Good day, ladies and gentlemen, and welcome to the Molina Healthcare second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Julie Trudell. Please go ahead.
Good morning, and thank you for joining Molina Healthcare's second quarter 2019 earnings call. With me today are Molina's President and CEO, Joe Zubretsky, and our CFO, Tom Tran. The press release announcing our second quarter earnings was distributed yesterday after the market closed, and the release is now posted for viewing on our company website. A replay of this call will be available shortly after the conclusion of the call for 30 days. The numbers to access the replay are in your earnings release. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein as of today, Wednesday, July 31st, 2019, have not been updated subsequent to the initial earnings call. In this call, we will also refer to certain non-GAAP measures.
A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2019 press release that we issued last night. During our call, we will be making forward-looking statements, including statements relating to our growth prospects, our 2019 guidance, our pending Texas RFP, and our long-term outlook. Listeners are cautioned that all of the forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for 2018 filed with the SEC, as well as risk factors listed in our other reports and filings with the SEC. After the completion of our prepared remarks, we will open the call up and take your questions.
Finally, as you may have noticed from our earnings release issued last night, we have enhanced our disclosures of information, eliminating the need for a quarterly supplement. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?
Thank you, Julie, and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the second quarter of $3.06, pre-tax earnings of $257 million, and after-tax earnings of $196 million, resulting in pre-tax and after-tax margins of 6.1% and 4.7% respectively on a reported basis. We are very pleased with our second quarter and first half performance, in which we are demonstrating that we can sustain our attractive margin profile while pivoting to top-line growth. The business continues to generate significant excess cash flow and our revenue growth initiatives are well underway.
We are raising our full year earnings per diluted share guidance by $0.60 at the midpoint of the prior range, with a new range of $11.20 - $11.50 for the full year. Now, some highlights for the first half of the year. Premium revenue was $8 billion and in line with expectations as our membership flows have stabilized, our rates remain sound, and our retention of at-risk premium continues to improve. We managed to a medical care ratio of 85.5% in the first half as we continue to demonstrate our ability to manage medical costs, execute strong rate advocacy efforts, and continue to improve our claim payment practices.
The year-to-date G&A ratio was 7.6%, also in line with expectations as we efficiently managed our resources to provide excellent service to our members and providers, all while continuing to invest in revenue growth initiatives. We continue to harvest dividends from our operating subsidiaries and have used the cash to pay down debt, lower interest expense, and provide ample dry powder at the parent company to reinvest in growth. We have a very strong balance sheet and a simplified and efficient capital structure. Now, some comments on performance by line of business. In the Medicaid business, we achieved an 88.3% medical care ratio and an after-tax margin of 3% for the first half of the year, squarely in the range of the target margins we have forecasted for this business. Some specific points on Medicaid.
TANF and ABD generally performed in line with our expectations, and Medicaid expansion outperformed. Medical cost trends remained well managed across all medical cost categories as the result of our continued improvement in utilization management and payment integrity. We continued to improve on our retention of quality and incentive revenue. Our Medicaid business is performing well, producing top-tier margins and well-positioned to grow. Our Medicare business, comprising our D-SNP and MMP products, continued to perform well as we managed to a medical care ratio of 85% for the first half of the year and produced an after-tax margin of approximately 7.4%, outperforming our expectations. More specifically on Medicare, we continued to demonstrate excellence in managing high acuity members by providing access to high-quality healthcare at a reasonable cost. This includes our market-leading management of long-term services and supports benefits, which are embedded in our MMP product.
We continue to see the results of our quality and risk adjustment efforts as our Medicare risk scores are becoming more commensurate with the acuity of this population and risk adjustment revenue has increased. Our attractive Medicare margin profile gives us plenty of flexibility to reinvest in additional benefits, which should help us maintain our product competitiveness as we position this business to grow in 2020 and beyond. Finally, our Marketplace business continues to perform well. We managed to a medical care ratio of 64.7% and an after-tax margin of 13.6% for the first half of the year. Specifically, the risk pool has seasoned, and our medical cost trend is stable and being well managed. We are capturing more accurate and complete risk scores.
As a result, we are paying less into the risk pool, and our membership is lapsing at the expected monthly level of less than 2%. These results and metrics were in line with our expectations and our prior guidance. The margin profile of the Marketplace business also gives us ample flexibility to ease up on rates, improve the value-added benefits, and pay competitive commissions so we can grow membership in 2020, albeit at a lower, more sustainable, but still attractive margin. Now I will comment on the first six months of the year through the lens of our locally operated health plans. Our health plan portfolio has continued to perform well. Our operating model continues to pay dividends as we empower local health plans to drive frontline decision-making with strong support from centralized services and disciplined corporate oversight.
