manage medical costs effectively as our efforts in payment integrity, network management and utilization control continue to offset stable, low single digit medical cost trends. And we continue to improve our retention of at risk revenue and improve our member risk scores. Our Medicare business is expected to grow premium revenues by approximately 12% with our DSNP product growing by 20%. Recall, we filed DSNP products in 150 new counties in 2020, including entering 2 new states, Ohio and South Carolina and gained market share in existing counties. We continue to progress toward our goal of having full penetration of our DSNP product in our Medicaid footprint. Our year end membership in Medicare all in is expected to be an 8% increase over 2019. From an earnings perspective in Medicare, we expect an after tax margin in the range of 5.6% to 5.7%, including the health insurer fee headwind of $22,000,000 after tax, which dampens margins by approximately 90 basis points. In this line of business, premium yields have kept pace with medical cost trend. We continue to effectively manage the high acuity LTSS population and we continue to improve on our member risk scores. In our marketplace business, we served 274,000 members at year end 2019 and produced exceptionally high margins. In an effort to be more competitive in our 2020 product set, we lowered our prices on average 4%. We began 2020 with approximately 350,000 marketplace members, a 30% increase from year end 2019, including our expanded footprint in 2 new states, Mississippi and South Carolina. We expect marketplace revenue growth of 9.2% in 2020 with after tax margins in the 4.7% to 4.9% range. Our marketplace membership and revenue growth outlook are below our initial expectations as the investments we made in product design and pricing did not produce the level of membership we had forecasted. This was particularly true in 2 markets, Texas and Florida, which comprised most of the shortfall to our expectation. In summary, we had competitive pricing in many, but not all of our markets and we saw fewer members move for the same price differential than we had seen in years prior. We do however expect membership attrition to be lower than in past years and thus we expect to end the year with approximately 310,000 members, a 15% increase over year end 2019. In conclusion, after another solid year of performance in 2019, we look to 2020 and beyond with confidence. We have a deep management team, a strong product portfolio, a healthy capital structure and a value creating approach to capital deployment. We are and we will be a pure play government managed care business. We are going to stay close to the core. We believe that the government managed care business has very attractive growth characteristics with compelling free cash flow generation. Now, I will turn the call over to Tom Tran for more detail on the financials. Tom? Thank you, Joe, and good morning. We report 4th quarter earnings per diluted share of $2.67 net income of $168,000,000 and an after tax margin of 3.9 percent with premium revenue of $4,100,000,000 Let me provide some additional detail on the quarter. My commentary will be focused on a sequential quarter comparison. The consolidated MCR for the Q4 of 2019 was 86% compared to 86.3% in the 3rd quarter, primarily due to improved results in Medicaid. Prior period reserve development in the quarter was negligible. More specifically, in the Medicaid business, our MCR for the quarter improved 80 basis points sequentially to 87.3 percent producing an after tax margin of 3.6%. We continue to perform well in Medicaid. Our Medicare business continued to perform well in the quarter. The MCR for the quarter of 85.5 percent was stable compared to 85.6% in the Q3 of 2019 producing an after tax margin of 5.5%. Finally, our marketplace business continued to perform well and generally in line with seasonal expectations as we report an MCR for the quarter of 73.5% compared to 71.2% in the Q3 of 2019 producing the net for tax margin of 4.5 percent. Regarding influenza, costs were higher in the current quarter compared to the same quarter in the prior year, but the overall impact was not significant. The G and A ratio for the Q4 of 2019 increased by 40 basis points to 8% compared to 7.6% in the Q3 of 2019 due mainly to spending on sales and marketing during the open enrollment for Medicare and Marketplace. Turning to our balance sheet, cash flow and cash position for the quarter. Our reserve approach is consistent with prior quarters and our reserve positions remain strong. Days in claim payable represents 50 days of medical cost expense compared to 50 days in the Q3 of 2019 53 days in the Q4 of 2018. As of December 31, 2019, our health plans had total statutory capital surplus of approximately $1,900,000,000 which equates to approximately 3.50 percent of risk based capital. In December, the Board of Directors authorized a share repurchase program of up to $500,000,000 And during the quarter, we