Earnings Call: Q4 2018

Feb 12, 2019

Good morning, and welcome to the Molina Healthcare 4th Quarter 2018 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Ryan Kubota, Vice President of Investor Relations. Mr. Kubota, please go ahead. Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Melida HealthCare's financial results for the Q4 ended December 31, 2018. The company issued its earnings release reporting Q4 2018 results last night after the market closed. And this release is now posted for viewing on our company website. On the call with me today are Joseph Bretzke, our President and Chief Executive Officer and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you have multiple questions, we ask that you get back into the queue so that others have the opportunity to ask their questions. Our comments today will contain forward looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors and could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10 ks annual report, our Form 10 Q quarterly reports and our Form 8 ks current reports. These reports can be accessed under the Investor Relations tab of the company's website or on the SEC's website. All forward looking statements made during today's call represent our judgment as of February 12, 2019, and we disclaim any obligation to update such statements except as required by the securities laws. This call is being recorded, and a 30 day replay of the conference call will be available at our company's website, alinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Thank you, Ryan, and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the Q4 of $3.01 and $10.61 for the full year ending December 31, 2018. For the full year 2018, we produced pre tax earnings of $999,000,000 and after tax earnings of $707,000,000 resulting in pre tax and after tax margins of 5.3% and 3.7%, respectively, on a reported basis. As these results indicate, we have accomplished much over the last year as we executed the first phase of our margin recovery and sustainability plan. The rapid improvement in our operating margin profile has allowed us to shift our focus to driving our profit improvement initiatives for continued margin expansion, while we are quickly pivoting to achieving top line revenue growth. The quarter itself was very strong, with pure performance earnings per share of $3.82 and an after tax margin of 5.4%, continuing the momentum we established early in the year. All in all, we are very pleased with the results for the quarter. The scope of our prepared remarks today will focus primarily on the margin expansion success we have already achieved and our confidence in sustaining it. However, to be clear, we are equally focused on and have already invested in top line revenue growth and are very attractive lines of business, Medicaid, Medicare and Marketplace, as well as our existing and potential new geographies. We plan to showcase this growth plan at our Investor Day in May. Now returning to our financial results. In order to provide the context for our 2019 guidance, it is best to focus much of our commentary on recapping the full year 2018, a year in which we produced pure performance earnings per share of $10.83 far surpassing our initial and revised guidance. This result includes on a consolidated basis, a pure performance MCR of 86.3% and a G and A ratio of 7.1%, both of which enabled a pure performance after tax margin of 3.8%. Now commenting on 2018 by line of business. The Medicaid business was $13,700,000,000 in pure performance premium revenue ended the year with an 89.4 percent pure performance medical care ratio and a pure performance after tax margin of 2.8%, which is within our revised long term target margin range. Several factors contributed to this result. We were able to skillfully manage medical costs, all against a backdrop of a reasonable and rational rate environment. And we were successful in executing on a variety of profit improvement initiatives, including network contracting, frontline utilization control and retaining increased levels of revenue at risk for quality scores. Our $2,100,000,000 Medicare business, comprising our DSNP and MMP products also delivered favorable results in 2018, Managing to a medical care ratio of 84.5%, we produced an after tax margin of 4.8%. Specifically on Medicare, we have proven we are adept at managing high acuity members who have complex medical conditions and comorbidities. We have also proven to be proficient at managing approximately $2,000,000,000 of long term services and supports benefits, an important and fast growing benefit across all of our products. And the risk scores of our members continue to improve, resulting in increased revenue that is more commensurate with the acuity of our population. Finally, our marketplace business was a significant contributor to this year's favorable results, with $1,900,000,000 in 20 18 PURE Performance Premium revenue and exceptional margins. If you recall, in 2017 and prior, this business was severely challenged And at that time, we set a corrective 2018 pricing action of nearly 60% was warranted. With that as the backdrop, the business produced a pure performance MCR of 65% and an after tax margin of 11.4% in 2018. Several factors contributed to this result. Our prices in the market, although they increased significantly over 2017, were still very competitive, and thus we are able to retain a membership profile that could be adequately scaled. Many of the core and routine managed care fundamentals applicable to our other businesses also help to produce favorable results in the marketplace business. Our ability to capture and forecast adequate risk scores has improved dramatically and our differentiated strategy of serving the highly subsidized working poor produced the right acuity mix and the right metallic tier mix, all of which worked well within our pricing parameters. Now commenting on 2018 through the lens of our locally operated health plans. We vastly improved the performance and balance of our health plan portfolio during 2018. Our largest health plans, Ohio, Texas, California, Washington and Michigan continued to perform well and established themselves as worthy of winning reprocurements. The underperforming aspects of our portfolio, which we described at the beginning of the year, were much improved in 2018. 