California continues to perform well in its very diversified book of business and in one of the more complex network environments in the country. With 590,000 members, our effective medical cost management and low-cost networks are producing MCRs in the mid-80s. As such, our California plan is poised to grow, particularly in returning to meaningful Marketplace market share. In Ohio, with 297,000 members, we are generating solid margins with a total book MCR of 88.2% for the first half of the year. The spike in Medicaid medical cost due to the introduction of the behavioral benefit and the higher acuity mix that came from redetermination efforts has been ameliorated by our effective rate advocacy in the state. We believe we are well positioned for the upcoming re-procurement.
In Washington, with 811,000 members and a diversified portfolio of products, our margin position is returning to its historical level, even with the confluence of significant membership growth due to our successful re-procurement and the introduction of the new integrated behavioral benefit. The higher medical cost trends experienced early this year due to this significant growth have abated as a result of the increased focus on inpatient stays and care management. In Texas, with 360,000 members, we await the announcement of the STAR+PLUS, STAR CHIP awards at the end of August. The continued excellent performance in our ABD business contributes to our confidence in the pending re-procurement. In summary, we are pleased with our second quarter and first half performance across all of our operating metrics, product lines, and health plans, and with respect to capital management. Now, I will address our updated and increased 2019 earnings guidance.
We have had a strong start to the year and very good momentum as we head into the second half. Our margin sustainability efforts have clearly taken root. This gives us confidence in raising full-year earnings per share guidance to a range of $11.20-$11.50, with $11.35 at the midpoint, and an after-tax margin of 4.3%. This earnings per share guidance implies achieving medical care ratios of approximately 88% for Medicaid, 85% for Medicare, and 69% for Marketplace, resulting in after-tax margins of approximately 3%, 7%, and 11% respectively. With these medical care ratios and after-tax margins, which are in the top decile, we are taking a cautious approach to forecasting any further margin improvement for the remainder of the year. Many times, the positive implications of favorable reserve development are overlooked.
As we continue to improve the management of our medical costs, we continue to outperform the medical cost trend assumptions embedded in reserving. This means our medical cost baseline and our cost trends for the current year dates of service could be conservatively stated. Our attractive and sustainable margin position that we have laid out in our full year 2019 guidance provides a strong earnings baseline as we pivot to top line growth in 2020 and beyond. I will now provide an update on 2020 and the longer-term outlook. As I shared with you at Investor Day, we expect 2020 premium revenue to grow by 7%-9%, supported by growth in all three lines of business. This excludes any impact of the Texas RFP outcome, which has not yet been announced. Our top-line growth initiatives for 2020 are well underway.
In Medicaid, growth in 2020 will benefit from the annualized impact of the RFP awards that we implemented and launched this year, along with expected Medicaid expansion growth in some markets. For instance, we have planned growth in Mississippi, Illinois, and Washington, and the potential for Medicaid expansion in Utah. In Medicare, there are more than 400 counties nationally where we offer only Medicaid, and our Medicare footprint is under-penetrated in approximately 65 existing counties. We have filed D-SNP pricing in 150 new counties for 2020, which includes entering two new states, South Carolina and Ohio. In Marketplace, our 2020 Marketplace rate bids have all been submitted. All of our submissions have not yet been made public, so we will not be commenting on rates in specific markets. Our approach is to perform a very detailed market-by-market analysis to evaluate our competitive pricing position.
We believe we have competitive products that will be priced well against the competition. We have maintained a very robust broker network and believe that our broker compensation plans will now be more competitive. Inorganic growth prospects are also an important dimension of our long-term growth strategy. While we will never comment on specific opportunities, let me offer some brief thoughts on our activity in this potential value-creating area. We expect to have $1.8 billion of investment capacity over the course of 2019. This comprises $500 million of cash currently at the parent, $900 million of presently available unused debt capacity, and $400 million of additional dividends we expect to harvest over the balance of the year.
If available, we would prefer to invest in attractively priced blocks of membership in our core products rather than buying back our own shares, as the operating leverage of membership growth is attractive, and we would prefer to grow our capital base rather than to shrink it. With our proven turnaround skills, we would also find value in acquiring health plans to harvest the performance improvement synergies for the benefit of our own shareholders. Our business development team is working the landscape hard to develop these types of opportunities. Nothing about our long-term outlook has changed since Investor Day, except for another solid quarter of performance and increased confidence in our future. A recap of our long-term outlook.
We are committed to delivering 10%-12% revenue growth, which will be derived from a combination of in-market growth and premium yield, actions we take in our product growth strategy, and from winning new territories. We will produce sustainable margins at a range of 3.8%-4.2%, with a midpoint of 4%, which is where we are today. We are committed to long-term net income growth of 9%-11%, and we are committed to earnings per diluted share growth of 12%-15% after deploying the excess capital generated. 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. We aspire to be the lowest cost, highest margin producer in this high-growth industry.