repurchased approximately 400,000 share for $54,000,000 Subsequent to the quarter through February 7, we repurchased an additional 1 point 5,000,000 shares bringing the total number of share repurchased to 1,900,000 for $257,000,000 Operating cash flow for 2019 was $427,000,000 an improvement compared to 2018 primarily due to the timing of premium receipt and government payments. Our initial full year 2020 earnings per share guidance on a GAAP basis is in a range of $11.20 to $11.70 We have not include the YourCare and Next Level acquisitions as these transactions have not yet closed. Our guidance assumes a steady state in Texas for the full year 2020 as we believe the existing contract will run through this year. Our premium revenue for the full year 2020 is expect to be approximately $17,400,000,000 which reflects a 7.4% increase over 2019. If the YourCare and Next Level acquisition were to close by June 30, premium revenue would increase approximately 9% year over year and the earnings impact for 2020 from the 2 acquisition would be negligible. We expect the medical care ratio to be in a range of 86.2% to 86.4%. The increase over 2019 is primarily due to a higher marketplace MCR in 2020. We expect our G and A ratio to improve to approximately 7.2%. This reflects revenue growth, fixed cost leverage and productivity improvements offset somewhat by reinvestment in growth initiatives. Our effective tax rate expected to be approximately 31%, an increase from 24% in 2019 driven by the impact of the health insurer fee. We expect asset tax margins in a range of 3.7% to 3.8% primarily due to lower marketplace margins that Joe previously mentioned. While we do not give quarterly guidance, I do want to point out that the Q1 earnings per diluted share will be less than 25% of our full year outlook due to the impact of the leap year and the timing of our capital actions. Lastly, I would like to announce that we will be holding an Investor Day on May 28, 2020 in New York City. That concludes our prepared remarks. Operator, we are now ready to take questions. Thank you. We will now begin the question and answer session. The first question today comes from Peter Costa of Wells Fargo. Good morning. Thanks for taking my question. Really just wanted to explore the Exchange business a little bit in terms of do you believe that margins will deteriorate further going forward? Or are we at the end of it here with this year coming up? And then talk about the pricing situation with competitors. How much further do you expect price competition to impact that business' growth? Sure, Pete. We hit our price point on our silver product. Meaning we are number 1 or number 2 in about 50% of our geographies. We hit our price point in bronze, either the number one price position or 0 premium in about 75% of our geographies. So we didn't hit our price point in all geographies. And where we did hit the price point, fewer members move for the price differential than we had seen in years prior. So we didn't get the volume that we expected to get for the 4% average price decreases we put into the market. So 2020, the earnings reset. We earned $150,000,000 which was exceptionally high in 2019. That will be approximately $75,000,000 in 2020. But I would say that 2019 felt more like $125,000,000 a year and 2020 should have been more like $100,000,000 a year. So while the spread looks wide, I think the jump off point in 2019 was particularly challenging. I think we need to go through the pricing cycle for 2021 to see where the margins land. We still have very high hopes for this business. It leverages our Medicaid footprint, our Medicaid network. Nearly 90% of our members are fully subsidized. So we're servicing the working poor serving the working poor. So it fits strategically. But let's go through the 2021 pricing cycle and see how we can grow the profit pool over time. Okay. Thank you. Next question comes from Matthew Borsch of BMO Capital. Yes. Maybe just a little bit more on the ACA Marketplace membership. And I'm curious in Florida and Texas, is it a dynamic of price competition being more intense than you had expected? And you also alluded to members not moving at the same price point as you saw the move in prior years. Is that reflected maturity in the market? Or are there other factors you might attribute that to? Matt, on the last point, it's the question of elasticity of demand. And I think where we misforecasted was the result of members moving as prices were moving up, as price increases were going into the market, members would move for $10 $20 And I think as prices have now moderated and even declined, I think you're seeing less movement for the same price differential as the market, as you suggested, seasons and matures. As your members become more chronic and they stay with you longer, these high acuity members are not going to move their health plan if they're using a lot of services. So I think the maturity and the seasoning of the market has something to do