1 year ago, we said that 25% of our revenue was in plans that were not profitable. In 2018, all of those plans were profitable. Florida and New Mexico were challenges for obvious reasons, but performed admirably as they faced the runoff of large portions of business. And Washington staged a recovery midway through the year it is now well positioned to return to target margins on its expanded revenue base. In summary, the Health Plan portfolio is in excellent shape. Now to recap the full year 2018 from the perspective of the operational improvements we implemented and the operating efficiencies we gained. From a pure efficiency perspective, we continued to improve our G and A profile, managing to a ratio of 7.1% for the full year 2018. We reduced our headcount by more than 800 FTEs or nearly 7% from the beginning of the year. More importantly, we continue to invest in the business. We improved the performance of our core processes, claims, payment integrity, member and provider services and a host of others, all of which create lasting effect. And finally, in 2018, we set the stage for ongoing improvement by making significant progress on a variety of outsourcing initiatives, some recently announced, which benefit 2019 beyond. Turning now to addressing the 2018 improvements to our balance sheet and capital structure. Our improved operating performance allowed us to dividend approximately $300,000,000 to the parent company. This augurs well for producing excess cash flow in the future. And we deployed approximately $1,200,000,000 to retire highly volatile and expensive convertible debt and repay the outstanding amount drawn on our revolving line of credit. This reduced earnings per share volatility and lowered our debt to cap ratio to approximately 47%. In summary, for 2018, across all of our product lines, health plans, operating metrics and with respect to capital management, we are very pleased with our 2018 performance. Now I will address our 2019 earnings guidance. We are establishing our initial earnings per share guidance for 2019 in the range of $9.25 to $9.75 As Tom will describe later, this is on the basis of GAAP reporting. The headline for 2019 is continued margin strength and sustainability despite the previously announced revenue decline, all without the benefit of anticipating any prior year reserve development. On 2019 revenues, overall, we expect premium revenue to come in at approximately $15,800,000,000 in 20 19, a decrease of approximately 10% due to the contract losses in Florida and New Mexico and the membership attrition as a result of the conservative approach we have taken to marketplace pricing. Despite these revenue challenges, we are encouraged by multiple new revenue foundations we laid in 2018 that will carry into 2019. Specifically, within Medicaid, we invested heavily in new business development, winning 3 RFPs, the largest being Washington, but also Puerto Rico and Mississippi Chip. We also submitted what we believe to be a winning proposal in the Texas STAR plus program. The Washington reprocurement award expanded membership in regions where we bested the competition in the consolidation of health plans and also enabled us to participate in the carven of behavioral health services. In Florida, we were able to recapture a third of our Medicaid contract and retain approximately $500,000,000 of revenue, positioning us well for Medicare and marketplace expansion. In Illinois and Mississippi, we will benefit from membership gains in 2018, which will achieve full year run rate revenue in 2019. And for the 2020 marketplace price filing in early 2019, we will equally focus on growing membership while maintaining profitability. We are forecasting the continued strength and sustainability of margins in 2019. The following points are relevant to that forecast. 1st, given the significant operating leverage in the Managed Care business, a 10% decline in the premium revenue base is difficult to overcome from a margin expansion perspective, but we are forecasting being successful in doing so. 2nd, we have taken a cautious view in forecasting the impact of our profit improvement initiatives in our 2019 guidance, although we maintain a high degree of confidence that we will capture them. And 3rd, while the 2018 results included significant prior year reserve development, as a matter of policy, we do not forecast any prior year reserve development in our guidance, although we maintain a consistent reserving policy throughout the year. Taking these points into account, the after tax margins in each of our lines of business will remain strong in 2019. Medicaid margins remain flat at approximately 2.8%. Medicare margins are up approximately 20 basis points to 5% and marketplace margins are down slightly, but still in double digits at 10.8%. Taken together, we expect a consolidated medical cost ratio between 86.7% 87%, a consolidated after tax margin in the range of 3.7% to 3.9% and net income in the range of $600,000,000 to $630,000,000 The margin improvement trajectory we've experienced is consistent with both our prior disclosures and the discussion of the profit improvement opportunities we have identified. Recall, in 2018, of the original $500,000,000 projection, we harvested $200,000,000 which is now embedded in our run rate earnings. Earlier this year, we increased our projection of opportunities by $250,000,000 to a total future improvement opportunity of $550,000,000 Our 2019 guidance includes harvesting over $200,000,000 of the revised profit improvement opportunity, which is more than offsetting the slightly negative spread between trend and yield of approximately $80,000,000 These ongoing profit improvement initiatives helped create nearly $2 of earnings per share benefit in our 2019 guidance. Overall, our margin recovery efforts have been successful to date and our margin sustainability plan is well established. While we will remain focused on further margin improvement throughout 2019, we have simultaneously pivoted to growth. We are carefully evaluating new geographic opportunities as well as the adjacent product and benefit carve in opportunities in our existing geographies. With such a successful year now behind us, I would like to take a few moments to acknowledge the people who have made all of this happen. The executive leadership team we have assembled have