In conclusion, we are very pleased with our second quarter and first half results and continued progress this year. Margin sustainability, the second part of our three-part plan, is off to a very good start, and we have launched the third phase, that is to generate double-digit top-line revenue growth. We are excited for what awaits us for the remainder of 2019 and beyond. Now, I will turn the call over to Tom Tran for more details on the financials. Tom?
Thank you, Joe, and good morning. We report second quarter earnings per diluted share of $3.06 on a GAAP basis and adjusted earnings per diluted share of $3.11, excluding the amortization of intangible assets. Our peer performance earnings for the quarter is $2.91, which exclude the positive impact from the net $0.15 gain on repayment of the convertible notes, partially offset by the restructuring costs. Let me provide some additional commentary on our performance for the second quarter. Premium revenue for the second quarter of 2019 decreased 10.3% to $4 billion, compared to $4.5 billion in the second quarter of 2018, which was in line with our expectations. Premium revenue for the second quarter increased 2.5% sequentially. The consolidated MCR for the second quarter of 2019 was 85.6%, compared to 85.3% in the second quarter of 2018.
Our continued focus on medical management, combined with a relatively stable trend environment, result in favorable prior period development of approximately $28 million pre-tax, or $0.33 per share. The MCR for the six months ended June 30th, 2019 improved to 85.5%, compared to 85.7% for the same period in 2018. Favorable prior period development for the first six months of 2019 was in line with the same period in the prior year. The G&A ratio for the second quarter of 2019 was 7.8% compared to 6.9% in the prior year. For the six months ending June 30th, 2019, the G&A ratio was 7.6% compared to 7.2% for the same period in 2018. For both periods, the increase in the G&A ratio was mainly due to the decrease in total revenue year-over-year and was generally in line with our expectations.
G&A expense increased in the second quarter from the first quarter of 2019 and was impacted by the timing of expenditures. Interest expense was $22 million compared to $32 million in the second quarter of 2018. The decline was due to continued repayment of debt. Turning to our balance sheet, cash flow, and cash position for the quarter. Our reserve approach is consistent with prior quarters, and our reserve position remains strong. As we have stated in the past, at quarter end, we remain consistent with our reserving practice that result in favorable prior period development in the second quarter. As of June 30th, 2019, our health plans had aggregate statutory capital and surplus of approximately $2.2 billion, which is well in excess of 400% of risk-based capital, which is yet another indication of the strong near-term parent company dividend harvesting opportunity.
We harvested $345 million of dividends in the second quarter, or a total of approximately $635 million year-to-date. We plan to harvest approximately $400 million of additional dividends for the balance of the year. Together with unused debt capacity, we currently have over $1.4 billion of available capital for deployment and expect available capital to be $1.8 billion by year-end. We reduced the principal on convertible notes by $139 million during the quarter and $185 million since the beginning of the year. Capital deployment actions have resulted in lower interest expense, a gain on repayment on the convertible notes, and a lower share count, which decreased to 64 million share from 66.7 million share in the same period of the prior year.
As of June 30th, 2019, our medical claims payable total $1.8 billion compared to $2 billion as of December 31st, 2018, due to the decline in premium revenue and the reserve on lost contracts have been paid down. Days in claim payable represent 48 days of medical cost expense, compared to 49 days in the second quarter of 2018 and 52 days in the first quarter of 2019. The sequential decrease in days in claim payable is primarily due to seasonal factors. Operating cash flows for the first six months ended June 30th, 2019 amounted to $156 million and is lower year-over-year due to the impact of timing of settlements with government agency and premium receipts from CMS. Shifting to our outlook.
We've raised full year 2019 earnings guidance to a range of $11.20-$11.50 per diluted share, with the midpoint of $11.35 per diluted share, or an increase of $0.60 per diluted share. This increase is comprised of the following, $0.15 per share net gain from the extinguishment of the convertible debt, partially offset by restructuring costs, and $0.45 earnings per share out-performance, which comprise of $0.33 per share of improved claim costs reflected in prior period development, which we do not forecast, and $0.12 per share from general out-performance for the balance of the year. Finally, our 2019 guidance does not assume any additional impact from prior period development, positive or negative, for the rest of the year. While we do not normally provide quarterly guidance, a quick thought on the trajectory of earnings on the back half of the year.
We expect that our third quarter earnings will represent slightly less than half of the earnings for the remainder of the year due to the ramping of our profit improvement opportunities. This concludes our prepared remarks. Operator, we are now ready to take questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question is from David Windley of Jefferies. Please go ahead.
Dave, you ready?
David, your line is open.
Sorry. Can you hear me now? How about that?
Yes. We can hear you.
Can you hear me? Yeah. Okay, sorry. Multi-part question on rates. Joe, you've talked about the Medicaid environment being kind of better than average. Curious if you still view it that way. Second, on your comments on risk adjustment and at-risk revenue retention, where do you think you stand there in terms of your recapture on at-risk premium? Third, in the exchange market environment, you talk about kind of easing your pricing in that environment to resume enrollment growth. Can you talk about the dynamic with such a high percentage of the enrollment subsidized? To what extent do changes in pricing have an impact on consumer decisions in that highly subsidized market? Thanks.