with it. On your first point, yes, in Texas and certain places in Florida, we did not hit the price point that we tried to due to a competitive force. And as we reprice into 2021, we're going to look at those markets and try to capture the market share that we think we can attain. Thank you. The next question comes from Mike Newshel of Evercore ISI. Thanks. Maybe just to follow-up on the exchanges. I mean, since the membership does appear less sensitive to price changes, is that going to change how you approach pricing next year in terms of optimizing margin versus favoring enrollment growth? And also just how are you thinking about the long term targets on margin and revenue growth that you provided at the Investor Day? Yes, the balance that you referred to is what you need to titrate in this business. You're looking for how many members you can grow for the price point you put into the marketplace. And the favorable news in all of this is that while fewer members move that also means that more members are retained. So we're projecting while last year we had about 1.5% to 2% membership attrition per month. We're projecting this year that to be more like 1%. As I said, as members stay with you longer, they're probably more chronic and heavy users of healthcare services and less likely to move. So I would say that, yes, as the market seasons, fewer members will move, but that's good for member retention. And how about the long term guidance on exchanges? How are you thinking about that? Well, I think we have to go through the 2021 pricing cycle. We'll look at all of the factors in this business. We'll look at our networks. We'll look at our broker relationships and our commission structures and then of course product design and price point. And we still think we can grow the profit pools albeit off a lower base. We're not reforecasting the long term margin picture for the business, although suffice it to say, it probably will take longer to get there than we had originally forecasted. Okay. Thank you. The next question comes from Steve Tanal of Goldman Sachs. Good morning, guys. Maybe just a couple of quick ones on the guidance and then one on the marketplace. So, just wanted to understand, is prior period development or prior year development now included in the guidance? And if so, is that at a similar level to 2019? I think it was about $0.98 in the first half of the year. Prior year development is not included in our sense of what amount of sort of revenue and net earnings would be lost if the appeal of the award doesn't go as planned kind of on an annualized basis just so we have a sense of what that delta would look like? Well, if the right now as the department has published, if they went through with the awards, the contract new contract would be effective on September 1, 2020. So therefore, it would be 4 months of revenue loss. And the Medicaid contract, that's approximately $350,000,000 and we estimate anywhere from $0.20 to $0.25 of earnings per share drag in this year. Now I wouldn't necessarily multiply that by 3 to get the full year impact because you just can't take the cost out fast enough. In 1 quarter, you're not going to take the cost out fast enough. So we need some time to readjust our cost structure and our fixed cost base to estimate the full annual effect. But for this year, dollars 0.20 to $0.25 is drag in the latter half of the year in the last half of the year and $350,000,000 of revenue loss in the Medicaid contract. Super helpful. Then just on the marketplace, wondering if you could comment on the MLR that's embedded in the guide? I'm sorry, can you repeat the question? The marketplace MLR for 2020 that's embedded in the guide? Yes, it's approximately 74% up from 68% in 2019. Awesome. Super helpful. Thank you. You're welcome. The next question comes from Justin Lake of Wolfe Research. Thanks. Good morning. I was hoping you could walk through your capital and balance sheet projections for the end of the year, assuming the deals close as you expect and the share repo that's in the guidance? Just trying to get an idea on the end of the year capital flexibility. Sure, Justin. And just to recap, during 2019, we were retiring the very expensive convertible notes that were in our capital structure that were getting more as the stock price moved up that were getting more and more expensive. So over a period of 18 months, we freed up $1,700,000,000 and the notes right now are substantially gone. Now as you know, those notes have a dilutive effect on your share count. And so retiring those notes actually is a catalyst going into next year on the share count dynamics as will be our share repurchase program having already repurchased 1,900,000 shares. All that being said, we still have $1,000,000,000 of cash at year end in the parent company, which means it's free in excess cash flow. We also have $900,000,000 of undrawn debt capacity for a total of $1,900,000,000 of dry powder to fund our acquisitions, to repurchase shares, and