proven their ability to successfully execute on the first phase of our turnaround plan, instilling confidence that they will likewise be able to execute on the next phase. And a special note of gratitude to the 11,000 plus associates on the front lines every day caring for our members and delivering high quality service. In conclusion, we are very pleased with our 2018 results and the strong foundation we have built. There is still significant opportunity for creating value, and we are excited for the future and what awaits us in 2019 and beyond. I look forward to sharing more about our future growth plans and longer term strategy at our next Investor Day on May 30 in New York City. With that, I will turn the call over to Tom Tran for more detail on the financials. Tom? Thank you, Joe, and good morning. As described in our earnings release, we report 4th quarter earnings per diluted share of $3.01 and adjusted earnings per diluted share of $3.07 excluding the amortization of intangible assets. We reported full year 2018 earnings per diluted share of $10.61 and full year 2018 adjusted earnings per diluted share of $10.86 excluding the amortization of intangible assets. 1st, I will highlight the non recurring items that occur in the quarter, resulting in 4th quarter pure performance earnings per diluted share of $3.82 It is important to note that these items are included in the 4th quarter GAAP reported numbers that we cited in the earnings release. Specifically, we recorded a $52,000,000 pre tax loss on the sale of our Pathways subsidiary, $8,000,000 of restructuring expenses primarily related to costs associated with our ongoing IT restructuring plan, a $3,000,000 gain as part of the repurchase of the 2020 convertible notes and related embedded co option termination and a $24,000,000 pre tax expense for a retroactive risk corridor adjustment for the California expansion business, primarily related to the state fiscal year ended June 30, 2018. Next, I would like to make some comments on the 4th quarter earnings beat of over 1 $130,000,000 pre tax or approximately $1.90 per diluted share on a pure performance basis, relative to the top end of our pure performance guidance range. The beat can be attributed primarily to the following 4 items. 1st, we had prior period development of approximately $90,000,000 in the quarter, most of which is intra year development and therefore is accounted for in our pure performance result for the full year. 2nd, our marketplace product continued to perform exceptionally well. The seasonal increase in medical costs we have historically seen did not materialize in the Q4 and member retention was better than expected. 3rd, administrative costs were lower than expected despite increased sales and marketing costs associated with open enrollment in Medicare and the marketplace. Lower labor cost was a primary driver of this favorable G and A ratio. And 4th, as a result of our improved 4th quarter performance and tax benefits on the loss related to the sale of pathways, the effective tax rate for full year 2018 at 29.2% was lower than we expected, which result in a 4th quarter benefit of approximately $20,000,000 Turning to our balance sheet, cash flow and cash position for the quarter and the full year. Our reserve approach is consistent with prior quarters and our position remains strong. We continue to have favorable intra year reserve development and as we have stated in the past, we intend to include that same level of conservatism in the quarter end reserve balances. Days in claim payables remain flat sequentially at 53 days. While operating cash flow was strong throughout the year, it was negative in the quarter, primarily due to our payment of the health insurer fee on October 1. As of December 31, 2018, the company had unrestricted cash and investments of approximately $170,000,000 at the parent company. The reduction to parent cash from the end of the Q3 of 2018 primarily relates to the purchase of the 2020 convertible debt. As of December 31, 2018, our health plans had aggregated statutory capital and surplus of approximately $2,400,000,000 which represent approximately 400% of risk based capital. I will now quickly discuss capital actions. We have continued to look for opportunities to delever the balance sheet. Our action in the quarter reduced average diluted share outstanding to 66,600,000 at year end from 67,900,000 at the end of the Q3. Finally, while not related to 2018, we recently complete a new $600,000,000 term loan to finance the repurchase conversion and redemptions of our 2020 convertible notes that are currently in the money and eligible for early conversion. This is a temporary facility, which allow us to keep our $500,000,000 revolver capacity undrawn. Shifting to 2019 guidance, I will ask some detail to bridge our 2018 performance to our 2019 pure performance guidance of $9.50 per diluted share at the midpoint. First, converting 2018 full year reported results to peer performance. The significant items that we call out in our earnings release added $0.22 to our 2018 reported earnings per diluted share of $10.61 for peer performance earning per share of $10.83 for the full year 20 18. 2nd, prior year development, which we do not include in our 2019 guidance, positively impact 2018 earnings per share by approximately $1.55 per diluted share. 3rd, we believe that the stranded overhead and resulting negative operating leverage related to the lost contracts in New Mexico and Florida negatively impacts the earning trajectory by approximately $0.75 per diluted share. 4th, the negative spread between trend and yield in Medicaid is projected to impact 2019 by approximately $0.90 per diluted share. And 5th, our projected net profit improvement is forecast to increase full year earnings per diluted share by $1.87 Combined, we arrived at our guidance midpoint of $9.50 The following points are also important relative to our 2019 guidance. 1st, 2019 guidance assumes consolidated net margins will remain flat at the midpoint. Specifically, we expect Medicaid to remain flat, Medicare to improve approximately 20 basis points and marketplace to decline slightly, but remain in the double digits, of our 2018 peer performance base, which include prior year development. 