Everybody, we're going to go ahead and get started. Thank you all for coming to Molina Healthcare's 2018 Investor Day here in New York. We really appreciate your support and interest in the company. I'm going to kick things off with the cautionary statement. Then just really quick, I'm going to run through the agenda. Joe Zubretsky will come up shortly, and he's going to do a company overview, and he will talk first. Then we'll take a quick break. Then we'll have the team come up. We'll have Pam and Joe come up after the break really quick, and then we'll do some Q&A with the group, and then we will have lunch. Without further ado, Joe Zubretsky.
Thank you, Ryan. Morning, everybody, and welcome to Molina's Investor Day. Today's conversation is not going to be conceptual or theoretical. It's going to be incredibly practical and tactical, bordering on the pedantic. We're going to take you through how this management team is going to execute across the panoply of managed care fundamentals and execute our margin recovery and sustainability plan. Our goal is that when you leave here today, you will be inside management's head on how we intend to execute our plan, so you can form your own investment thesis. At the risk of being presumptuous, we have our own investment thesis. Very rarely is there a turnaround story into an incredible growth trajectory. This company is aimed at the right profit pools.
There's irrefutably no question that being in managed Medicaid, being able to manage high acuity populations, has an inherent growth rate that is an incredible investment opportunity. First, we have a job to do, and that is to build the financial and operational infrastructure to achieve attractive margins and sustain them without earning surprises. At what risk? We also believe that this is a very low-risk execution investment thesis. The bottom has hit. We're on a path to recovery, and starting from the strength of a business that's producing 1.5% after-tax margins from the disastrous financial year of 2017 is a great place to start. Now we're on the path to recovery. Inherent growth rate is stunning. The turnaround plan is achievable with low-risk execution. That's our investment thesis. Been at it for 6 months now.
A lot of hard work. We're being swift and decisive in the actions we're taking. Late last year, we addressed a burdensome, even bloated, SG&A cost structure by taking out $235 million of SG&A costs. We had to strengthen the balance sheet. Our accruals weren't right. Our reserves had proven to be understated. Many of our sensitive estimates in the business were always surprising investors. We took the opportunity late last year in the first quarter to strengthen and hold a very strong balance sheet. We had a short-term liquidity issue because our capital structure had optionality in it, yet our parent company cash flows had dried up due to the earnings miss. We solved that. We'll take you through in a few moments exactly how we have solved it and how our investors should think about it.
The Florida and New Mexico losses were surprises to the new management team, all we could do is control the flow of the next ones up, that were Washington, Texas, and Puerto Rico. We completely revamped the procurement process quickly, put the right resources in place, brought in outside resources to help, the Washington win was significant for our company. Next, we realigned management incentives to focus on what's important. There were too many measures the management team was trying to manage to. This is about earnings. We need to get back to an earnings profile that makes sense for investors. All of our incentive compensation programs, whether it's a performance-based piece of restricted stock or the short-term pool, is now generated out of earnings. In the short term, eventually, we'll get back to incentivizing for premium growth. First quarter, solid.
We're off to a good start. Not declaring victory on the year, the ability to raise guidance one quarter into the year was significant for us. Lastly, the most important body of work that I've been hard at for the last six months is building a new executive leadership team, many of which are here today. Qualifications for being part of this turnaround, decades of managed care experience, decade of understanding managed Medicaid, proven track record of achieving attractive margins and fixing broken things. That's what we have here today. Able to attract Pam Sedmak. Many of you know her. I worked with Pam in a prior life. I know the margins she can produce. I know the growth rates she has achieved through re-procurement, I have tremendous confidence that she is going to work with the local health plans to drive favorable results. Jim Woys.
Decades of experience with Health Net. Ran the whole thing. Jim's responsible for all of our transactional operational activities and all of our clinical activities. Claim, call center, payment integrity, national utilization management, national quality, national network. Jim is going to create a portfolio of value-added services that will fuel the health plan's profitability. Jim, welcome. Mark Keim, Head of Strategy, Corporate Development, and Transformation. Mark and I go way back. He's done some of the most value-creating deals and transactions in managed care, he's going to continue to do the same. When you want to restructure your pharmacy business, go find the team that did it before and have them do it again. It's that simple. When Joe White approached me with his desire to retire, we went into the marketplace and found another real pro, Tom Tran.
