Earnings Call: Q3 2018

Nov 1, 2018

Good day, and welcome to the Molina Healthcare Third 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, VP of Investor Relations. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the Q3 ended September 30, 2018. The company issued its earnings release reporting Q3 2018 results last night after the market closed, and this release is now posted for viewing on the company website. On the call with me today are Joe Zubretsky, 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 can 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 that 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 our company website or on the SEC's website. All forward looking statements made during today's call represent our judgment as of November 1, 2018, 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, malinahealthcare.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 3rd quarter earnings of $2.90 per diluted share $7.60 per diluted share for the 9 months ending September 30, 2018. For the quarter, net non run rate charges were $30,000,000 or $0.35 per diluted share. These charges resulted primarily from a mandated retroactive adjustment for a minimum loss ratio floor and risk corridor on the 2016 California Medicaid Expansion Business, partially offset by the gain on the sale of MMS. This adjustment is described in our earnings release. For the 9 months ending September 30, 2018, net non run rate benefits were $54,000,000 or $0.59 per diluted share. Therefore, from a pure performance perspective, after considering these non run rate items, we achieved fully diluted earnings per share of $3.25 for the 3rd quarter and $7.01 for the 9 months ending September 30, 2018. I also note that the quarter included $0.34 in tax benefits, mainly to adjust our year to date effective tax rate to a lower projected tax rate in recognition of our improved outlook for full year earnings. The 9 month results, however, fully reflect our projected full year tax rate. We are very pleased with the continued improvement in the performance of our business and our financial results reflect the significant progress we are making in executing our margin recovery and sustainability plan. Now for a deeper look into the underlying operating levers and metrics. 1st, with respect to revenues. Premium revenue decreased by approximately 4% from the Q2 of 2018 and approximately 2.7% after removing the impact of the retroactive California risk corridor adjustment. The decrease is largely attributable to the expected seasonal decline in marketplace membership, the Washington Medicaid Pharmacy carve out effective July 1st and the effective rate changes for July 1st. Our Medicaid and Medicare volumes remained strong. 2nd, with respect to our control of medical costs and the resulting medical care ratio, we continue to produce sequential MCR improvement. Our pure performance medical care ratio, excluding the retroactive California risk corridor adjustment, was 86.4% in the 3rd quarter, a 60 basis point improvement over the 2nd quarter MCR of 87% on a pure performance basis after adjusting for the benefit of the 2017 marketplace risk adjustment and cost sharing reduction. Medical costs across all the health plans and product lines were largely stable and in many places improved when compared to prior quarters. Our medical cost baseline continues to develop favorably and we have managed cost trend to below our forecasted trend rate. Now that we have credible 9 month data with good visibility into the underlying medical economics, we can attribute the improvement to many of the early actions the company has taken to improve its performance. Most notably, we have re contracted high cost providers in our networks. We have added additional resources to frontline utilization management and improved execution of utilization controls and care management protocols. This has resulted in lower rates of hospital admissions, ER visits and short inpatient stays as well as reduced length of stay for hospital admissions. We have improved claim payment integrity processes by enhancing our software platforms to ensure we pay for services appropriately, reducing errors and duplicate claims and executing better on coordination of benefit recoveries. And we have achieved better performance in retaining at risk revenue by improved risk scoring and quality measurement. All in all, we have enhanced our ability to manage and forecast medical costs, all while ensuring our members receive the high quality service they deserve at the right time, at the right price and in the right setting. I turn now to our control of administrative costs. We have continued to improve our administrative cost structure and to lower our G and A ratio through a number of our ongoing initiatives. We have reduced our administrative expense sequentially in each of the last three quarters through the following actions. 1st, we have managed our headcount to align with activity and transaction volumes. Since the beginning of the year, we have reduced our headcount by more than 600 positions or over 5% of our workforce. 2nd, we have continued to streamline our management ranks and manage spans of control. 3rd, we have eliminated spending on certain IT projects that in our view were not creating value. 4th, we continue to steadily reduce our excess real estate capacity. And 5th, we have negotiated lower unit costs in many of our labor and non labor contracts. We will continue to scrutinize all aspects of our administrative cost structure. However, we anticipate that administrative expense in the Q4 will increase due to the seasonality of some marketing programs and the commencement of many of our transformation initiatives that will produce benefits in 2019 beyond. We also made significant progress in the quarter related to our capital structure and free cash flow to the parent. In the quarter, we continued to deleverage and reduce the share count volatility associated with our convertible notes. We closed on the sale of MMS delivering approximately $230,000,000 of cash to the parent and we recently announced the sale of Pathways, a non core asset for a nominal purchase price. The transaction closed in October and we estimate that we will record a loss on the sale of approximately $0.60 per diluted share in the 4th quarter. Our capital structure is stable, cash flows to the parent entity