2nd, our G and A ratio increased 50 basis points to 7.6% in our 2019 guidance. This increase is primarily driven by the incremental G and A costs incurred to realize the profit improvement initiatives that will benefit our medical care ratio and result in an overall net profit improvement and a stranded overhead cost due to the revenue loss in New Mexico and Florida. And third, 2019 guidance does not assume any impact from prior year development, positive or negative. All things being equal, if we have favorable development as we did in 2018, our forecasted result will be higher and conversely, if development is unfavorable, our forecasted result will be lower. You should note that our reserve methodology supplemental presentation with additional detail on our financial results and 2019 guidance. Going forward, we plan to provide this additional detail alongside future earnings release as a way of providing further insight into the business. This concludes our prepared remarks. Operator, we are now ready to take questions. We will now begin the question and answer session. The first question today comes from Josh Raskin with Nephron Research. Mr. Raskin, please go ahead. Hi, thanks. Good morning, guys. Wanted to ask a little bit more about the revenue bridge and sort of backing up to the Investor Day where you guys started with the $15,600,000,000 of premiums. And I know you got $500,000,000 back in Florida. You talked about, I think, Mississippi being about $ So it sounds like some stuff has ebbed. I don't know how much of that is asset sales versus exchanges. And then I think last quarter you guys were a little bit more optimistic about potential growth in the marketplace. And so just wanted to hear a little bit, I guess, within that answer what changed there? Well, Josh, on the revenue bridge, very clearly, Florida and New Mexico was a major component of the decline at $2,200,000,000 We also note that if you're looking at total revenue, you always have to adjust for the half of $400,000,000 And yes, the service businesses that we divested in 2018, MMS and Pathways had $400,000,000 in revenue, which effectively disappears in 2019 guidance. But we did pick up $900,000,000 of organic growth and you cited all the reasons Mississippi, Illinois, full year run rate of increased membership, clawing back to $500,000,000 in Florida certainly helped. Washington, as we vested certain competitors in various of the regions, we will have increased Medicaid membership and the behavioral carbon. So all in all, dollars 900,000,000 of organic growth embedded in what was a disappointing year of contract losses, certainly bodes well for our revenue pickup in the future. Got it. Got it. And then just a quick question on the outsourcing you guys announced recently. Could you just walk through a little bit more of the specific functions that were outsourced and maybe how much of that savings is in guidance? The contract we just signed, the outsourcing arrangement with Infosys related to our IT infrastructure, data centers, user services, etcetera, sort of a hardware, think of it as a hardware. It will result in rebadging certain employees to Infosys. It will result in a certain number of position eliminations. But we also have increased the effectiveness of the operation, better up times, better response times, and just more effective operations. That agreement has already incepted. There is a 90 to 120 day transition period. So the outsourcing won't actually occur to about until about the middle of the year. And so the savings in 2019 guidance is modest, but we'll ramp to full run rate in 2020. Perfect. Thanks. The next question comes from Matthew Borsch with BMO Capital Markets. Please go ahead. Thank you and congratulations. Thank you for all the disclosure. So can you just help us think about where you would like to get to in terms of a run rate on the operating cost ratio, if that's even the right way to think about it? I mean, I know that there are structural differences depending on how much you grow the various parts of the business. But I'm just trying to look at your mid-7s guidance for 2019 relative the low 7s that you achieved in 2018 and then the stranded overhead in the G and A that you're spending to achieve savings? Sure, Matt. While we're not giving a forecast for 2020 beyond, we certainly believe there is more upside to our G and A ratio than downside risk. So you're right about the puts and takes in 2019, painful reminder of how the operating leverage works in this business. The stranded fixed costs of the loss contribution margin from New Mexico and Florida put 30 to 40 basis points of pressure on that ratio. But more importantly, we're investing $90,000,000 to $100,000,000 in raw G and A to invest in medical cost improvements and other improvements to our core business. I believe in the future, we will as we grow, we'll get positive operating leverage, we'll continue to invest in the business. And of course, you cited the mix effects that you're likely to get depending on how big the marketplace business in the future. So we believe that the G and A ratio has room for improvement going forward, while we're not giving a forecast more room for upside than downside. Thank you. The next question comes from Justin Lake with Wolfe Research. Please go ahead. Thanks. Good morning. So as the focus shifts to top line growth, I was hoping you could walk us through any kind of early view of your exchange strategy for 2020, as well as any key RFPs or opportunities for state membership transitions that could fuel revenue growth into next year? Sure, Justin. On the exchanges, as we said in a public forum just about a month ago, we plan to grow this business. We actually think we can double its size and still have a proportional relationship between our exchange business and our Medicaid business in the states in which we do business. Obviously, that won't all come in 1 year. And the interesting thing about this business is you know where your prices are in relation to the competitors. So we've done a very exhaustive price elasticity study. We know where our prices are too rich against the competition. We plan for 2020 to ease up on price. We certainly aren't going to price to 15% pre tax margins and 10% after tax margins. But we believe we can grow the business, have the MCR move up from the mid-60s to 70%, maybe even into the low-70s, maintain a high single digit margin without ever