Great, Dave. I'll take those in order. We believe the Medicaid rate environment is very stable, rational, and actuarially sound. We have been experiencing a medical cost trend in the very low single digits in our Medicaid business, rates have generally kept pace with the rate of medical cost inflation. With respect to risk adjustment and at-risk revenue, across all of our lines of business, Marketplace, Medicare, and Medicaid, we continue to improve our performance in retaining at-risk revenue, and that is emerging in the results in a very obvious way. We continue to get better at whether it's quality withholds in Medicaid, whether it's risk adjustment in Marketplace, whether it's star ratings in Medicare. Across the board, we are just getting better and better at retaining at-risk revenue. As I said, it's showing up in our medical care ratios. Lastly, yes.
With the performance of our Marketplace business, when the year is over, we'll have 275,000 members, $1.5 billion in revenue, and 11% after-tax margins. There is ample flexibility to improve the value-added benefits we inject into the products to ease up on rates. We've seen some of the rate filings in certain states, we believe our pricing for 2020 is well-positioned us to grow versus the competition. Our prospects for growing the Marketplace business in 2020 seem to be moving along a good execution path. We'll know more when we see some of the competitor rates, particularly in the larger states like Texas and Florida. Hope that answers your question.
Yes. Great. Thank you.
Thank you. Next question is from Peter Costa of Wells Fargo Securities. Please go ahead.
Thanks. I wanted to ask about the TANF and CHIP business medical loss ratio. It seems like it deteriorated a little bit year-over-year. Others have talked about pressure in Medicaid loss ratios. What do you think the issue there is? Is it really just that the mix is no longer improving with tightened eligibility and no longer getting sort of the incremental people found from signing up for healthcare reform? Meaning that you need a higher rate from states going forward, or what's happening in there that's causing the rates not to keep up with trend?
Well, thanks, Peter. For the most part, our TANF and CHIP business is performing as expected. You're right, in many states, and for us in particular, in places like Ohio and Michigan, where eligibility redetermination efforts have been ongoing, it is fair to say that there's an acuity mix shift that occurs. Generally speaking, healthier people are the ones returning to work, and the unhealthy population will stay on the Medicaid rolls. You do get an acuity mix shift, not only in traditional TANF and CHIP, but in Medicaid expansion, where the incomes are a little higher. There is a phenomenon there, but I will tell you that for the most part, the states have been very reasonable in recognizing the acuity mix shift, and our rate advocacy efforts have allowed us to actually get rate relief on some of these acuity mix shifts.
I would call it a sort of a mild trend that's putting a little bit of pressure, but not really a phenomenon that has to be dealt with in a dramatic way.
Okay.
I got a couple here, Peter. Last year, we didn't have any Mississippi start-up at a time, so that also add a little bit to the start-up business in Mississippi throughout. If you compare Q2 this year versus Q2 last year, so that's another data point for you.
Yeah, agreed. That brings me to my second question, which is, you have very high targeted margins in your businesses, but you don't have as much growth as some others have. Where you have had growth, like in Mississippi or Washington and places like that, you've seen pressure on your margins. Would you be willing to trade your high margin targets for more growth going forward? Can you talk about sort of the trade-off between growth and margin, at least in the first year or two?
Well, I would say with Washington in particular, when you grow 30,000 members due to an incredibly successful reprocurement, and there is a major carve-in of the integrated behavioral benefit, there will always be some level of uncertainty as to whether the rate you obtained was reasonable, and enough to capture the trend that you're going to experience. I consider some of these pressures that we've been experiencing more benefit related than trend related. They will essentially and effectively end up in rates, as they did in Ohio with the integrated behavioral benefit and the higher acuity mix shift that happened in the expansion population. In answer to your broader question about would we be willing to invest margins in growth? Yes. I mean, we do believe we can sustain these margins, in perpetuity and start growing the top line at double digit rates.
We believe our cost structure is very, very effective, and we aim to be the lowest cost, highest margin producer in a high growth industry. We will invest some of our Marketplace margins in product features and pricing next year to grow. We really do believe we can maintain a single-digit Medicare margin and a 3% Medicaid margin in perpetuity.
Thanks, and congrats on the quarter.
Thank you.
Thank you very much. Next question is from Josh Raskin of Nephron Research. Please go ahead.
Thanks. Good morning. Just two questions. The first is just, as you think about the three segments into 2020 and maybe even beyond, are there specific sort of margin resets? I know you've talked about the pricing on the exchanges, or in the Marketplace for you guys. In Medicaid or Medicare, are there minimum MLR resets? Are there state arrangements on profit sharing, things like that, or other sort of technical requirements where you would expect the margins to normalize just based on sort of being above targeted margins? The second question, just on the M&A commentary, certainly appreciate you guys looking for books of business and understand that rationale. Is that a commentary around the potential divestitures from Centene Wellcare, or is that a broader commentary around provider-owned plans and other plans in the Marketplace?