are strong and our credit metrics are sound. This positions us well for beginning the conversation about a potential credit rating upgrade, which could lower our future cost of debt. I turn now to the performance of our product lines. Our Medicaid product performed well compared to the 2nd quarter. On a pure performance basis, our Medicaid MCR was 89% compared to 89.8% in the 2nd quarter. Our ABD and expansion products drove the improvement, while we experienced slightly higher medical costs in our TANF product, which still has much room for improvement. Medicare generally performed in line with our expectations, but deteriorated sequentially with a combined medical care ratio of 87.3% compared to 85% in the 2nd quarter. On a 9 month basis, the total medical care ratio is in line with our expectations at 85.7%. The sequentially elevated MCR was in the integrated MMP plans and largely attributable to certain revenue transfers between the Medicare and Medicaid lines of business, which had no impact on our consolidated results. Our DSNP product continues to perform very well and serving the dual eligible population is a key area for our future growth. Both our MMP and D SNP products benefited from our improved collection of risk score data and our ability to retain quality withholds. Our marketplace business has continued to perform well, achieving a pure performance medical care ratio of 65.3% compared to 68.4% in the 2nd quarter after removing the impact of the non run rate items. This 310 basis point improvement was driven by lower medical costs and higher revenue from better riskScore performance and better than expected membership retention. We have not yet observed the seasonal in year utilization increase we experienced in prior years. Marketplace is now performing at an after tax margin of approximately 9% to 10% for the full year, well ahead of our pricing expectation, while only triggering the minimum MLR in one market. The pricing actions that we took in 2018 increased our average rates by nearly 60%. Based on our performance year to date, we are pleased at how well our forecast of expected cost trends and membership mix aligned with the rate increases we delivered. I turn now to the performance of our local health plans. The majority of our health plans have continued to perform well as a result of our new operating model, which mandates local execution and decision making with stringent enterprise oversight and performance management. Michigan, Texas and Washington continued to perform well across most lines of business. Michigan saw improvement from slightly higher premium revenue and continued inpatient cost improvement as the health plan is focused on reducing short term inpatient stays. Texas with more than 50% of our marketplace revenue improved sequentially. While much of the improvement was due to lower medical costs and improved revenue retention in marketplace, the Medicaid and Medicare lines of business combined also performed slightly better than expected. We remain positive on our prospects with the reprocurement of the Star and the Star Plus contracts. Washington has continued to reduce the inpatient cost pressures in the Medicaid product that were identified earlier in the year through a more intense utilization management approach. Also, as you will recall, Washington carved out the Medicaid pharmacy benefit in the 3rd quarter and our results now reflect the corresponding premium and medical cost declines associated with that carve out. In the quarter, we also made significant progress on many future value creating initiatives. Most notably, our Mississippi Health Plan went live on October 1 as a new entrant into a market with 2 existing health plans. As a start up plan, we will receive all of the auto assignment membership until our health plan reaches 20% of the total membership in the program. We currently expect to end the year with approximately 20,000 members and the projection for 2019 could be as high as 90,000 members by the end of the year. Our new island wide contract in Puerto Rico is expected to go live with approximately 290,000 members, a slight decline from our prior 2 region membership roles, but with significant potential for additional membership. We remain confident that we will be able to earn and sustain a return in excess of our cost of capital. And finally, the court has not yet issued a ruling on our protest in New Mexico. Pending the court's decision, we are managing the runoff of the New Mexico Medicaid plan and transitioning the membership. We will remain in the marketplace in Medicare business in New Mexico in 2019. I turn now to our revised guidance. Our revised GAAP guidance for the year is $8.80 to $9 earnings per diluted share or an increase of $1.65 at the midpoint from our previous guidance. On a pure performance basis, our revised guidance is a $2.60 per share increase. Our GAAP guidance and our pure performance guidance are expected to be nearly identical as the non run rate benefit for the 1st 9 months will be offset by the loss on the sale of the Pathways business. Tom will elaborate on guidance in a few minutes. Assuming the achievement of our full year guidance, we step back and look at our businesses for the full year 2018 through the lens of our margin recovery plan. Our Medicaid business is a solid franchise, has a diversified footprint, great product depth and with an after tax margin between 2% 2.5% is now performing very well, although there is still significant room for improvement. Our Medicare business with annual revenue of approximately $2,000,000,000 is favorably positioned in the duals market and is performing well, having now achieved after tax margins between 3% and 3.5%. In our marketplace business, after years of corrective pricing actions and instability is not only stable, but is now producing after tax margins of 9% to 10%. Measured off of any starting point we could choose, Marketplace is a significant part of this overall margin recovery story. On a consolidated basis, we expect to achieve an after tax margin of 3.2%, which for the 1st year of this turnaround is a result we are very pleased with. I will close with some preliminary thoughts on 2019 as we head into the Q4. While it is too early to provide detail on 2019 earnings, I can provide the following observations as we see them today. At the midpoint of $8.90 pure performance guidance