tripping the minimum MLR. So we're feeling really good about the growth prospects of this business and the ability to grow it, produce a high single digit margin and have the pool of profits grow over time. Any Medicaid opportunities? Right now, the early read I can give you on growth for 2020 beyond would be in Medicaid and Medicare. In DSNP, we plan to file a notice of intent to play in 170 additional counties in DSNP alone, 2 states of which would be brand new, Ohio and South Carolina. With respect to Medicaid, there are $30,000,000,000 of opportunities coming into the market in our estimation over the next 3 years. Wave 1, Louisiana, Minnesota, Hawaii, Kentucky and possibly Pennsylvania. Wave 2, Tennessee, West Virginia and Indiana. We have a newly developed business development team, a revamped RFP team. We're on the ground in many of these geographies doing a feasibility study, the regulatory environment, strength of the competitors, our ability to build networks. So we're actively at work working on the growth phase of this turnaround. Thanks. The next question comes from Ana Gupte with SVB Leerink. Please go ahead. Hey, thanks. Good morning. Congrats on 2018, great performance. And I just wanted a question about what you put out in January, which I thought was a very nice logical presentation on your opportunities for growth. But when you kind of look at the Medicaid, if you start with Medicaid benchmarking against the commentary and performance we're seeing from the key national competitors, doesn't look like it's that easy to expand margins neither United or WellCare or Centene have shown great performance on margin expansion there and trend deal spread as you say has got some pressure. And while I kind of look at all of your margin expansion drivers and they all make sense, I mean is there any read across or why does it look like you can do so much better than yourself and others, I guess, on the trajectory? Well, I think, Anna, I think the first thing I like to remind folks is that the cost structure that is built into the rating structures is the entire market. And so that if you can create a cost structure, both your G and A profile and your medical cost profile, that is better than your competitors, you get the lift in rates from the market cost structure. And then you can operate at a more efficient structure and produce best in class margins. Now whether it's sustainable or not, we have to prove that. But to your point about Medicaid, we broke through the 90% barrier on pure performance Medicaid for the year at 89.4%. But I would remind everybody that ABD is still at 91%. That's $5,500,000,000 of premium in 2018 alone. So I do believe there still is room for modest improvement in our Medicaid line, which obviously is a $13,000,000,000 line of business for us. Okay, all right. And then just following up on the earlier question related to marketplaces and margins and growth. If it's going to go from low double to very high single and this year you're not growing into 2019 and margins look like they're a bit under pressure. The overall exchange book is down a bit year over year and there are policy changes and competitive forces at play. Do you think that would remain a big growth driver? I mean looking at 2019, it seems challenging to me to see that happening. Well, I think our market niche is very differentiated. We are servicing, as I mentioned in my prepared remarks, the working poor. 20% of our membership are fully subsidized, another 70% are partially subsidized. We get to leverage our Medicaid network, not only the network itself, but the cost structure in the network to give us very, very competitive cost structure. So look, for 2019, at this time last year, we were compelled nearly to put trend into the market on top of our 2018 rates. We didn't know at this time last year that 2018 would have turned into a 15% pre tax year. So we put trend into the market on top of what were already very rich rates, and we're paying for it on the membership line coming into 2019. That is not going to be the phenomenon in 2019 for 2020. We now know exactly where we sit with our membership. We know their acuity. The churn of members is very low, so 80% of these members we had in prior years. So we're feeling really good about the stability of our book of business, our ability to now put a more reasonable price point in the market to begin growing again. Thanks Joe for the color, very helpful. You're welcome. The next question comes from Scott Fidel with Stephens Inc. Please go ahead. Hi, thanks. Good morning. Just first question, just wanted to get a little more detail on the negative spread that you discussed that you're building in for 2019 in Medicaid. And maybe just can you call out which markets in particular where you're seeing rate cost spread upside down? Is it just a few markets or are you seeing that more widespread? Well, Scott, we don't really like to talk about rates and the strength of rates in individual markets. But I would tell you that it's marginal across all markets, 20 basis points here, 50 basis points there. You're always having debates about trend components. How is pharmacy trending? Sometimes when benefits are carved in and carved out, how much premium is a state taking away on a carved out benefit and how much premium are they putting on a carved in benefit? So I would just say all in all, these are the normal puts and takes of the rating environment. And right now, at about 100 basis points of negative spread this year, it's very stable and very rational and we'll always have profit improvement initiatives, always have an inventory of profit improvement initiatives of 150 to 200 basis points of premium. That is the way you need to run this business to make sure that in a year where we're presented with a negative spread, we can offset it and keep our margins whole. Okay. And then just had a just one follow-up. Just interested in and what you can update us at this point just around some of the recent headlines coming out of Ohio on them discussing potentially rebidding the Medicaid contract and just given some of the even sort of above average scrutiny of the PBM servicing the Medicaid plans in that market? Sure. We were fully expecting Ohio to reprocure to drop an RFP perhaps late in 2019 for an effective date in 2020. So we're fully prepared for