Josh, on your first question about margin resets in our three segments, t he margins we're achieving today are subject to all the caps, and corridors that exist in the various markets. Various markets have, as you know, G&A caps. They have profit caps. There's quality withholds. There's all types of features to sort of regulate the amount of profit you can earn. The 3% margin we're earning in Medicaid is subject to all of those puts and takes. I don't see a margin reset coming in the Medicaid business at all. In Medicare, in our MMP product, they have introduced various levels of minimum MLRs that probably will change over time to put maybe a little bit of pressure on the MMP product.
That's the only phenomenon I can actually think of that represents anything close to profit pressure due to profit caps, corridors, and the like. On your last comment on M&A, that was a very general comment recognizing the significant financial capacity we've created in a short period of time, and returning to positive operating leverage. As a reminder, we had negative operating leverage last year when we lost the Florida and New Mexico contracts, and we want to start creating positive operating leverage, and there is significant operating leverage to create if we can attract books of business. It was in recognition of returning to positive operating leverage and the significant financial capacity we have created. We would never comment on any specific situation with respect to M&A.
Okay, that's helpful. Thanks, Joe.
Bye, Josh.
Thank you. The next question is from Justin Lake of Wolfe Research. Please go ahead.
Thanks. Good morning. Let me just follow up a little bit on Josh asked about margins. Broadly on 2020, thinking about the run rate of earnings in 2019 into next year, I know, for instance, you guys typically exclude the incremental PYD that you've kind of called out so far year to date as a headwind to next year. Is there any other headwinds that you would want us to kind of consider and anything else we should keep in mind as we kind of look to 2020 and versus that 12%-15% growth rate target that you have out there on EPS?
Justin, no, really. The good news about this year is when we print the final numbers, if everything goes as planned, it'll be a very, very clean year. The revenue base, the MCR, the SG&A ratio, the margins we're producing are all very reflective of the earnings power of the business. We finally have a clean, stable year where we can step back, look at it, and say, "This is the baseline off of which we'll grow." There really are no significant headwinds or tailwinds as we emerge into 2020. As we said, with 7%-9% premium growth projected for next year, we should return to positive operating leverage, and the margins on that business should hold. Without giving a forecast for 2020, which we're not, we're feeling pretty good about the trajectory we are on for the second half of 2019 into 2020.
Got it. Just following up, and I apologize if I missed this before, you talked about the 7%-9% premium growth. Were you able to give a breakdown of kind of where you see that coming from specifically, especially on exchanges versus Medicaid?
We haven't done it specifically, but generally what we've said is we filed in 150 new counties in our D-SNP product. We're only in 65 today. We actually expect to grow market share in the 65 we're in because we're woefully under-penetrated in those 65 counties. We have good growth prospects for Medicare. In Marketplace, as you suggested, we will ease up on rates, as you probably saw in some of the rate filings. Where our margins today are outsized, we can reinvest in the product. We're going to do a better job pricing bronze. We're seeing a lot of people select bronze over silver because of the lower monthly premium. We'll do a better job there. Very confident in our ability to grow the top line in Marketplace.
With respect to Medicaid, it's mostly going to come from in-market extensions of run rates we're creating this year. Mississippi run rating into next year. We've had a good year in Illinois and South Carolina building our revenue base due to better positioning in the auto-assignment algorithm. Washington, the growth that they've experienced this year will extend into next year. Most of the growth in Medicaid next year will come from things that already exist today. It's merely an extrapolation of the benefits that we're enjoying this year due to some in-market growth.
Thanks for the color.
You're welcome.
Thank you. The next question is from Sarah James of Piper Jaffray. Please go ahead.
Thank you. You guys are the second company to flag this redetermination, I'm wondering if this is something that's always been going on to this degree or if states are kind of approaching it with a new vigor and that's why it's coming up. You talked about being able to resolve any shifts that causes in mix through rate advocacy. I was hoping you could give us an idea of what the turnaround timeline on that is. Is this something that you typically will resolve in the first quarter, or does it take a couple quarters of advocacy to get the payments where you need them to be? Thanks.
Sarah, on redetermination, I think there are a couple factors at work here. One is, I think it's fair to say that certain states have an increased focus on redetermination, which makes perfect sense. They're spending taxpayers' money, and they want to make sure that people on the rolls are actually eligible for Medicaid. There is an increased focus. It seems to have abated a bit. Secondly, we're dealing with a very good economy, people are returning to work. As they return to work, the healthier people will return to work, and the sicker people who can't work will stay on the rolls, which therefore creates the acuity mix shift that you observe. As a company, we can do a better job keeping people that are going through the redetermination process.