to grow the business the way we intend to. The only thing I would add here as Joe said is that we expect to continue to attract dividend from MAP subsidiary as we continue to generate profit in 2020. So that additional dividend structure will also give us additional flexibility there to do other things. That's helpful. Can you tell us what you will be $90,000,000 up $50,000,000 for $140,000,000 for the so total of $90,000,000 for the 2 acquisitions. And then we still have $250,000,000 left in our current share repurchase authorization, but we can top that up at some point in the future. Thanks. And then just a couple of quick numbers questions. First, can you give us an investment income assumption for 2020? And then second, Joe, just to follow-up on the commentary on Texas, I just want to make sure you were saying that it's $0.20 would be $0.25 dilutive to this year, but it would actually be less we should multiply that by 3, to get the $0.75 because you'd be able to cut some costs, so it would be lower than that on a full year basis once you get that cut in? Yes, that's correct. Dollars 0.25 of drag if we were to lose the contracts on September 1. But we're still looking at how quickly we would reduce our cost structure. And so we I don't have a full year number, but I'm expecting it would be less than 3 times the 2020 effect. Tom, investment income? Sure. On the question of investment income, we lumped together investment and other income. If you look at 2019, it's $132,000,000 3rd quarter happened to be higher than normal as we went through some restructuring of our portfolio. Typically you would see roughly about $30,000,000 a quarter. I would say that for 2020 you should see that number to be lower because yields have dropped significantly over this past year due to the Fed. Fund had decreased a couple of times. So, I don't have the number right in front of me. So, let me just follow-up with you right after the call. I give you the exact number. Thanks again. The next question comes from Scott Fidel of Stephens. Hi, good morning. Question, just want to ask something maybe a little more thematically. And Joe, interested in just your thoughts on just looking at the Medicaid RFP process more broadly and what transpired in 2019. It was a pretty messy year in terms of how the RFP played out in a number of states. When we think about North Carolina, Kentucky, Texas, Louisiana, just interested if you think holistically there's any broader takeaways around what we've seen play out in the Medicaid RFP process. I mean, one could certainly look at each of these from a bit of a idiosyncratic sort of one off dynamics in each state. But clearly, when you aggregate it together, it was just a difficult much more difficult year for RFPs in general than we've traditionally seen. I think that's a fair point. And the specific sites you mentioned certainly have a lot of intrigue around them in terms of how they all unfolded. We don't view it any differently than we always have. We think non incumbents have a reasonable chance of displacing an incumbent, which means you need protect your turf and go after the new ones hard. We still think the ground game works. You have to be in a state a year or 2 before an RFP is dropped in order to build the provider relationships, the regulatory and political relationships and really get to know the landscape and we're doing that. So while I think this year as you mentioned might have some idiosyncratic noise to it, We still believe that the pipeline of Nevada, Missouri, Iowa, Indiana, Tennessee, Georgia a little further out, We'll evaluate all of those through the screens we put them through, the friendliness of the regulatory environment, reasonable rate structure, the strength of the incumbency and ability to develop a network and we'll take our shots and go after the ones we think we can win. So long term, I don't think my view of the growth aspects of new state wins has changed even though as you suggest 2019 was a bit noisy. Okay. And then just one quick guidance question. Just your thoughts on the good range for operating cash flow in 2020? Well, operating cash flow really fluctuate a lot. So that depends on timing of government payment. So now we're in good zone. We expect operating cash flow to be positive going forward. But every quarter you're going to see fluctuation and that's just the nature of the business we're in. Okay. All right. Thanks. The next question comes from Josh Raskin of Nephron Research. Hi. Thanks. Quick ones on guidance as well. Just as we think about adjusted EPS, any difference in amortization expectations for next year? And then the share count reduction, sort of that 5% boost you're seeing, is that share buybacks? I think it feels like it almost assumes a reauthorization of the buybacks as well. Josh, I'll answer the second question first then hand it over to Tom. In 2019, we were retiring a very expensive convertible notes, which as you know end up in your diluted share count. So