Tom has decades of experience assisting with the managed care turnaround in the Medicaid business, understands how to make money in this business, how to find small problems before they turn into big ones. Really an expert at managerial finance and performance management. That's what this company needs. Back to basics. I've been working hard at building the team. I have great confidence that once the team starts to gel, the chemistry starts to build, the plan will execute itself. A quick spin through the company. You know all this. It's a great franchise. A Fortune 150 company with 4 million members and nearly $19 billion in revenue. I asked myself when I took this assignment, can you find a 2% margin in that? With all the analysis in the world you can do about what's wrong, how hard is it to fix?
At the end of the day, if you can't find a 2% after-tax margin in $19 billion of revenue, you haven't earned your stripes, and you don't deserve to be in the industry. It's a great franchise. There is so much here to work with. From a broad portfolio of products, a broad portfolio of geographies, and great capabilities. The franchise is aimed at the right profit pools, and there is so much to work with here in order to find that attractive margin level that we're going to talk about in a few minutes. Great geographic diversification. You remember the good old days when companies like us had two very large contracts and a bunch of hobbies? This is a very well-diversified company in some great states with very attractive regulatory environments, reasonable rate environments, inherent growth rates, under-penetration of managed care in certain of the high-acuity segments.
Whether it's our $2.5 billion businesses in Washington, California, and Texas, and Ohio, billion-dollar businesses in Michigan. We have some under-scale businesses that we're going to try to scale up. But the portfolio has strong incumbency status, reasonable rate environments, very reasonable regulatory environments. It's a great portfolio. We're a managed Medicaid company, essentially. The strategy of the company was to use TANF and CHIP as the anchor tenant. Go in and establish a foothold in a state with TANF and CHIP, and then use that as the platform to expand in the higher premium products. Even though we're essentially a Medicaid company, six, seven of our states expanded Medicaid at premiums a lot higher than TANF, $300, $350 per member, per month. And certainly the ABD population at over $1,000 a month, a very attractive growth area for us.
Even though we're managed Medicaid, we've managed to leverage our footprint into Medicaid expansion and ABD, which obviously have higher premium flows. The duals. We all know they're coming, they're coming soon. When they come in, the growth rate in managed Medicaid is going to be significant. We have a foothold. We have a D-SNP business and a MMP business, which are duals demonstrations that are very profitable. We've demonstrated we know how to manage high-acuity populations. And we believe there's yet another growth catalyst in our Medicare business in addition to Medicaid. D-SNP and MMP is important because that's where the high-acuity lives are going to live. We know that there is an inherent growth rate in this line of business that is significant. There's an aging opportunity with 11,000 people a day turning 65. There's a Medicare population sitting inside our Medicaid footprint.
Very important product line. One that we believe is sustainable, will live in perpetuity, and one that we believe that once we fix our margin issue, that we can grow significantly. I'd say the same thing about the marketplace. A lot of people have asked me, "Why are you in it?" It's an extension of Medicaid. We're not selling products to a self-employed architect making $200,000 living in an affluent suburb. We're selling product to the working poor. We're operating our business just above Medicaid. 90% of our members are highly subsidized. And what does that mean? That means the Medicaid network works. The Medicaid network is perfect leverage for being in the marketplace business the way we're in it. So two very important complementary product lines to our managed Medicaid business. When I talked about having hit the bottom, 2017 was pretty bad financially.
There's no question about it. This chart says that we're pivoting from past performance. I try to avoid hyperbole during meetings like this, but this is hardly a pivot. It's a tectonic shift from a very poor financial year that with charges fully loaded in, produced $500 million of losses to a company that, on the basis of our guidance, is going to earn over $400 million this year. When you're starting from 1.5%-1.6% after-tax margins and you're trying to get to that 2%-2.5% attractive range, this is a heck of a start. We worked hard at putting a plan in place that was specific, that was granular, that you could performance manage. Pam will talk later about weekly leading indicators, drilling into details during quarterly business reviews and monthly operating reviews, discipline this company has never had.
I think that initial discipline that we've instilled in these early stages is exactly the reason why we have this very quick start and this great jumping-off point for our margin expansion trajectory. It's not the portfolio, it's performance. We've done all the analysis you could possibly do, taking best-in-class margins in all our products in all our states and creating a pro forma saying, "You can make money in the geographies where we are and the products that we're selling." There's no question. This analysis is sort of a clever way of showing that. 58% of the revenues in our portfolio are in products and in geographies that are today earning better than 2% after-tax margins. 20% is profitable but below 2%, and 7% is unprofitable. The 15% that we've lost, trying to fight hard to get it back, were in the underperforming categories.