We believe that some of the softness in our membership rolls over the past couple of years are because we've been lax in working with our members to keep them on the rolls should they continue to be eligible, and they leak out of Molina into the system and wind up in other companies, and we're going to do a better job keeping them on the Medicaid rolls if in fact they're eligible. On the rate advocacy efforts, the states are very aware that healthier people go back to work and the less healthy people stay on the rolls.
A recent example in Ohio, where there was a rate advocacy effort to look at the redetermination effort that took place there, to look at the acuity mix that stayed on the Medicaid rolls, and the market in general, including Molina, has been very successful in making sure that rates have stayed commensurate with the acuity of the population. There is usually a lag time, but states have been very reasonable to observe that phenomenon, and have been agreeable to making sure the rates are adequate.
Got it. That's very helpful. One clarification. In the release, you guys mentioned a decrease in Marketplace risk adjustment compared to 2018. Can you quantify how much that was?
I'm sorry, your question again, Sarah? Risk adjustment on 2018?
Y eah, the Marketplace risk adjustment that you guys experienced this quarter that relates to 2018, c an you quantify how much that was?
We haven't quantified that. If you recall last year, I understand your question now. Last year, we disclosed an amount that was very significant. I mean, at the time, it represented almost 25% of our earnings forecast for the year, so we disclosed it because we thought it was relevant. This year, the number was immaterial to the quarter, to the six months, and certainly to the full-year forecast. We have not spiked it out and probably will not.
Got it. Thank you.
Thank you. The next question is from Stephen Tanal of Goldman Sachs. Please go ahead.
Morning, guys. Thanks for the question. You guys have covered a lot of ground, so maybe just a couple numbers questions here j ust on the prior period development. You guys framed the $28 million pre-tax in the quarter. I just want to confirm whether that's net of offsetting reserve builds and what the comparable number was last year, just to understand sort of the year-on-year swing in MCR, if any.
Yes. Stephen, it's Tom. $28 million is primarily prior year development there for the quarters. If you look at the six months this year, as Joe commented in his prepared remark, it is pretty consistent with prior year, in the same ballpark number, essentially. For the year-to-date numbers, it's approximately in the zone of about $90 million in total, pre-tax.
Okay. Got it. That's sort of the way you guys are defining that is net of reserve builds, correct? Is that the right way to think about that?
Yes. We are consistent in our approach to reserve, and that's a very, very fair comment.
Perfect. Thanks. Maybe just one more follow-up. Just sort of on the Medicaid redetermination story. It sounds like the states are actually playing ball, which is great to hear, but just wanted to clarify, are you guys actually seeing sort of off-cycle rate increases where those issues are playing out, or are you typically having to wait for the next renewal cycle?
Typically, you're waiting for the next renewal cycle and agreeing to a prospective adjustment. Every once in a while, you might be able to argue for some retrospective rate relief, but generally speaking, if there's a mid-year true-up, it'll wait for that process. If you have to wait for the following year, usually that's the way it happens. Every once in a while, you can approach a customer for a mid-year correction if, in fact, there's a dramatic shift in acuity or benefits.
Got it. That's very helpful. Maybe just the last one for me, just the MA sort of D-SNPs business looked particularly strong on MCR. I'm wondering if you could give us maybe some specific commentary on what's working particularly well in that business, and then I'll yield. Thanks, guys.
It's really just the fundamentals. We continue to manage high acuity populations really, really well. The membership is very stable, and we continue to get a lot better at risk adjustment, and making sure that the scores that we're achieving are commensurate with the acuity of the population, and that continues to give us some lift. We're just really operating really well on the fundamentals of the business. With our renewed interest in growth and filing in 150 new counties next year and increasing our penetration in the 65 existing counties, we're really bullish on our prospects in the D-SNP line of business.
Awesome. Great to hear. Thanks.
Thank you. The next question is from Matt Borsch of BMO Capital Markets. Please go ahead.
Yes. I know you've touched on this. I was just hoping you could talk on the sequential drop in days claims payable relative to the favorable reserve development that you saw. Just to put it in context, I recognize the track record that you've developed for conservative and favorable reserve development speaks to the integrity of your reserving process. I just want to get a little bit more comfort on this, that the reserves were replenished going forward given the drop in days claims payable.
Sure, Matt. I'll kick that question to Tom.
Yes, Matt. You're right. We are very consistent in terms of our reserving methodology. Regarding the quarter end June 2019, you see a drop of four days. You look back last year, June 2018, if you compare that to March of 2019, it's a similar kind of drop of roughly about four days. June is typically a low utilization month, and you usually set your reserve based on that. Most of your reserve balance at the end of the quarter consists of the current month. That's really the phenomenon of seasonality that I mentioned.
Got it. Okay. That's great. Thank you, Tom.