EPS for 2018, we have a very solid earnings baseline and within a range margins that are sustainable and have less potential for volatility. In short, the quality of earnings in 2018 is high. Against this backdrop of a solid 2018 earnings baseline, we are currently in the process of developing our 2019 financial plan and evaluating all of factors that will impact our 2019 earnings trajectory, including the continuation of the positive momentum we have in managing medical cost trend, the continued adequacy of our Medicaid rates, the competitiveness of our Medicare and marketplace rates once our competitors' rates are known, how much of the significant profit improvement plans we previously communicated will manifest in 2019 earnings and while we are effectively managing the total and partial runoff of the New Mexico and Florida Medicaid contracts, the potential for some level of stranded fixed costs still exist. Over the long term, management is committed to increasing both operating earnings and earnings per diluted share above This plan will fully consider the solid 2018 earnings baseline and these other factors, all of which will determine the 2019 earnings trajectory. We look forward to reporting that outlook to you in February when we announce 4th quarter earnings. We are very pleased with our results to date. We remain committed to executing the fundamentals of Managed Care and ensuring that our operating and financial platforms can produce sustainable results. When this is done, we will turn our focus to positioning the company for the inherent growth in this very attractive government managed care sector. With that, I will turn the call over to Tom Tram for more detail on the financials. Thank you, Joe, and good morning. As described in our earnings release, we report 3rd quarter's earnings per diluted share of $2.90 and adjusted earnings per diluted share of $2.97 excluding the amortization of intangible assets. These strong results were driven by the continued improvement of our day to day operational processes that affect medical costs and administrative expenses, favorable cost trends across most of our products as well as our ongoing margin recovery initiatives. First, let me quickly highlight a few of the items that we call out in our earnings release, particularly as it relates to the $0.35 earnings per diluted share of out of period non run rate items. Regarding California, the state imposed a retroactive risk corridor for the state fiscal year ended June 30, 2017, which we noted last quarter as a potential exposure. The state formally present their contract amendment this quarter, which we then agreed to. As a result, we record in the quarter a $57,000,000 pre tax charge or $0.65 per diluted share. This charge has little impact on how we view the profitability of our California Medicaid business going forward. Excluding this charge, the California Medicaid expansion product operated within an acceptable medical care ratio in the quarter. We recorded a $5,000,000 benefit in the quarter for marketplace cost sharing reduction or CSR subsidies for 2017 days of service. This benefit relates to the reprocessing of claims data for CSR eligible members and allow us to reduce our liability with CMS. We recorded a $37,000,000 pre tax gain on the sale of our MMS subsidiary, which we sold for approximately $230,000,000 We recorded $5,000,000 of restructuring costs in the quarter, primarily related to 2 items. The ongoing true up of our initial lease abatement estimates as we continue to rationalize our office space and costs associated with our 2018 IT restructuring plan that is focused on improving our IT operations with outsourcing and or co sourcing various aspects of the technology function, which will provide significant future cost savings. Finally, as part of the repurchase of the 2020 convertible notes and related embedded co option termination, we incur approximately $10,000,000 of expenses. These costs primarily related to the acceleration of the remaining discount amortization on those notes as we continue to simplify our capital structure. Regarding our tax position, our full year effective tax rates improved to a range of 32% to 33% from 35% to 36% per our previous guidance due to improved earnings for the year as our marginal tax rate is approximately 22%. This improvement result in a 3rd quarter benefit of $0.34 earnings per diluted share. However, for the 9 month ending result fully reflect our expected annual tax rate, so our 9 month result need not be adjusted for tax items. I will now spend a few minutes discussing our reserve position. Our reserve approach is consistent with prior quarters and our position remains strong. The favorable development we experienced in 2018 from 2017 has increased slightly to approximately $230,000,000 including the explicit margin that we hold. We continue to have favorable intra year reserve development and as we have stated in the past, we intended to include that same level of conservatism in the quarter and reserve balances. Days in claims payable are up approximately 4 days sequentially. Approximately 2 days of the increase are attributable to the expansion of the quality review process for claims payment, which involves certain extra review steps prior to finalizing payment. The remaining 2 days are due to normal fluctuations in the reserve balance. Turning to our balance sheet and cash flow. We have continued to look for strategic opportunities to delever the balance sheet as we outlined during Investor Day and our capital actions year to date have result in a benefit of approximately $0.30 earnings per diluted share for the year. As of September 30, 2018, the company had unrestricted cash and investments of approximately $390,000,000 at the parent company. We continue to be more capital efficient at the health plan level, ensuring a more consistent and regular dividend flow to the parent company. At the end of the Q3, our health plans had aggregate statutory capital and surplus of approximately $2,100,000,000 which represents more than 3 50 percent of risk based capital. Our operating cash flows are strong. However, operating cash flows was negative in the quarter, primarily due to our payment of the marketplace risk transfer for fiscal year 2017. Let me offer some additional thoughts on our revised guidance. We have raised our full year guidance to a range of $8.80 to $9 per diluted share, an increase of $1.65 on a GAAP basis and an increase of $2.60 on a peer performance basis at the midpoint from our previous guidance issue on August 1. This increase is comprised of the following. 