There's enough to work with here. By the way, there's no reason why a 2% business can't be a 2.5% business. We're not looking at a portfolio and saying 2% is fine. If it can be three, it's going to be three. Getting the high performers to perform better, bringing up the low-end performers, this is about performance management. It's not an endemic problem with the portfolio. When we published our first quarter results, we had the luxury of increasing our guidance by $1 of earnings per share. $0.38 of it was a throwaway due to the one-time items, but $0.62 of it was outperformance. $0.40 of which actually emerged in the first quarter, and we threw in $0.20 plus for good measure for the balance of the year. Again, taking a very cautious view. We're not updating our guidance today.
A couple of months later, having looked at March data service results, having closed April, and looking at May leading indicators, we can reaffirm our guidance with a high degree of confidence. The quarter clearly was aimed and performing in a positive direction. Not updating our guidance, but reaffirming with a high degree of confidence. Our challenge in 2018 was to secure the existing business. While clearly New Mexico and Florida were surprises to us, unfortunate surprises, and we'll talk about what that means financially in about an hour or so. Sometimes wins mean a lot from a financial perspective. The revenues and profits are nice, but sometimes they mean so much more. The momentum that the Washington win is building inside our company is extraordinary. We knew we were well-positioned, but we're in better position today than we were before.
The significant market share that we actually have, we can actually probably grow membership off this re-procurement process. Big win for us. They run a great plan up there with $1.8 billion of annualized revenue. It was very important from a financial point of view, but also from a momentum building point of view. Puerto Rico, we're in the middle of the process now. I think they've announced recently that they intend to announce the awards on June 6th, I think Pam said. We'll know. Look, when you're re-procuring the Commonwealth, you have to ask yourself the question, with all the issues that we all know that you have to deal with in the Commonwealth of Puerto Rico, is it worth being there?
We dove deep into it, and I'm now convinced that with Pam in charge of the health plans, a new management team on the island, and the noise of all the disruption of the storm that's now out of the numbers, that while Puerto Rico may never be the gem of the portfolio, we can earn consistently in excess of our cost of capital on the island. We're going to pursue the award to the extent that the rates and the financial infrastructure that they've previously articulated holds. Texas, very important business for us. Large ABD contract out for bid. Originally, they said they would announce the awards in October of 2018. There's some speculation that may get pushed out due to the snafu they had on the CHIP award. We don't know, but we're assuming it's October of 2018 for contract inception, 01/01/2020. Highly confident.
We have great business down there, a great management team, and we're very confident that not only will be awarded the six regions that we have, but possibly some subset of seven more regions that we currently don't play in. It's possible that in the Texas reprocurement, not only will we sustain the position that we have, but we could grow. We're going to take you through the plan. The plan has three very simple components to it. First and foremost, I talk about this inside the company till I'm blue in the face, we have to build the financial and operational infrastructure to both restore our margins and sustain them through operating improvements and executing our managed care fundamentals. In a moment, I'm going to give you a nine-point plan of how we're going to do that.
It gets very specific and very granular, almost to the point of being boring. Margin expansion and shareholder value creation is not boring. It's exciting, we're going to take you exactly through how the management team thinks about restoring the margins of this company. Can't forget about revenue. Can't forget about it. The negative operating leverage that the two losses are creating is a headwind into 2019, and it was a painful reminder of how important revenue is to positive operating leverage. The story around revenue is secure the reprocurements, figure out a way to organically grow the footprint that you have and the products that you're in, and then look out beyond two years for those opportunities that the entire industry is going to chase as the industry itself is growing.
Lastly, and maybe the most underappreciated part of the story, because it's one that doesn't get talked about a lot, is how using some basic financial fundamentals, we intend to repair our capital structure, to provide EPS accretion for our company. We'll take you through the whole story. It's actually quite simple, but very value creating. If you look across a sequential timeline of how we're going to do it, 2018, my goal was to have my senior leadership team in place in the first six months, and I've largely done that. We'll fill in the talent gaps on the second line. We've already replaced our leadership in Medicare, Marketplace, pharmacy, claims, payment integrity. Find the best second-line lieutenants you can find and make sure that these subject matter experts can produce.
By 2020, there'll be a very seasoned management team in place that's clicking, high chemistry, and operating really well. We'll see the progression of margin recovery. Starting from 1.5%-1.6% is a great start. It's a great starting place. We'll get to at least 1.9% by 2019, and in 2020, at a minimum, 2.3% or higher. Everybody always asks me, "What did you assume for the tax rate?" The tax law says we're paying 21% in taxes, and that's what all these projections assume. This is steady state, current tax regime. We know we have to fight hard for rates at the state level. We're rate takers. We're not rate makers. We know all that. At some point in time, earnings are fungible. It's hard to know exactly where they came from.