about a third of our share count reduction is just a spillover effect of all the convert retirement activity in 2019 hitting full run rate in 2020 and the remaining portion is the actual reduction in share count as a result of the share repurchase program. It does not anticipate any top up to the existing $500,000,000 authorization. Yes. On the intangible amortization, if you look at the table we disclosed in the earnings release, it's approximately $17,000,000 pre tax for 2019. That number is going to drop a little bit in 2020. So I expect to be roughly about $0.17 to $0.18 per share for the full year versus this year a little bit roughly about $0.20 Okay, perfect. And then you guys talked last quarter around some of your select some of the specific Medicaid markets cost pressures and some high cost claims and obviously no sign of that, no mention in the press release. Maybe any look back as to what the potential drivers were, what you guys were seeing or was any of that still lingering in the quarter? It really wasn't. In the second and third quarter, we did note some cost pressure here and there. The one that we were most aware of and IMD facilities in the behavioral benefit, the inclusion of IMD facilities in the behavioral benefit and then of course due to redetermination the acuity mix shift. As we've often said that rate advocacy is a very important part of this business. And we and the other participants in Ohio work with the state, got a rate increase in mid-twenty 19 and then got a very significant rate increase for Oneonetwenty going forward. So that was the one we were most concerned with and we think that has largely been solved with our rate advocacy efforts and a nice rate increase on Oneonetwenty twenty. Perfect. Thanks. The next question comes from Charles Rhyee of Cowen. Yes, thanks for taking the question. Just two quick questions. One going back on the marketplace. If you're seeing fewer members move because of pricing, is there anything beyond pricing that you can do to really differentiate the products to drive growth? Yes, there are some benefit design, dental, vision and what we call ancillary benefit features, many of which we implemented in for this cycle. And then of course there are your broker relationships and is your commission structure competitive and will broker loyalty help move membership. So we're looking at all of those factors in our 2021 pricing cycle. Okay, great. And then just going back to Kentucky, you mentioned that you kind of resubmitted the bid. Were there any kind of major changes when you looked at the revised RFP there? And can you talk maybe give us a little bit more thoughts on sort of what changes you revised for your bid as you resubmit it? Thanks. Sure. The only changes to the RFP were 2, I'll call them administrative matters really. The questions on the capabilities did not change at all. But what we did and I would imagine all of our competitors did is you went back and looked at where you could have scored better and tried to shore up your RFP response, which we did and as I said, I'm sure the competitors did as well. Okay, great. Thank you. The next question comes from Steven Valiquette of Barclays. Great. Thanks. Good morning, guys. So a couple of questions around the marketplace. I guess first for the 2020 membership since you mentioned that Texas and Florida in particular were soft relative to your expectations. Is there any chance that maybe just the unfavorable headlines from Molina around your initial outcome in the Texas Star Plus award may have hurt your marketplace membership growth in Texas? And do you have any thoughts to me on why you think Florida may have been soft? And I have a follow-up after that. No, the dynamics in Texas and the two businesses are quite separate and distinct from each other under different regulatory regimes, etcetera. So no, we do not think that the marketplace and Medicaid business had anything to do with each other. It was competitive pricing. You do the best you can. It's a blind bid. You try to predict where your competitors are going. And as I said, I think the good news is we did hit 50% of our silver geographies and in 75% of our bronze geographies. So we hit the price point in many places. We'll try to do better next year. And hopefully the attrition rate will stick and we'll have sticky membership and profitable going forward. Okay. And then just quickly again for marketplace. I mean you mentioned last month in January that 80% of the 300 and and 50,000 members are renewals or retained, which you mentioned gave you stability and visibility on the MLR. But just to kind of explore this a little further, this whole discussion around less new members for 2020 leading to lower margins. And is it possible that just a larger percent of your marketplace book because it's retained members is maybe hitting up on MLR floors in 2020 than what you expected and that is what is mechanically making the net margins come in a little lower than expected