1st, our medical cost baseline continues to develop favorably and we have managed cost trend to below our forecast trend rate. 2nd, we project that our marketplace product will perform better than we previously projected due to better revenue retention and lower medical costs. And third, we expect that performance of our Medicaid product will remain steady in the 4th quarter. Now to bridge our result in the 1st 9 months of the year to our revised guidance in the 4th quarter. Our peer performance earnings per diluted share was $7.01 for the 9 months ending September 30, 2018. We estimated that our 4th quarter earnings per diluted share at the midpoint of approximately $1.90 On a sequential basis, our 4th quarter earnings per diluted share is projected to be lower than our 3rd quarter's earnings, primarily due to three reasons. 1st, the expected marketplace seasonal decline in membership and increase in medical costs. 2nd, the cash up benefit from the lower effective tax rate in the 3rd quarter will not repeat in the 4th quarter. And 3rd, an increase in our general and administrative expense ratio for the 4th quarter, which is projected to be at 8%. This increase is due to seasonal spending, including sales and marketing initiatives related to the open enrollment period for Marketplace and Medicare expenses related to certain IT projects that were delayed from the Q3 into the 4th and expenses related to certain transformation initiative that began in the 3rd and 4th quarters, which will contribute to 2019 earnings and beyond. Finally, let me offer a few additional points of consideration relating to our revised guidance. Our guidance assumes no prior period development and our guidance was developed based on GAAP rather than adjusted earnings per diluted share, which would exclude the amortization of intangible assets. This concludes our prepared remarks. Operator, we are now ready to take questions. Thank Our first question comes from Justin Lake of Wolfe Research. Please go ahead. Thanks. Good morning. Joe, thanks for the 2019 outlook. Maybe you can give us a little more color there in terms of just starting with the 2018 numbers. Can you talk about what you think a reasonable jump off point for 2018 is versus the $8.80 to to $9 Are there areas where you don't think the margins are sustainable, like potentially the 9% to 10% in the individual business? Sure, Justin. When you cut through all the puts and takes of the quarter, it's a solid $3 quarter and a very solid $9 year. Our guidance at $8.90 at the midpoint. The quality of earnings in 2018 is very strong. And we think that's a great jumping off point for planning our trajectory into 2019. I cited the various factors that one always takes into consideration when forming a plan. The continued strength of our Medicaid rates, the competitive positioning of our Medicare and our marketplace rates, can we continue to manage our medical cost baseline and trend as effectively as we have this year? And then certainly of the $500,000,000 of profit improvement initiatives we outlined for you at Investor Day, certainly some of that has endured to the benefit of 2018, but most of that is still yet to be harvested. Are are endemic to the industry and those specific to Molina. And over the long term, we're committed to growing earnings share and our pre tax earnings off of 2018 solid baseline. That's helpful. And then just a follow-up there. Maybe another way to come at it is just net income margins. Clearly, relative to peers, they're now towards the higher end of the range. To grow up here with a shrinking with a top line, that's it looks like it's going to be down next year given the membership losses before accelerating in 2020. Where do you think the margins on a net income basis can kind of sustain relative to what you kind of put out there at the We're going to produce We're going to produce Medicaid margins just under 2.5% this year after tax, Medicare margins at nearly 3.5% and marketplace at nearly 9%, averaging to the 3.2% after tax margin in our guidance. Clearly, the marketplace has outperformed our expectation this year without question. We've managed it effectively. We put 58 points of rate into the market last year. This year, we only put low single digit rate increases into the market because our rate actions no longer needed to be corrected. And so I think the question on the marketplace isn't whether we can sustain the margins is can we continue to hold on to the membership at the margin we produced this year. But it's a solid product, it's performing well, and we're just now learning how our prices are comparing to our competitors and we'll have a better outlook for you when we report our Q4. Thanks. Our next question comes from Josh Raskin of Nephron Research. Please go ahead. Hi, thanks. I guess similar sort of line of questioning around margin sustainability. And I guess the first thing is, I think you mentioned, Joe, long term, you guys want to keep, I think, 2018 levels of profitability and so or I'm sorry, levels of earnings. And so should we think about on a lower top line, this 2019, does that mean 2019 steps back and then longer term we get back to the $9 or is that not what you were saying? And then the second question just in terms of the sustainability looking at the G and A side, you guys are running at about a 7% ratio. And so I'm just curious, is that a sustainable number in light of the fact that you're going to be trying to reinvigorate the growth engine, I look at things like $24,000,000 of CapEx for the 1st 9 months and it just feels like that can't be sustainable if you're really trying to grow the business. So maybe just help with a couple of those questions. Thanks. Sure. With respect to 2019 revenue, at our Investor Day, we laid out an outlook, which suggested that the 2019 premium revenue would be about $15,600,000,000 At that time, of course, we are accounting for the total loss of Florida and the total loss of the New Mexico Medicaid contracts. We've since recovered 2 regions in Florida, dollars 500,000,000 and the Mississippi implementation will be an incremental $300,000,000 to 2019. There are other growth opportunities