We're showing you the story that we can return this company to not only target, but rather attractive margins far in excess of our cost of capital over the next two years. From a revenue-based perspective, as I said, defend what you got, rebuild the reprocurement team, build the pipeline in 2019, start to produce revenue in 2020. Capital perspective. Deploy your excess cash, get your debt-to-cap to target, achieve target capital structure in 2019, and in 2020, start to produce excess capital, which gives you a range of options of deployment, all of which are very accretive to shareholders. The last point I want to make as we march through this, I'm not word-smithing on you, I'm not trying to weasel word something here, but it is pretty important. Today, when we're talking about 2018, we're talking about guidance.
We're right in the middle of the year. We're producing results every day. We're guiding you. When it comes to 2019, we have a reasonable expectation of the trajectory of the business, but we're calling that a projection. It's what we reasonably believe we can produce given the trajectory of the business and the line of sight we have into 2019. For 2020, we prefer to call it an outlook. Trajectories can change, stuff can happen. Given the momentum that we have from 2018 into 2019, given the natural trajectory of the business, what we think we can produce and the performance improvement plan we have in place, we believe that 2020, the margin picture we have painted should be termed an outlook. 2018 guidance, 2019 is a projection, 2020 is an outlook. Here's the story. Here's the three-year revenue outlook.
2018, sort of a year of equilibrium. The big news in 2018, as you recall, was rebaselining the marketplace business, going from a $4 billion business to a $2 billion business, shedding half our membership. At $18.7 billion, good place to start. Now you get saddled with two large contract losses. There's no way to overcome that. You're not going to overcome it in rates, you're not going to overcome it with retaining more revenue at risk, and you're not going to overcome it with growth. 2019, the best we can tell, 11.8%, nearly 12% decline in revenue due to the large contract losses. We'll return to growth in 2020. We have line of sight to nearly $3 billion of pipeline opportunities. We think we can squeeze $600 million out of that.
We believe the rate environment will be reasonable, nearly an 8% growth rate, in 2020. Of course, the if has all kinds of intrigue and mathematical inconsistencies between these numbers. The real story is the contract losses in 2020 are going to be a headwind on earnings, we'll return to growth in 2020. Here's the margin story. A lot going on inside these numbers. Those of you who have already turned to the back of the deck, there is a detailed bridge that I'm going to take you through in about an hour, that'll show you how we've constructed these and how they're produced. As I said, an extremely stable starting place at 1.5%-1.6%. A trajectory of building to 1.9%-2.2% after tax in 2019. Bear in mind, that's going to be off a declining revenue base.
Positive operating leverage moving into 2020 and a return to growth, where we think we can produce, at the midpoint, 2.5% after-tax margins. Again, everything's in there, whether it's taxes, rate environment, your ability to manage medical costs, everything is boiled into these numbers. I want to remind you that throughout this presentation, in order to keep it simple and digestible, we kept the capital structure constant throughout this projection. Those margin numbers assume the capital structure that's in place today is still in place. In a few moments, we're going to show you the accretive power of this incredibly volatile and conservative capital structure we have today, and how we're going to deploy excess parent company cash to produce some accretion. It's not in these numbers, it's additive.
1.5%-1.6% to start, 1.9%-2.2% in 2019, midpoint of 2.5% after tax by 2020. We believe that that is attractive as compared to whatever your estimate is to our cost of capital. We're going to take you through the details. I will try not to get too granular and too specific, but you know the managed care business. Without details, you can't manage anything. There's no such thing as medical cost trend. There is no such thing as medical trend. Everything is local. It's a provider contract that's overpriced. It's utilization that's not well controlled. It's a rate that doesn't make any sense. Everything is granular and specific, and we're going to take you through the portfolio of profit improvement opportunities that this management team is going to execute against. On this page, $400 million-$600 million of pre-tax opportunities, $500 million at the midpoint.
What really struck us about this portfolio of opportunity, and you'll see it when you get to the detail, there's no singular bet here. Not required. It's like a giant rock pile that we need to chip away at. There are certain things that are undermanaged in our company, but there's no singular bet that if one big thing doesn't work, we can't achieve our plan. In fact, I would argue that our biggest risk as a company isn't that there's not enough opportunity, it's that there's too many, and we don't prioritize in the right way and get at the ones that can provide immediate value. A very balanced portfolio of opportunities across managing medical costs, about continuing to manage our SG&A load and to manage at-risk revenue, adding up to $400 million-$600 million of pre-tax opportunity to be harvested over a period of three years or greater.