that. The new administration, always when there is a change in administration, you never know what the new plan will be. The new administration in Ohio does seem to be prepared for re procuring the Medicaid program. So we're fully prepared to deal with that and given the scope of our business, our market share and the way we perform, we're extremely confident of prevailing and perhaps even growing in net reprocurement. With respect to PBM and pharmacy, yes, Ohio has been particularly scrutinizing the pharmacy industry. Look, the pharmacy trends are what they are. They're putting pressure on costs and everybody knows that. I would say this, we have enough flexibility in our contract with CVS Caremark that if whatever Ohio decides they want for a pharmacy benefit carved in, carved out, separate PBM, carved in PBM, we would be able to deal with it and put a proposal that would satisfy their requirements both for medical and for PBM. Okay. Thanks. The next question comes from Dave Windley with Jefferies. Please go ahead. Hi, good morning. Thanks for taking my question. Joe, you mentioned that the emphasis contract sounds like will ramp through the balance of the first half of this year and not generate a lot of savings for 2019. I wondered if you could put a ballpark number on what you expect the total savings to be over time? And is that part of the remaining kind of overall cost savings bogey that you've laid out recently? Or is that somehow separate from that? Thanks. Hey, David. This is Tom. Yes, we're not going to disclose specific cost saving with the Infosys contract, but it would be fair to say that it's quite significant compared to our current base of operating our current base of expenses. And that it's really a multiyear contract. So you should expect to see that to be lasting over a number of years. And it is embedded in the $550,000,000 of saving that we had put out at the last JPM conference. Okay. Thank you. Yes. The next question comes from Steve Tanal with Goldman Sachs. Please go ahead. Good morning, guys. Just two questions for me. I think on the first one, just thinking about some of the thought processes around tax reform and Medicaid rates last year, I think you had all suggested that tax reform benefits would find their way back into Medicaid rates. But I just want to get your updated thoughts on that. Are you seeing any actions from the states in that front? Is that maybe partly related to the trend discussion? Or how are you all thinking about that now? No, the discussions about the tax regime rarely enters into rate discussions. As I said, most of the discussions are around debates about different cost components, how they're trending and the rate take up or take out for benefit carve in and carve outs. But very rarely, if ever, is there a discussion specifically about taxes. Great. Okay. So probably more sustainable now. And I guess just the other one that I had was wondering if you could give us a little more specificity on sort of the savings that are baked into 2019 versus 2020. So in the slides for the call, it looks like you're stating there's a portion of the $550,000,000 of remaining profit improvement opportunity. You could maybe size what you expect to sort of book in 2019 in the context of the guide and maybe give us some clarity on whether you expect to drive your sort of annual G and A run rate down by about that amount sort of exiting 2019 into 2020? Sure. If you look at the $1.87 of earnings per share we put in the guidance bridge, just to pull that apart, it's about $150,000,000 pre tax. That number is $250,000,000 of gross profit improvements offset by $90,000,000 to $100,000,000 of hard G and A cost to produce them. And the first thing I would say is we were very exact by including all of the costs to produce those benefits, but very cautious in forecasting the benefits that will actually emerge in the P and L. So the $150,000,000 of net profit improvement is $250,000,000 of gross profit improvement offset by $100,000,000 of the hard cost to produce them. We still consider that conservative and that will build into the run rate that we will project forward in 2020. Perfect. Great. Thanks for all the clarity. You're welcome. The next question comes from Sarah James with Piper Jaffray. Please go ahead. Thank you. So great guidance for 2019, obviously a very impressive margin profile. Can you help us understand or break out parts of that that may be unsustainable? Help us understand what part of that is in different products or various lines? Thank you. As we look at, Sarah, as we look at the margin guidance, let's to keep it simple, after tax margin is probably the easiest metric to look at. So we're not adjusting for all the puts and takes of hips and things like that. We are maintaining a 3.8% after tax margin consolidated in an environment where revenues are declining by 10% and an environment where the 2018 margins included $137,000,000 pre tax or $1.55 of favorable development. So the question of sustainability is an interesting one, but to maintain that level of margin in that environment, particularly compared to 2018, we think is a really good solid forecast to project forward. 2.8% in Medicaid, 5% in Medicare and still double digit in marketplace is a very attractive margin profile. And really in this environment, we think that's a very good start to the year. Just to clarify there, so if we take those segment margin profiles that you talked about and the 3.8% in 2019, are you saying that this is a sustainable net margin profile for the company? So I'm thinking back to I Day, there was the 2.3 to 2.7 laid out for 2020. But as you've moved through some of the cost saving initiatives, is this where the company looks like it's going to be going forward? We think high twos for Medicaid is certainly sustainable. We think that mid single digits for Medicare is certainly sustainable. And as we described previously, we believe that as we grow our marketplace business, the margin will drop from low double digit to high single digit. Conscious effort to move the MCR up from the mid-60s to 70 or even low 70s, not trip the minimum MLR and grow the profit pool rather than focusing just on the percentage margin. Thank you. The next question comes from Kevin Fischbeck with Bank of America. Please go ahead. Great, thanks. So related to that exchange comment, is