in our existing portfolio. Our marketplace business should grow next year with rates now filed in Utah and Wisconsin. As you know, we are very successful in our Washington reprocurement, where we have fewer competitors in many of the regions we won and so our membership will grow. Ohio carved in the behavioral benefit halfway through this year. We'll get a full year of that next year. And we picked up 70,000 members mid year in Illinois and we'll get a full year effect of that in 2019. So all in all, I think the premium revenue picture without giving you a specific forecast is a lot better than the outline that what we outlined at Investor Day. Your second question was about G and A. There's more G and A to harvest here. We've redeployed a lot of that G and A to the front lines. Our net 600 headcount reduction was net of resources we put in the field to control medical costs. We will spend money on many of our transformational initiatives that will produce better baseline medical costs that will put a little pressure on it next year. But we're very determined to control our fixed costs and to leverage our fixed costs. And we think there's upside to the G and A ratio as well. Got you. And I'm sorry, Joe, just to clarify, my question on 2019 was, with the understanding that premiums probably go from about 17,500,000,000 this year to maybe just under 17,000,000,000 next year now, obviously a lot better than what you guys were talking about previously. My question was around the earnings. I think you had made the comment that 2018 that long term you wanted to maintain that level of profits that you're seeing in 2018 that run rate $9 number. So I was just asking more on the combination if you've got a little bit lower top line on a year over year basis. Did it sound like earnings per share in your mind for 2019 just directionally would have to take that step back on lower revenues and then eventually get back to where you were? Or was that not what you were implying? Again, without giving a specific forecast, even with the revenue declines next year, we are pretty committed to growing earnings per share and pretax earnings off of the 2018 base. Too early to give you the specific 2019 trajectory, but we are committed even in the face of the revenue decline on the 2 loss contracts, we're committed to that long term objective. Got you. That's perfect. Thanks. Our next question comes from Ana Gupte of Leerink Partners. Please go ahead. Yes. Hey, thanks. Good morning. Yes, so again following up on the margins, with the 3 plus margins, net margin that you have right now, do you expect there is still a runway for expansion? And is that likely to come mostly from additional mix shifting to the exchanges, which are really high margin? Or is there still core MLR improvement from claims editing, payment integrity, PBM or anything else in Medicare, Medicaid? And then on G and A, are you still looking to drive more efficiency? Are we just looking at leverage at this point as you grow on the cost side anyways? With respect to our margins, you specifically, Anna, mentioned Medicaid. With an 89.9% year to date MCR, there's still room for improvement in our core Medicaid business, maybe 100 basis points or 200 basis points long term in the MCR. And we're committed to improving our Medicaid margins. On the G and A side, yes, there's more efficiency. There's leverage, fixed cost leverage as we grow. There is more efficiency, and we will redeploy some of that efficiency back to the frontline to make sure that we do not skimp on utilization control resources, which was part of the medical cost problem the company experienced. We also are going to invest in some of these transformational initiatives. It will cost money if we outsource or co source our IT operation. We are spending more money on payment integrity routines and frontline utilization controls. So there'll be a little bit of upward pressure on the G and A ratio as we improve our processes, but it should have a corresponding and exponential effect on our medical cost line. And then on the rate side, just finally, you have like a mid-60s exchange loss ratio and you said only one region had the MLR floor issue. But are there any rate pressures that states may be bringing to your attention with such low loss ratios? You're probably not alone. And then on the tax reform side, might they start to put pressure on the rates in Medicaid? Is that sustainable over the long term? On the second question, the Medicaid rates, it's a very rational rate environment right now as we accept the Medicaid rates that are being offered to us. For the most part, the rates are actuarially sound. They always seem to come in a little bit lower than your observed medical cost trend, but states expect you to find managed care savings and we do that routinely. The tax reform conversation really isn't part of the rate dialogue with the states. On the marketplace side, we're just now learning how our rates are going to stack up against our competitors. Our average rate increase for the marketplace that we filed in 2018 for 2019 was 4%. These rate increases no longer need to be corrective. They just need to accurately reflect medical cost trend, the acuity of our population and the metallic benefit designs that we put into the market. So we're pretty comfortable that our strategy in the marketplace, which was to hold on to our membership ranks and maximize contribution margin dollars for 2019 will hold and that will position us well to file rates in 2019 that will allow us to grow into 20 20. Thanks for the color. Appreciate it. Our next question comes from Sarah James of Piper Jaffray. Please go ahead. Thanks and congratulations on the turnaround execution. You've previously talked about focusing on the turnaround before you turn back to top line growth acceleration. Given the progress is running ahead schedule, how are you thinking about when it's right to explore top line opportunities again, thinking specifically of non incumbent RFPs, M and A, but also anything like organic M and A or HICS market expansion? Thanks. Well, as we continue to focus on our margin recovery and sustainability efforts, as you suggested, there is still more to do. Some of those opportunities have yet to been harvested, and that is our primary focus here at the company. In the meantime, we also recognize that the sales cycle in this business