The way you will see these opportunities emerge in our earnings stream is $130 million of benefit in 2019, $170 million of benefit in 2020, and beyond that, it's pure conjecture. In mapping risk to our P&L outlook, we fully considered the execution risk, the timing risk. Certain things will produce more value than we estimated. Certain things may produce no value. Certain things are not unilateral. Provider contract negotiations are bilateral agreements where you have a counterparty who's going to protect their interests. Negotiating with vendors for capitated rates for subspecialties. All of these things take work. They're not unilateral, they're bilateral, so there's a degree of execution timing risk associated with it. But this is management's best estimate, that in the first two years, we can create $300 million of pre-tax opportunities, $130 million of which emerges in 2019, $170 million of which emerges in 2020.
We'll go around the horn. There's nine of these, so bear with me. I won't read every bullet on the page, but read them at your leisure and absorb them. Utilization management, the best way I can describe it in our company is inconsistent and sporadic. It's really extraordinary. It's done very well in many of our local health plans, and in many, it's not done well at all. And the statistics bear it out. Whether you're looking at ER visits per 1,000, whether you're looking at hospital admits per 1,000, whether you're looking at short stays, which are too high, which means observation days are too low. All of these things not only lead you to believe, they're convincing and conclusionary that you're not very effective in certain places at utilization control. We manage every highly specialized unit cost or care management inside the company.
We don't outsource oncology. We don't outsource musculoskeletal. There's companies that do that very well and are actually willing to take capitated risk to do it. We're getting all that. Between Jim at the regional level and Pam at the local level, we're going to create more consistency across utilization management across our company, introduce specialty referrals where the state allows us to do so, implement more clinical practice bulletins. This company has the fewest number of clinical policies I've ever seen in a managed care company, which means we're not screening enough cost. We're not even looking at things that other companies are looking at. Whether you accept them or deny them is another story. We're not even looking at them. It's under managed. I think $40 million-$60 million of opportunity here is a conservative estimate once we fix this. Same goes for high acuity.
We have hundreds of infants in NICU at any point in time. We spend over $200 million a year, and we're not very effective at it. We have 65,000 members who are diagnosed with opioid use disorder. Those are just the ones we know about. You say, "Well, what difference does that make?" On a per capita basis, we're spending twice as much on those patients as we are on the typical Medicaid patient. We're in the high acuity business. We manage nearly $2 billion of LTSS costs buried inside our ABD product and buried inside our MMP product is nearly $2 billion of long-term care services support that we know are not being managed very effectively. $30 million-$50 million is a very conservative estimate.
Once we put the right care programs in place, the right platforms in place with the right care management systems, we know we can manage our high acuity costs more effectively. Irrefutably. I learned a long time ago that after you find a lot of money in your pharmacy contract, keep looking because there's more. Just always is. I've done this before in prior lives. We have a great partnership with CVS Caremark. They're a great partner, but our business internally is not well organized. Utilization control is done in the field. The CVS relationship is managed centrally. It's not even one business. We're spending $3.5 billion a year on pharmacy, over $1 billion in specialty, which is trending at 20% or better.
You can look at our generic dispensing rate, you can look at our discounts, our generic discounts off of AWP, any scripts per thousand, any rational RX pharmacy metric that can be measured and managed is not in market. It's not all unit costs. Some of it is utilization control. We conducted a market check last year. We're conducting a market check again, and since our contract is going into a renewal period, we're going to look hard at recontracting with CVS or Caremark or others. Internally, getting UM right is our problem. How to manage rebates, Caremark or Molina, how wide are our networks and who manages the network, who pays claims, who handles the calls, all that is being reevaluated because there's tremendous value sitting inside this incredibly complex part of the business.
$50 million-$70 million is a conservative estimate of how much value there is. There's always value in your network. We're okay. Basically our facilities are DRG as a percentage of Medicaid. That's kind of the construct. You got to start drilling in. It's absolutely incorrect in this business to say, "My contracts are fine because as a percentage of Medicaid, they're okay." What about utilization? Unit cost is only one aspect of medical cost control. Many of our contracts have stop-loss with very low thresholds, which means $50,000 in, you're at billed charges. Too many of them operate that way. Whether it's a footprint that's too wide with high cost providers while meeting network adequacy, whether it's getting the outliers back in line and avoid paying billed charges, or just recontracting high cost providers, there's value here, estimated $35 million-$55 million. Always at it.