that transition to that new margin profile expected to happen in 2020 or is this like a multi year move for you? It's a analysis of the elasticity, the pricing elasticity of the product and how much growth you think you can put on the books for the level of margin that you're willing to give up to do it. And it's market by market, geography by geography. We know where our competitors sit. We certainly know their strategy for the metallic tiers. They know ours as well. But with our new marketplace management team, and now that we have a book of business that is 80% repeating, we think we have a very, very good visibility on our marketplace business to grow it at high single digit rates and never trip the minimum MLR. So, it's all a question of how fast we want to grow. It is a multi year effort. You never like to grow any book of business too quickly. So it's probably a multi year effort. Okay. And then you mentioned that I guess you still have $350,000,000 of cost savings out of the 550,000,000 beyond 2019. How should we think about the ramp of and the progression of those savings over the next few years? Well, we're just now getting by the point where we've planned for 2019. We'll probably give the market a view of that at our Investor Day in May, which will also give a glimpse of the 2020 growth rate as well. So if we could wait another month or so, couple of months until May, try to give you a forward look of how the profit improvement will emerge over the next couple of years and also how the top line will grow over the next couple of years. But it's there. We certainly we put it out there for public disclosure, so we certainly understand it. We have models that I won't say prove it, but are strongly suggestive that it's real and tangible and actionable, and it can offset a lot of rate erosion in the marketplace and also help sustain our margins. And I guess you probably I think you just basically said you didn't want to answer this question in May as well. But you mentioned kind of 2 waves of Medicaid RFPs over the next few years. You've already talked a little bit just about exchange membership and then expanding Medicare into next year. Do you think that you're going to actually grow better in 2020 than you top line than you did in 2019 excluding the contract losses? If we just kind of put those aside, is 2020 going to be a year showing that growth or is 2020 still you've got so many things investing and it's really 2021 before we see the top line grow? Yeah, really, I think just to give us the next few months, we're in the middle of our 3 year strategic planning process, which is culminating in mid April, shared with our Board in May and showing to the marketplace in late May. So you could just indulge us and wait to that point in time, we'll give you a good view of 2020 at that time. Fair enough. Thank you. The next question comes from Zach Sopcak with Morgan Stanley. Please go ahead. Thanks. Good morning and congrats on a great 2018. I want to ask about the $1.55 prior year development. Just so I'm clear, it sounds like your reserving methodology is similar for 2019. Is there anything in that 1 point 2019 might progress? I wouldn't say there's anything unusual from a sense that reserve methodology has been very consistently applied quarters over quarters. And so we saw that development coming out and we have the same approach going through 2019. So we're not predicting any favorable and unfavorable development, but certainly if you follow that methodology, then you can draw your own conclusion. What we also see in the Q1 so far is that flu effect has been somewhat attained, low comparing to prior year. So that certainly can be a positive sign for potentially a mild seasonal effect of a seasonal high medical costs that you see in the winter. Okay. That's helpful. Thank you. And that layers into my second question on seasonality. So you seem in 2018 to kind of buck traditional seasonality, probably given you have a lot of different things going on with the profit improvement opportunities. Is there any way you can help us think about seasonality for 2019 given you'll also be harvesting additional opportunities or any other way to think about kind of the progression throughout the year? Medicare and Medicaid books are pretty evenly distributed from a seasonality perspective. Marketplace is generally back end loaded as to medical costs, but last year in 2018, it wasn't. We think we had more chronic members. That doesn't mean they were necessarily bad members, but they were just chronic members that were utilizing services throughout the year. I think this year you'll see a pretty even seasonality pattern. Marketplace could be a little bit back loaded, but Medicare and Medicaid could be pretty evenly distributed. Okay, great. Thank you. Next question comes from Gary Taylor with JPMorgan. Please go ahead. Hi, good morning. Two part question. 1, you provided GAAP guidance without amortization of intangibles, which I think was roughly $0.30 last year. I know a little bit of that goes away with the Pathways deal. So do you have an updated estimate for 2019? We disclosed in a table in our earnings release the amortization on intangible for 2018. For 2019, you're right, it's going to be lower and we estimate that to be in a neighborhood of about $0.20 EPS. Thank you. And the second part of my question, can you help us understand a little bit, so the exchange enrollment down for 2019, you talked about that, the effect of your pricing essentially. Can we talk about Florida a little bit? And what is the impact on your cost structure could you just talk about enrollment exchanges in Florida, but just the impact of having to withdraw from a portion of the state from the Medicaid perspective have an impact on the Florida exchange enrollment? Yes. So Florida, for the obviously the Medicaid contract that we lost in certain region. The state started transition in the Q4, late Q4. So when you look at membership that we disclose in the table in the earnings release, you would see that 10F membership declined quarter over quarter. And the big chunk of that is really from the Florida market decline as membership transition to the region that we will exit. From a viewpoint of impacting on exchange, the 2 really doesn't have that much effect. It's not really related. In fact, we do see membership