is very long. And if you don't start building the engine today to grow, then you won't grow in 2019, 2020 2021. So we're hard at work rebuilding our RFP response unit. We're hard at work rebuilding our new contract business development unit. In the meantime, there are plenty of opportunities in our existing footprint, in our existing product line to grow. If we can win more regions in Texas when Texas finally announces the STAR plus contract, if we won 7 more regions and add our current market share, it could be over $1,000,000,000 of incremental opportunity. Ohio strongly considering putting their ML, their long term services and supports business into managed care. So there are plenty of opportunities marketplace. We believe that business could be twice the size it is today and we can hold on to our margin and have it be a very good allocation of capital in the portfolio at a very attractive margin. So before we go into new, new, I think there's plenty of opportunities in our existing footprint and our existing product line to grow. But in the meantime, we are rebuilding that greenfield business development operation, so we can participate in RFPs in 2019 2020 for the benefit of 2021. That's very helpful. And one more, you previously talked about $0.50 upside not in guidance from capital deployment related to debt and converts. Can you update us on how much of that has been achieved? And if the remainder is on the table for 2019 or if we should be thinking further out? Thanks. We originally gave you a $0.50 estimate. And if you recall, I think at the time, our share price is about $85 which meant that the cash that we've used to buy in the converts was purchasing a lot more of the converts than it is at $125,000 $130 So that estimate for the full year is now $0.30 But we've bought in a lot of those convertible notes. We've reduced our share count and the potential volatility in EPS as a result of it. But I think Tom said in his prepared remarks that the estimate for the year on our capital actions is about a $0.30 benefit for the entire year. Thank you. Our next question comes from Steve Tanal of Goldman Sachs. Please go ahead. Good morning, guys. Thanks for the question. So it seems like you're implying further improvement in the Medicaid loss ratio next year will offset likely lower margins in the marketplace. And I guess if I think about that, is that now about the TANF population with where the Medicaid sort of loss ratio is running in there? And does that become inevitably more dependent on rate updates to the extent that's sort of a lower acuity, lower utilizing population where there's maybe, I guess, in theory, less you can do? Well, we definitely think there is upside to our core Medicaid performance. Citing some facts here, TANF is still running over 89% year to date. ABD is running at 92%, just under 92%, which is respectable. We actually think that we can more effectively manage the long term support and services benefit that's embedded in the ABD product more effectively and we can improve on that 92% performance. And expansion is doing well at 87%. We're getting still getting very, very effective rates. So the business is performing well. I think that there is upside in our ABD line and upside in our TANF line. Just being more effective on the front lines of utilization controls, the rate environment if it continues to be stable and we can continue to effectively manage our medical cost baseline and trend, we all believe that there's upside to those performance statistics. Okay. That's really helpful. And just sort of separately on the marketplace business, kind of given the way minimum MLR rebates are assessed on a rolling 3 year basis, is there anything you can tell us about the impact of, I guess, what would effectively be swapping 2018, obviously, a really strong year with 2015 less strong on sort of the outlook for earnings or margin next year? Good observation. The old poorly performing years are rolling off, but we still have room. As you suggested, it's a 3 year rolling average. We only triggered the minimum MLR in one state, that being New Mexico, and we fully considered our position as we filed our 2019 rates. So no, we don't expect the rates that we filed still do not imply a triggering of the minimum MLR in any of our other states. And if we did, we certainly would include it in any forecast we give you for 2019. Awesome. Really helpful. Just lastly for me, just on marketplace enrollment, the expectations We're in 7%. We've refiled. If you remember, we are We're in 7%. We've refiled. If you remember, we were in Utah and Wisconsin a year ago. We came out in 2018. We're going back in for 2019. We expect that Wisconsin and the positioning of our pricing and our product will provide some meaningful membership growth in Wisconsin, Utah probably less so. But those are the 2 states we so we'll be in 9 states in 2019. And we're going to consider expanding our marketplace footprint to be everywhere we're New York. Awesome. Very helpful. Thanks a lot, Dre. Our next question comes from Dave Windley of Jefferies. Please go ahead. Hi, good morning. Thanks for taking my questions. So Joe, thinking about your $500,000,000 plan, just a few, subpart questions here. 1, has this year benefited from anything that would have been, say, outside of that plan? 2, you mentioned that you've harvested some of that plan, but still a lot of it to go. Would you care to put numbers on or maybe a proportion of the $500,000,000 that you think you're already seeing flow through the P and L? And then as you I guess in the extreme and it's been asked a little bit already this morning, but in the full harvesting of the 500,000,000 dollars Molina would seem to get to margin levels that would be very high relative to peers. And I guess I'd be curious your view on the difficulty or the reasonableness of pushing margins at Molina to that kind of to that spread against similar books of business? Well, thanks for the question. And as a reminder, I always remind folks when we talk about these profit improvement plans that one, it first goes to fund any deficit you get in rates. Rates always seem to lag medical cost trend by a basis point here or there And it first goes to fund that. If you remember the charts we showed you at Investor Day, we had this sort of contingency reserves sitting out there suggesting that somewhere you'll get a bad