or is that not really what you're seeing? Thanks. We in 2019, we are at the minimum MOR in one state, New Mexico. We have been for 2 years now. And as you know, the 2017 year, it's a 3 year rolling calculation. The 2017 was a particularly poor year. And as we just announced, the 2019 was an exceptionally good year. So that will put pressure on the minimum MLR in a couple of additional states, but it's really not material to the overall story on the margin. It's really the product sorry, the volume pricing equation that is the larger part of the story, not the minimum MLR. Okay, perfect. Thanks. The next question comes from Gary Taylor of JPMorgan. Hi, good morning. Most of my questions answered. I just want to go back to Medicaid margins for next year, a little bit, I think up 10 basis points is your guidance. And you had mentioned some rate increases in Ohio, so I've noted those. I guess my question is, what have you contemplated for 2020 in terms of just the redetermination environment in general getting better or worse, staying the same? And with this Trump public charge rule now being allowed to take effect at least while it's being litigated. What are your thoughts on whether that has any impact in terms of enrollment and margins? Gary, on the last part of your question, the public charge redetermination, the impact on 2020, we certainly took all of that into consideration. And we saw membership stabilize in the last half of the year. The quarter over quarter sequential membership in Medicaid is pretty much held steady. And so many of the significant redetermination efforts that were going on in Michigan and particularly Ohio have moderated. Certainly, the public charge that we're aware of it. 3 of our states, California, Texas and Illinois in particular have high concentrations of the populations that are subject to it. But Department of Homeland Security only estimates that 140,000 people nationwide are really affected by it. But the chilling effect is something we're aware of and we certainly considered in our guidance. With respect to rate and profit improvement, it was not just Ohio. We actually did well on rates in many of our geographies. As I said, the rate environment is stable. It's very rational. It's actually sound. And just about all of our geographies rate not only kept pace with both single digit medical cost trend, it exceeded it in some places. So that helps margins in 2020 and also we continue to pound away at our profit improvement initiatives. Payment integrity, utilization control, better risk scores, all contribute to the profitability of both the Medicare and the Medicaid book of business. So we're pretty confident we can maintain this margin position in 2020 and perhaps beyond. Thanks. One other question if I could just on prior year development. Your GAAP earnings guidance roughly flat year over year is hurtling almost $1 of excess development that you're assuming does not recur. And I know I think that $0.98 is higher than it's been historically the last few years. But could you just remind us on maybe what lines of business were the largest contributors to that $0.98 or roughly $1 just so we can think about that a little bit heading into 2020? Most of the favorable development that we have report throughout 2019 were related to Medicaid business. Thank you. Next question comes from Kevin Fischbeck of Bank of America. Great. Thanks. So I just want to go back to the exchanges for a few minutes. It sounds like you're saying that the delta versus your expectations on the exchanges is really about membership rather than margin. So are you saying that the margin is more or less in line with kind of what you expected when you were pricing the business last year? No, Kevin. We expected the margin to be more closer to the long term guidance range that we gave you. So we're certainly coming in lower. But as we said many times, you can't have a conversation about margin or membership without the companion statement. Our goal is to grow the profit pool and growing it off of the $75,000,000 base will be pretty important to our earnings growth story going forward. So every single year we go into the pricing cycle, we'll try to sort through the competitive forces. We'll work with our broker relationships and our goal is to grow the profit pool yield over time. Now whether we can get it back to the 8% after tax margin range we had originally forecasted, it will take some time to get there. But as we go into the 2021 pricing cycle, we'll know more. And is it the minimum MLR? I think you said minimum MLR was not a big issue. So if it's not minimum MLR being a big issue in 2020 that caused the margin to drop, what is it just growth in lower margin markets than you expected? Yes, Kevin, MLR does play a factor in the lower margin in 2020, but it's not really the major factor if you will. As Joe mentioned before, we come off the 2017 bad year, drop off your 3 year rolling calculation. So 2020, we expect to have higher minimum