growth for the Hicks membership in the state of Florida. Okay. So which states would have been the largest exchange declines for 2019? The large membership we have in the exchange is really in the state of Texas. So we do see decline in state of Texas from 2018 into 2019. So there are fluctuations in many different states, some gains, some loss, but certainly Texas has a major impact on the decline from 2018 into 2019. Okay. Thank you. The next question comes from Steve Valiquette with Barclays. Please go ahead. Thanks. Good morning, everybody. So Joe, I don't want to beat the exchange topic to death here, but just coming back to your investor presentation from last month. And again, that slide that shows Molina marketplace growth scenarios, where you talk about the marketplace res for Molina growing to either $2,600,000,000 or $3,600,000,000 You touched on the March component of that slide already, but again just for the revenue side, just want to clarify those revenue numbers were intended to be actual targets for Molina and what the timeframe is, if there is one or again was the revenue portion of that slide more just for illustrative purposes? Thanks. It was for illustrative purposes. But it was really to make the point that if we were to but it was really to make the point that if we were to return the business to its original size, which was $4,000,000,000 Knowing what we know about our pricing competitiveness, knowing what we know about administrative cost leverage, can we produce high single digit margins and grow the business back to its original state. So it was illustrative. We do believe it's doable over some period of time and how that manifests itself in our ongoing forecast will be showcased at our Investor Day in May. Okay, got it. Okay, thanks. The next question comes from Michael Newshel with Evercore ISI. Please go ahead. Thanks. I know you touched on some specific states, but can you just break down the exchange enrollment results for the year between same market declines versus gains you saw in new markets? We're not going to go into specifics state by state here. But Michael and I mentioned before is that Texas, which were roughly about 55%, sixty percent of our membership in 2018. We did see a decline there. So that's where really the main driver the membership decline from 2018 into 2019. As you know, we have reentered into some new state. The former state that we exited Utah in Wisconsin, we did see some level of membership there, nothing significant. But the remaining market, there are fluctuations up and down. Some we gained, some we lost. I mentioned before Florida, we gained some membership. Some market was fairly stable, for example, state of California, fairly stable. So overall, there's a decline definitely from 360 at the end of 2018 into January. Right now, we are somewhere around 325 to 330. Okay. How about can you size the impact of the investments that are in the bridge from 2018 to 2019? I think you said Pathways removes a loss, but MMS may have been a slight contributor. Is the net impact material at all there? Dario, I would say that's about $0.10 $0.10. I'm sorry, was that it's about a $0.10 headwind the divestment net? 2018. The next question comes from Peter Costa with Wells Fargo. Please go ahead. Hi, guys. Good morning. Congrats on the quarter. Really want to talk to a bigger picture about what's going on with RFPs in Medicaid in general. You saw the North Carolina quality scores that came out and you've seen other recent scores that have come out. Have you seen anything that has given you more positive or less positive views on your Texas bid? And in particular, beyond that, do you think there's something that you guys are missing or that you need to acquire to look better for some of these RFPs that seem to be favoring more population health and things like that? Peter, we're still very optimistic based on everything we know about our RFP bid on Star Plus in Texas. No news has emerged that makes us any more or less confident. We've always been very, very confident in the outcome. We think our strategy on building capabilities internally and our rent to own strategy is the right balance. We really don't believe you need to acquire the equity of a company in order to import and integrate its capability. And you've seen us announce the major partnerships with some world class partners and you'll see more of that on esoteric and niche capabilities that we think couldn't possibly be scaled adequately or capably in order to deliver into our operating platforms for delivery into a service model. So we're building capabilities internally on core capabilities. We're looking for co sourcing partners on a rent to own strategy for esoteric capabilities. And as long as they're fully integrated, we believe our products can win in the marketplace and continue to win RFPs. We have no reason to believe that they can't. Okay. So not so we shouldn't expect any further acquisitions regarding specialty capabilities or anything like that? The front, I always welcome an opportunity to look for a bolt on membership opportunity in a current state where we can get some good operating leverage. But no, not spending capital on EBITDA multiples for capability plays. Okay. Thank you. The last question today is a follow-up from Justin Lake with Wolfe Research. Mr. Lake, please go ahead. Thanks. Good morning. So thanks for the extra question. Just wanted to ask a numbers question on investment income. It looked like you guys guiding to about $195,000,000 I think there might be other stuff in there besides investment income, but big step up in that number. So just wanted to get some clarity on that. Thanks. Justin, the $70,000,000 increase in investment and other revenue is due to 2 things. 1 is that higher investment income, I would say that roughly about 40% of that change and the rest is really the full year effect of the ASO fee for the pharmacy benefit that were carved out in the state of Washington, whereby we'll pay an ASO fee to manage that program for the state. So last year it was only a half year and 2019 is really a full year. So I hope that clarified the change there. Thanks for the color. You're welcome. This concludes our question and answer session and also concludes our conference. Thank you for attending today's presentation. You may now disconnect.