You're welcome.
Great. The next question is from Ricky Goldwasser of Morgan Stanley.
Yes. Hi, good morning. Just a couple of follow-up questions here. First of all, on Ohio, because we keep coming back to Ohio as an example of a state where rates have been readjusted. The second quarter margins for the state reflect kind of like the steady state margins, or should we see margin expansion into 2020 as a result of these rate adjustments? That's the first question. Second question, I know Centene on their call talked about the ongoing process of divestiture and the discussions. Just any thoughts on that and any specific regions that you'd be interested in?
With respect to the profitability of Ohio, I would say that the rate adjustment that we're getting is keeping pace with the new acuity and trend of the population. We're not projecting any significant change in the margin picture that we're presenting today. That rate was necessary to keep pace with medical cost inflation. No change in the trajectory of the State of Ohio profitability. The rate increase that we were able to get helps us keep pace with the rate of inflation. On the last question, we just make it a practice never to comment on any specific M&A opportunity. To repeat what I said in our prepared remarks, we have $1.8 billion of capacity and the desire to return to significant positive operating leverage. We are very interested in books of business and membership in our core products, and I'll leave it at that.
Thank you.
You're welcome.
Great. The next question is from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.
Okay, great. Thanks. I guess a couple of things. One is, you mentioned that, I guess it sounds like the Medicare business is coming in a little bit better than you guys expected so far. I think you're a little bit above your target margin there. Did you guys realize that in time for the 2020 bids or is that potentially going to be a source of upside kind of going into next year as well?
No, this profit picture was emerging as we were filing our bids for 2020, so it was taken fully into consideration, Kevin.
Okay. I think you said something along the lines of that when you have favorable development, that people might not quite appreciate how that maybe sets you up for additional upside kind of later in the year. Maybe just provide a little more color then as to kind of what you're trying to message there.
Well, really what I'm saying is that, I think oftentimes, favorable and unfavorable development is just seen as sort of some actuarial phenomenon when it really is performance related. The actuaries have to use an experience period where they're looking at your medical cost trends, and including those trends in reserving. If you continue to outperform those assumptions by payment integrity routines, effective utilization management, your reserves are likely to run off redundantly, and your medical cost baseline and trend used for the current year dates of service are likely conservatively stated. Stated another way, when you're managing into declining trend, it can't help but be very positively from a financial point of view.
That's really what we're trying to message there, that favorable development and the very attractive margin position that we've created for ourselves really is the product of very, very effective cost management across the board.
Okay. Maybe just the last question. You guys have a lot of things going on from a cost perspective. You had the pharmacy agreement earlier. You talked about payment integrity and risk adjustment. Can you talk about what else is still kind of to come here over the next 12 months?
It really is more or less extensions of all the things you mentioned. We're not done implementing all of our payment integrity routines. We have full run rate of our new pharmacy contract in our earnings. Our IT outsourcing is now in the expense run rate. I would just say that more or less extensions of many of the initiatives we talked about before and that we continued to show you at Investor Day. No big other initiatives other than the ones we've already mentioned, but more or less extensions of ones we've already begun to implement.
All right, great. Thanks.
Thank you. The next question is from Charles Rhyee of Cowen. Please go ahead.
Yeah, thanks for taking the question. Joe, you talked earlier about trying to make sure you're keeping members on the rolls if they are eligible. For members that are no longer eligible, are you able to focus on them to get them into sort of an eligible exchange into the Marketplace? How successful have you been if you're able to?
The state rules are all different across these lines in terms of whether you can approach members for other products, whether they could be warm transfers, et cetera. We obviously comply with those state rules and do the best we can to keep them in a Molina product. It's hard to answer that generally. All the state rules are different in terms of what you can and can't do. I will tell you that when it comes to the member, and it comes to the network, it's critically important, and that's why we love our product suite.
Medicaid, Medicaid expansion, and Marketplace, as members move up and down the scale of their incomes relative to the federal poverty level, and they love their primary care physician, and they like their network, and love the Molina brand and how they're cared for, when they have a choice, they will stay with a Molina product. Whether we can transfer them or not, many of these decisions are made by the provider and the member jointly, and if they have a positive Molina experience, they will stay with the Molina product.
That's helpful. Earlier, you also talked about redeterminations. I think one of your peers talked about relative to the state that they're in, they may be halfway through or a little bit more of states kind of going through this process. Can you talk about relative to your footprint where the states are in terms of going through this cycle of sort of redeterminations?
They're always going through it. We've seen, I would say in the last 12 - 18 months, most of the pressure we saw in our book of business occurred in both Michigan and Ohio. I would say that has largely leveled out. The fact that the redetermination leakage has leveled, and then the Washington, Mississippi, and South Carolina, and Illinois membership has grown. Net net, we're going to be back into positive territory on a sequential basis when it comes to Medicaid member months. Redetermination leveling, our growth initiatives starting to take hold. I think we'll be back into solid positive territory from a volume perspective real soon.