loss, higher I would say a rebate and more state than just New Mexico. But all of those factors played into the margin compression for the year. Number 1, off of the higher revenue base, the operating leverage is significant. Let's not forget that. Your variable cost in sales expense is certainly there, but you're leveraging a fixed cost base. So the fact that we didn't hit revenue really, really hurt us in the operating leverage in this line of business. Okay. I guess the fact that you're hitting minimum alarm more cases that give you then a pricing tailwind into next year or are you now rethinking how beneficial that might be given that people really weren't switching for the incremental price differential? Well, when we go into the 2021 pricing cycle, we'll have to forecast. Again, here we go with 3 months into the year forecasting if we're going to be up against it in a state and take that into consideration in the pricing. And as you know, it's a 3 year rolling average, so you can't get it all back in 1 year, it takes time. But again, as Tom said, it's not a significant part of the story. We might bump into it in a couple of more states than New Mexico, it's just not a significant part of the story for this year. Okay. And then just last question. So just basically just tied us down. The costs are coming in basically as expected. You continue expecting to come in as expected. There's no cost issue. We're really talking about a pricing, minimum MLR and membership growth issue, not a cost issue anywhere in here. Yes, I think that's exactly it. It's the balance of those three factors that you try to anticipate in price for. And this year we misforecasted it and we didn't hit it. All right, great. Thanks. The next question comes from Dave Windley of Jefferies. Hi, good morning. Most of them covered, but I have a couple. On the acquisitions, Joe, you mentioned that they're relatively low margin, which gives you an opportunity. I think Tom in his prepared remarks said if they close by exit date, they would be neutral to earnings this year. I guess I'm wondering how much of your playbook does that assume? Are they just naturally financially neutral and your operational the playbook pretty well in the organic business or pretty quickly, how quickly do you think the playbook pretty well in the organic business or pretty quickly. How quickly do you think you can execute that in these acquisitions? We believe we can get these to run rate to our target margins after 1 year of operating them, whatever that year is, 12 months of operating them. And bear in mind, it's not just getting the $550,000,000 of revenue to our target margin. I hate to keep talking about operating leverage, but it's real. These two properties in particular, 1 in upstate New York is basically just folded into our existing infrastructure and same with Ohio. We have a very large Illinois health plan. We need no more management. We fold it in and we get the operating leverage off it. So it actually produces north of your target margins because of the operating leverage you get and we plan to get to a run rate after 12 months of ownership. Got it. Okay. And am I right that approximate delta from where you're acquiring them to your target margins is a good 200 basis points or more? Yes. These two properties in particular are basically breakeven. Okay, breakeven. And then just for simplicity to the share count question and the reduction in share count in 2020, can you give us after the retirement of the convert, after the buyback that you did in the Q4, like what was the ending share count for the year as opposed to the average for the Q4? Yes. The ending share count is going to be lower than what we provided to you on the guidance table. So because as you buy share, it's going to flow throughout a number of quarters. And the number is probably roughly about a little bit less than 61,000,000 share for the end of 2020. Okay, great. And last question, on the comments about attrition, Joe, I think you had talked about fewer movers. I'm interpreting that as movement during like an open enrollment period and during shopping. Do I also understand that you're translating that to you think your retention within the year is going to be higher? And is the thought process in those 2 different kind of periods the same? Good point. Our retention during open enrollment was north of 80%. So we ended the year with 274,000 members, 80% of those are now members inside our 350,000 beginning of the year membership. We also saw this last year and you can see it in the medical cost. You can see higher use of pharmacy, chronic conditions using expensive drugs. So the members are clearly more chronic. You see it in the risk scores. You see it in the retention rate and the open enrollment retention rate. And therefore, we are projecting that we'll only lose about 1% a month where in the past we've lost 1.5% to 2% a month. Okay. And then is that higher chronic mix than consistent with what you expected in pricing