Your network's never good enough. Our networks are strong, but they can be better. The company really had focused on physician and hospital facility as sort of its main focus. When you start adding up all of the other things you pay for, it adds up quickly. Whether it's behavioral services, dental services, lab, DME, transportation, vision, all of these things add up to real money. Spending $400 million on behavioral every year, $700 million on non-behavioral ancillary services. Guess what? We look at our PMPM cost of doing these things, they're not market. They're out of market. We're paying too much in units, and we're paying too high unit costs. We have very fragmented contract portfolio with vendors. We don't have national contracts. We have local contracts with multiple vendors. It's hard to control, no negotiating or purchasing leverage.
We're getting at this hard, and we really believe we can create value by creating specific cost centers with cost center leaders who are responsible for their vision contract, responsible for their dental contract, and driving hard at delivering value to the health plans through our ancillary services. A lot of value to create there. Next. Moving into the operating aspects of the company. If you can't pay claims timely and correctly in this business, you can't be in the business. Whether it's member experience, provider abrasion, or not being able to look at your actuarial data with a degree of precision and confidence, you have to pay claims correctly. The company was growing so quickly and implementing contracts and networks so quickly that we missed a step.
It's all being corrected, and under Jim Woys' leadership, I'm very confident that our metrics are coming back into line with what a normal managed care company ought to be experiencing. Look at some of these stats, $135 million in provider settlements. Why? Because the providers were right. We had underpaid certain providers, and they presented the data that proved that they were right. $30 million in late payment penalties to states. These are self-inflicted wounds that are avoidable. By focusing on core fundamentals of getting your contracts configured appropriately, having the right claim edits in place, making sure that payments are going out on time, making sure that fraud, waste, and abuse is not just a compliance activity where you check the box, but you're actually looking for fraud, waste, and abuse to save money.
By looking at the claims grievances and appeals process, you deny a claim, they appeal it, you overturn the appeal. You're back where you started, and you spent all this money. It's a very inefficient process. We know we can be better at it, and Jim Woys is all over this with his team. We believe there's, at a minimum, $20 million-$30 million of value sitting inside better processing of claims and claim payment integrity. We're not done with SG&A yet. 1,700 people and $235 million of run rate is a lot, and that was a down payment that Joe White and his team delivered last year. There's more. I have said repeatedly that this company isn't underspending, but it is underinvesting. The money's aimed in the wrong places. The money needs to be allocated and aimed at things that create real value. We don't need more SG&A.
We have too much of it still. 40% vacancy rate in real estate, managing claims in two of the highest cost environments in the world, Long Beach and Detroit. Just legacy. Where our people are in the labor cost pool and what it costs, our real estate capacity, focusing our resources on things that add value, outsourcing things that are commoditized and don't add value. At the end of the first quarter, we suddenly announced another 100 FTE reduction for $10 million of annual savings. My sense is there will be no big bang here. There's not going to be a big announcement someday where you're going to wake up and see a huge charge and a huge sort of reduction.
It's going to be chipping away, making sure our cost structure stays in line with our revenue base, and we're aiming our resources at places where we can add value. There's more SG&A here, estimated at $25 million-$50 million over the next few years. This is where the big money is. As I mentioned before, we pretty much are an in-sourced company. The prior management team thought that it should be doing everything to run a managed care company, whether it was proprietary or commoditized. IT is a great example. Half the resources in our IT shop are outsourced anyway to contract vendors. There are things that we do internally that we're going to seriously consider outsource and co-source relationships.
We do think that there's real value, not only in the amount of money you will save, but in the efficiency and efficacy of the operation. Our IT issues right now isn't the software, it's the management of the operation. We've lost some people. We need to rebuild the management team. Again, this falls into Joe White's world. It's ripe for considering an outsourced or co-sourced relationship. Lastly, with the nine-point plan, and again, significant value sitting inside here. I've often said that once you've accepted the capitated rate as you negotiate with the, quote-unquote, "negotiate with the state," the capitated rate you accept is only the start of the conversation on revenue.
There is significant amounts of revenue that are at risk for some level of performance, whether it's a quality withhold, whether it's a risk score, whether it's other forms of producing quality measures that allow you to keep a percentage of your revenue. Our risk scores are not where they need to be. An amateur can come in and look at our risk scores in certain populations and know they're too low. It's not because we have a better population in the market, it's because our risk scores are too low relative to the competitors. We're not chasing the charts, and we're not aiming in the right direction. Right now we're retaining about 70% of our Medicaid revenue. That needs to be 80%-85%. Our risk scores, both in Health Insurance Marketplace and in Medicare, are far too low, and we have no four-star plans.