Oh, that's great. Thanks. Lastly from me, I think you mentioned a little bit about Texas at the very start here. In terms of just timing, if I'm not mistaken, Texas has kind of delayed decisions before, had to rebid again once. Any kind of additional color you can give as to what's going on maybe in Texas in general, why things are taking so long here?
No, I really can't. We're just subject to whatever decision-making process that they have decided to take. The last we heard, it's going to be the end of August. We also believe that they'll likely announce the STAR+PLUS and the STAR CHIP awards concurrently. We're in wait-and-see mode. We remain confident, but we know nothing more than you know based on what you've read and heard.
Great. Thanks a lot, guys.
You're welcome.
Thank you. The next question is from Steven Valiquette of Barclays. Please go ahead.
All right. Great. Thanks. Good morning, Joe and Tom. Thanks for taking the question. Actually two questions just on the Marketplace quickly. One, just to follow up on the Marketplace risk adjustment true-up in 2Q 2019. While you're not disclosing the number, are you able to clarify whether the true-up was contemplated in the guidance for 2019? Number two, the Marketplace MLR of 64.7% in the quarter, while it was up versus roughly 54% in 2Q last year, it's still a pretty phenomenal number in the grand scheme of things, especially if it did not include any material benefit from any sort of risk adjustment true-up. You mentioned it could trend higher from here, which makes sense.
I guess the question is, I'm just looking for a little more color on how this 2Q Marketplace MLR stacked up versus your own expectations, just for the quarter specifically. Thanks.
I'll let Tom add some more color to this, but I think two perspectives, Steven, are important. One is that we true up our accruals and our risk adjustment every quarter. I think you can assume that not all of it was actually adjusted in the second quarter. Some of it was adjusted in the first. It wasn't material to the quarter. I think the phenomenon you're looking year-over-year in terms of loss ratios, obviously last year was benefited hugely by that number. On a going forward basis, you've got it captured correctly. At 67.4% year-to-date, 69% projected, we're right where we want to be. It's a very profitable book of business. It'll produce over $220 million of pre-tax profits for the year and gives us a very solid baseline off of which to grow.
We're just getting better and better at risk adjustment, and we keep outperforming the assumptions that the accountants and actuaries use to account for the risk adjustment, and that bodes well for the continued profitability of the business.
Yeah. I'll add a little bit more color to the question you asked about last year. Marketplace MCR at 57%. Last year quarters benefit tremendously by the Marketplace risk adjustment. If you kind of normalize for that, then the MCR would've been around 67%. We're very comparable to what you see this year.
Yep, that's helpful. Yeah, I quoted the six-month numbers, not the quarterly, so thanks for correcting that, too. Thanks for the extra color.
Okay. Steven, thanks.
Thank you very much. Ladies and gentlemen, our final question is from Gary Taylor of JP Morgan. Please go ahead.
Hi, good morning. Just a couple quick ones. I appreciate all the comments today. Just trying to understand, and I've certainly heard the comments about the redeterminations and so forth. As I just look at, and I understand it's portfolio business, that's part of the answer, but when we look at TANF, in the first quarter, MLR was down 500 basis points, this quarter up 120 basis points, and then expansion, the complete opposite. First quarter MLR was up about 420 basis points and then down 350 basis points. In both quarters, the trend of the buckets sort of offset each other. When we look at just how that's progressed year to date, are we to think that there's been more rate adjustment in the expansion population, or is that just much better operational performance in that population?
If you were to look at parsing the different components of the Medicaid business, I would look at the six months, first of six months, this year versus last year. If you look at that, TANF and CHIP, year-over-year comparison for the six months this year, last year, has actually improved by almost 200 basis points. On Medicaid expansion, it's fairly stable. We have had some rate advocacy in Ohio that came through in a quarter, so really help bring the overall loss ratio for expansion business back to a more normal zone, if you will. On balance, the portfolio is really doing well.
Year-to-date, I totally get it. Just a little more quarterly fluctuation than I guess maybe I've anticipated. Just trying to think about that better. My last one would just be, and maybe I missed this earlier, we're talking about one state and I missed it, but just Illinois. It was a good quarter, so I'm going to pick on one where it looked like the MLR was up to just try to understand. Anything specific around Illinois for 2Q?
Illinois is doing really well. It'll be a billion-dollar business shortly. The margin recovery of the last two years has been significant. In the quarter, if memory serves me correctly, there was a provider settlement that hit the quarter. One-off effect. Illinois is doing great. It's got mid-single-digit margins. It'll have $1 billion of revenue soon. The prospects for growth there are very strong.
Great. Thank you very much.
Thank you very much. Ladies and gentlemen, that then concludes today's conference. Thank you for attending the presentation, and you may now disconnect your lines.