and kind of MLR expectations? I presume you baked that into your guidance, but just to make sure. Yes, absolutely. And again, higher acuity members, as long as you get paid for them and get the right risk scores, higher acuity members are finding can produce target profitability. So yes, we took that into consideration as we price the book, but we have to get the risk scores and we're getting better and better at that every day. Got it. Thank you. Thanks for the answers. The next question comes from Sarah James of Piper Sandler. Thank you. For 2020 guidance in Medicaid and Medicare margins, they're both well above peer average and your long term guidance that you gave at I Day. But the net margin of the company is still well below the midpoint of long term guide. So I'm wondering if the 3.8 percent to 4.2 percent is still what we should be thinking about for long term net margin guidance for Molina as a whole? And how sustainable are the heightened Medicare and Medicaid margins that you're experiencing in 2020? Well, certainly in Medicaid with a projection for 2020 of 3.2% to 3.4% after tax, we believe that the Medicaid margins are sustainable. And again, all based on a reasonable, rational and really sound rate environment. So that's the context for being able to sustain those margins and our ability to manage medical costs. On the Medicare side, bear in mind our book is different. It's not traditional Medicare Advantage. It's DSNP and MMP. These are high acuity members, heavily burdened with LTSS benefits and we're very good at managing those. So it's a $2,500,000,000 book of business with starkly characteristics than many of the larger Medicare players. So I don't think the comparison to traditional MA is the right comparison, but we believe these margins are sustainable in this area. And yes, you're right, it's really the margin rebalance in 2020 on marketplace that has caused us to operate at the lower end of our long term guidance range. And as we go through our 2021 pricing cycle for marketplace, we'll make the determination as to whether long term guidance still stands or not. Got it. And then maybe if I compare the MA margins to your own book, because you're right about the product mix there. So they're running a good bit above the 5%, 5.5% long term guide. And then you mentioned they're also absorbing 90 basis points from the hip. So as we think about that book going forward, when the hip falls off, can you add that 90 basis points back in? And how do you think about the long term margin profile of your MA book? Well, clearly when the hip goes away for next year, it's a complete reversal. So you're right in that point. As you grow the business more aggressively, newer members that come on are going to attract a higher MLR. Typically, we see new members coming in, in the mid-90s and the book as it seasons produces mid-80s. So if we start growing this book more aggressively, that will put pressure on the MLR, which will in turn put pressure on the margins, but that's all contemplated in pricing and in forecasting. But that would be the dynamic that I would expect as we grow this book in the future. Thank you. This is Tom. This is a question from Justin Lake on investment income before. I just want to provide you with a data. 2020, we expect 19. The next question comes from George Hill of Deutsche Bank. Good morning. And I think most of my questions have been answered. I'll just tack one more on about the churn that you were looking for, I guess, churn wasn't what you expected. I guess do you know what churn in aggregate looked like kind of across the market inclusive of your book? And I guess what does I'm trying to figure out like what do those numbers kind of tell you about the economic sensitivity of that market and like what type of price decrease do you think is necessary to drive churn in that book and grow market share? And I recognize there's a lot of moving pieces with that, but Yes, there are a lot of moving pieces. And one thing I would say is that, first of all, we did retain an open enrollment 80% of our members. So we have at least our own data point. Hard to say what the competitors saw, But we believe this is sort of a dynamic as prices have now stabilized or even moderated and decreased. The $5 $10 $20 price differential. Keep bearing in mind these are nearly fully subsidized members. So the marketplace 10,000,000 members wide, we're serving a niche. We're serving these highly subsidized members. 86% of our members have some subsidy, about half of those have a full subsidy. And the dynamics I think in that market might be different than the marketplace at large. If a member is high acuity and they're using services, they're less likely to move. That's a dynamic we've always dealt with. But I think as prices have moderated, members are not leaving for the same price differential they have left for in prior years. Okay. That's helpful. Thank you. This concludes our question and answer session as well as the conference.