As we launch our D-SNP products, we're not getting the 5% four-star bonus that other plans are getting. This needs to change. There's tremendous value in stars, in HEDIS, in quality withholds, and in risk adjustment sitting inside our company. Pam, Jim Woys, and the finance team, now Tom, are going to be on this. There's an entire work stream to make sure that we're keeping, legitimately, every dollar of revenue that's owed to us. That's the spin through the portfolio. $400 million-$600 million of pre-tax benefit over 3+ years, $300 million of it we think we can pull through to the P&L in 2019 and 2020. Balanced portfolio, not banking on any one major item to produce the value, but to better manage an under-managed portfolio of operational deficiencies. Let's turn for a moment to our revenue base.
The lesson learned, it's something you always realize, but when it stares you in the face, you realize it even more. The negative operating leverage of lost revenue is startling. Our strategy is to secure the revenue base, meaning go hard at the procurements that we can control. Florida and New Mexico, we couldn't. They were already gone. Fight hard in the ones that you've already announced you lost by exercising all of your regulatory rights that you have within contract law and state law, and try to win back what you've lost, but try to secure what you have. Meanwhile, revamping the entire procurement engine to participate in the inherent growth rate and manage Medicaid over the next two years. You'll see when we get to the revenue projections, we haven't promised you a lot of delivery in 2019 or 2020. We're trying to be measured.
We're trying to be realistic. Rebuild the procurement engine in 2018, start building the pipeline in 2019, which then starts to produce revenue in 2020. Here's how we think about it. There are short-term opportunities for 2019 and 2020. The 2019 ones, to be honest with you, are already baked. They're already here. Whether it's Mississippi and Idaho producing a full year of growth, whether it's a behavioral carve in in Washington, they've already occurred, so we know they're going to happen. 2020 beyond gets a little more speculative. I'm looking at that, and you say, if we expand our footprint in Texas ABD, it's an extra $1 billion of opportunity there. We had a $1 billion-dollar marketplace business in Florida, which is now less than 25% of that. We could build that back. We might go back into Utah and Wisconsin in the marketplace.
If we just incrementally grow market share in many of our markets, there's $1.5 billion-$3 billion of opportunity that's sitting out there that we could harvest in 2020. I know, not a headline, but after you restore margins and you start to build your credibility back in growing revenue, it's going to take some time to build the portfolio. That's the plan. I showed you this chart before. Big win in Washington, great momentum. We think we can make money in Puerto Rico, so we're giving that the good old college try. Texas, October 2018, we announce the award date. Speculation is the state may push it off. Not only the announcement of the award, but perhaps even the contract inception.
More to come on that, but we're highly confident that with the business we run in Texas, with Pam having presided over the re-procurement, we're very confident in a positive outcome there. These are the opportunities that I talked about. The $600 million in 2019, as I said, it's already happened. Full year of Mississippi launch, full year of Idaho D-SNP, carve in of behavioral in Washington, offset by the carve-out of pharmacy in Washington. Kind of a neutral revenue effect. The $600 million in 2019 of things that have already occurred and just need to manifest themselves in the revenue line.
As I mentioned before, with a portfolio of $3 billion of opportunities in our existing footprint, in our existing products, not knowing whether Texas will produce the $1 billion of extra revenue, not knowing whether we can ever build Florida back up to a $1 billion of marketplace revenue. To conservatively estimate that on all those opportunities, you'll find the $600 million that makes the most sense for 2020. Big step to restoring positive operating leverage to the company. Great momentum to, again, get back into the fast lane to start participating in the inherent growth rate in this industry. We don't really want to focus too long term, we wanted to at least impress upon you that we haven't ignored the long-term opportunities that many of you have written about and know about. We just lay them out there. We haven't qualified these.
That's not saying we think these are the ones that are most attractive or that we've analyzed them and we're going after them. There's a portfolio of opportunities out there that's coming to procurement. Many of these are re-procurements. Whether they'll allow non-incumbents to come in, we don't know yet. Storyline is that there is long-term tremendous opportunity in this business, there is no reason, after we fix our operating foibles, get back to attractive margins, rebuild the re-procurement engine, that we can't start participating in this industry growth rate. We haven't forgotten about it. We're not obsessed about it. One step at a time. Two short-term opportunities of $600 million each are building to a crescendo of being able to participate in this incredibly robust industry growth rate on a going-forward basis. The capital management story is an interesting one.