rate, somewhere the rate might be actuarially unsound and you're always using your profit improvement issues to first offset that deficit before anything drops through. And as you suggest, you're absolutely correct. We would then look at our profit improvement plans and the margins that we're creating as a result of it to reinvest in growth. We would not push margins up as high as you suggest and sacrifice growth when the time comes. So $500,000,000 could drop through to margins and if we aspire to be the best margin producer in the industry, maybe we get there or maybe we reinvest it in top line growth. Your original question was about how much of the $500,000,000 has fallen through to 2018. And without parsing it item by item, we definitely benefited this year by more effective utilization management. We definitely benefited this year by working the network harder, claim payment integrity certainly added some benefit this year to our medical cost line. And as we suggested, we continue to be more effective at SG and A control. I would say that the more technically challenging, the more operationally complex items that you saw on our chart at Investor Day still have yet to be harvested. So bottom line, I would say a significant amount of the $500,000,000 has yet to have been harvested and manifest in earnings. You'll be seeing over the next 2 to 3 months announcements from us on partnerships that we're creating with low class vendors to partner up and take advantage of high acuity care management, maybe re contracting with our pharmacy. Clearly, we're anticipating co sourcing or outsourcing our IT operation. You'll see some announcements for us on that front over the next 2 to 3 months. Helpful. Thank you. Our next question comes from Steven Valiquette of Barclays. Please go ahead. Yes, thanks. Good morning. I think most of the good questions have been addressed already. Just a follow-up on that last one. I think you guys are citing kind of throughout this year that some lower inpatient costs has also been part of the upside. So I was curious kind of where you stand, because I dug a little bit deeper on that last question, just on contract renegotiations on the inpatient side, whether that's something that played a role this year or that's something that's also still kind of ahead of you just thinking about that category in particular? Thanks. Yes, I think we've managed our inpatient cost very effectively. We had some cost pressures in Washington that we previously announced. We had some behavioral inpatient pressures in New Mexico that we previously talked about. But for the most part, one trend seems to be very stable in most regions around the countries, the general environment for trend. And second, we have been more managing it more effectively. And we can see in all our statistics, admits per 1,000, short inpatient stays, average length of stay, ER visits, admissions out of the ER, whatever stat you want to focus on, we have been managing it very effectively. And so the inpatient and the facility cost component of trend has been A, stable and performing well. And secondly, we've been managing it better than we had in the past. Okay. All right, great. Thanks. Our next question comes from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead. Great, thanks. I just wanted to circle back with the G and A commentary because it seems like you're talking on the one hand about significant savings, but then also kind of making some investments that might push up G and A with the MLR benefit. And then I guess separately, I guess you're talking about maybe investing for growth in RFPs in the future. I wasn't sure if that was going to put upward pressure on G and A. I guess when you put that all together, are you looking for G and A as a percentage of revenue to continue to trend down or is this more about, hey, there's savings that we can reinvest elsewhere to drive improvement elsewhere, either top line or MLR? Kevin, we're not prepared to give sort of a pinpoint forecast on our G and A ratio beyond 2018. But those are the headwinds and tailwinds to our G and A ratio. And I view the upward pressure. If we continue to invest in things that improve our medical cost baseline, I consider that to be to have an excellent return and we would make that trade all day long. So yes, there are going to be some upward pressures as we invest in some of these processes that will produce significant benefits to the company. Certainly, when you're chasing top line revenue, it costs money. But there is more fixed cost leverage and there's more efficiency to be gained in our operation. Those are the ups and downs, but we're just not prepared yet to give you a pinpoint SG and A ratio forecast beyond 2018. But it's there. We're managing it very effectively and growth side of the equation, EMEA has been historically much better at protecting and expanding in markets where you already are located. I mean, what do you have to add capability wise to be successful in entering new markets? Well, we are currently sketching out the building of our rebuilding of our business development engine. You need to have a ground game. You need to be in the states, developing network relationships and governmental relationships before the procurement drops. And in the past 2 years, this company has not really invested in any of that given the issues it was going through. So we're rebuilding all that under Pam Sednak's leadership. We will develop a new business development engine that we think can compete with our rivals and we can win our fair share. It's really not about the money. It's about really establishing yourself locally, building the relationships with the Department of Health Services and the regulators and making sure you have great network relationships. So when the RFP drops, you're prepared to go. Okay. Thanks. Our next question comes from Gary Taylor of JPMorgan. Please go ahead. Hi, good morning. Really amazing performance this year. So you've done a great job. Two questions about that performance. The first one just going back to exchanges a little bit. Can you help us bridge this comment that you're looking you're either running or anticipating for the year 9% to 10% after tax margins in the exchange business with the 58% year to date MLR. And I guess presuming some seasonal uptake in the 4Q, maybe you end the year closer to 70%, but still implies somewhere between a 20% 30% G and A load to only get to a 9% to 10% after tax margin. Can you bridge that for us? Yes. Your numbers are directionally in the right zone there. So in this business, the G and A tend to be high. You have commission, you have sales and marketing. So certainly it's really in the upper teen to as much as 20%. And our Q4, you're right, the medical care ratio is going to be higher than what we experienced so far year to date. In the last earnings call, we talked a little bit about that, that they tend to be somewhat in the 80s, but we believe that given the trajectory that we are in today, it will be much less than that, more likely start with a 7 as opposed to an 8 in front. So if we think about ultimately minimum MLRs at 80% in this business and G and A in upper teens to 20%, I mean that would imply longer term after tax margin significantly lower than 9% to 10%. Is that how we should be thinking about this? Or do you think you bring G and A down over time to sustain something mid single digit or better? Our G and A loads and our product lines that aren't fully scaled are too high and they can be scaled. If we double the size of the business, our SG and A would not double. There is fixed cost leverage there very, very clearly. The other thing as a reminder in the minimum MLR, there's all the add backs, right? The number we produce for GAAP, there's all kinds of additions and subtractions to get to the number. So if you are operating in the mid to high 60s with our G and A load of 15% to 20%, we're still floating below the minimum MLR in many of our places. But your point is well taken. There is a practical cap in the margins you can achieve because of the minimum MLR. And if we ever get there, it's a high class problem to have, we'll fully consider it in the rates we file and we'll grow more. One other question for you, Joe. Just thinking about your comment that there's still significant amount of the $500,000,000 opportunity you identified that could flow through to earnings. When that takes place, if that does take place, it really seems that you're completely redefining the margin profile of what's still primarily Medicaid business and redefining that margin profile versus your peers and versus history. And we've always heard companies in this business talk about overcaps at the state level, politics and visibility of margins, etcetera. So in just 6 months here, you've redefined the profile to some degree and you suggest there's still further to go. How do we think about this historic concept that there were these pretax caps at the state level and just sort of the visibility of the margins politically? It's a very fair comment and that's why every time I show a forecast or projection, I always have what I call the rate yield decrement in the analysis because you're never sure that you're going to get fully paid for your medical cost trend. And I always say that over time, profit improvement always ends up in rates somehow and somewhere. So you're right, over time just through the process of negotiating and accepting rates from states, profit improvement will end up in rates over time. That in itself puts a practical cap on what you can achieve. But again, our goal is to be low cost. We want to be very effective on the front lines, service our members and our provider partners well, but be low cost. And if we can continue to do that, we can either drop it through or we can reinvest it in top line growth. And that's our aspiration and that's what we're trying to achieve here. Great. Thank you. Our next question comes from Zach Sopcak of Morgan Stanley. Please go ahead. Hey, thank you for the call and congrats on the quarter. I wanted to ask first about exiting the Pathways business. If you forget about the, I guess, the loss you're taking on the sale of the business, was it a negative or positive earnings contributor in 2018? And should we think about that exit as a tailwind or headwind going into 2019? The exit is clearly a tailwind. It was running an EBITDA loss for the year. If you recall, the goodwill associated with that purchase was written off in the Q3 of 2017, which left a little bit of working capital and fixed assets in the business and that selling it for a nominal purchase price still produced the loss. Negative EBITDA contributor, and it would have required a lot of future investment in order to fix the business. And there's always a private equity firm around who sees value in that, wants to put the hard work in, but it's just not core and was not a financial contributor. Got it. And just on that non core comment, now that you've exited MMS and Pathways, is there anything else your portfolio that you would consider non core that you're still working on? Or do you think it's where you want it to be? No, we like the portfolio. We like the geographic diversity. We like the product line depth and breadth. The portfolio right now is fine and we're focused on managed care and that's what our focus is on. Okay, perfect. Thank you for the question. Our next question comes from Michael Newshel of Evercore ISI. Please go ahead. Thanks. Do you have a timeline in mind for retiring the remaining convertible debt and warrants? And also do you expect to have more deployable capital from subsidiary dividends next year than you talked about at the Investor Day just given the earnings outperformance this year? I'll kick it to Tom in a minute. But bear in mind that the 2020s are due in January 2020. So whether we buy them in the open market or they're presented to us by January 2020, they will be totally out of our capital structure. That's right, Joe. There's a balance remaining of approximately $315,000,000 So between now January 2020, we will retire those convertible. Right. And then to retire the associated warrants as well, it's like a total of like $1,000,000,000 close to? Exactly. And we're sitting now with between $300,000,000 close to $400,000,000 in parent company cash. Obviously, with the outlook for next year, I have harvest more cash flow to the parent. We have a $500,000,000 revolver. So we have plenty of capacity. As those notes are presented to us or as we go into the market, we have the free cash flow at the parent to buy them. Yes, to be able to do that all next over the course of next year. Absolutely. All right. Thank you. This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.