Let me just set this up for a moment. The company introduced embedded options in its capital structure converts years ago. When the stock was never above the strike price, nobody worries about it. 1.6% coupon debt actually looked pretty good. The day your stock starts to run, the options go in the money, which increases the market value of the debt. The earnings haven't kept pace, your operating cash flows don't provide dividend capacity to the parent, is a mismatch. You've got an in-the-money option that they have to be satisfied, you don't have the parent company cash flow to satisfy it. That was a predicament.
We came in working with Joe and Mark Keim, we created a plan that with clear line of sight to the earnings capacity of the business, we're now going to correct the very conservative position that we were forced to take. We were forced to hoard parent company cash, draw down the revolver, put a bridge in place. We did all that because we didn't know. We were still producing our 2018 plan, coming off a $500 million loss. We had to clear the fog of war before we actually knew where we stood. This chart just clearly shows that the market value of our debt is higher than its book value, and that as the stock runs, your fully diluted share count goes up because your debt's getting more expensive. Quite simple.
However, as I did mention, half the story here was not the capital structure, it was operations and earnings. When you're not dividending cash flows from the subs to the parent, you can't satisfy your fixed charges, you can't defease debt without raising more capital. We have line of sight now. If we execute our plan as articulated on these charts, we will have $800 million of parent company cash in excess of a liquidity cushion of $180 million at year-end 2018. If we hit the earnings projection we shared with you for 2019 and 2020, we'll produce at a minimum $600 million of additional dividends in each of the next two years. The parent company cash story is not only acceptable, it's actually pretty robust. We were forced into an over-conservative picture, and now we can correct that.
$800 million of parent company cash, $600 million over the next two years. Our subsidiaries are adequately capitalized. They can actually fund the growth in the business. For instance, next year we're shrinking, we'll release capital. The cash flow is more predictable. We don't have to rely on the revolver. The headline here is, I know many of you were speculating as to what the answer was. We don't have to raise new equity in order to solve this problem. In order to get our capital structure in line with a debt-to-cap that makes sense, with parent company cash flows that are predictable and that satisfy our fixed charges, we do not have to raise new equity. As I mentioned to you a while ago, when you're looking at these projections, we purposely kept capital out.
It was just way too hard to put capital correction into earnings bridges, it got very complicated. We kept it out. The margin trajectories that you've seen, the earnings trajectories you've seen, all assume that we're sitting here with $800 million of parent company cash and the converts still out there being diluted to earnings per share. Pretty simple. We're going to solve the problem.
By a combination of repaying the revolver, which I believe we did just yesterday or the day before, perhaps terminating our bridge facility sometime in the next quarter or two, and then with a series of capital market transactions, either buying in the converts, taking out some of our high-yield debt, whatever portfolio of opportunities emerge out of deploying the $800 million of excess cash, it'll be accretive to whatever margin story we're telling by $0.40 to $0.50 of EPS, which basically means that the amount of conservatism we needed to hold until we understood the problem was costing the company $0.40 to $0.50 of earnings per share.
Think of it as the correction of an over-conservative position to get back to a capital structure and cash flow position that is "normal." Every projection you've seen in here is devoid of the $0.40 to $0.50 of accretion, which is effectively split half and half between what will go through earnings and what will emerge in earnings per share through the reduction of outstanding shares. Right? You've taken the converts, your shares go down, your earnings per share go up. You reduce your debt expense, your earnings go up, and you produce earnings in that way. Equally balanced between share count and earnings, a range of $0.40 to $0.50, which is accreted to the margin expansion story we were telling throughout the day.
Longer term, having managed many balance sheet intensive businesses in my career, long tail lines of insurance, capital intensive businesses that require 600% risk-based capital loads. When I first came into managed care decades ago, I was astonished at the cash flow characteristics and the capital flexibility of this business. Just think about this. If at your target rating and at your risk-based capital levels that regulators require you to hold, if you could produce a 2% after-tax margin and you're leveraged, operating leverage of $1 of capital for every $10 of premium, you're producing 20% ROEs at the subsidiary level. Level that up at the parent company by 50% to double capital over 30%. Grow it 10% and have to put that back into your subs. You're throwing off excess cash flows in excess of 20% of your capital.
It's an incredible business, which then can be deployed to should I be growing faster organically? Should I be buying things? Or should I give it back to you all in the form of share repurchases or even a dividend? The capital characteristics, once we get back to our margin sustainability, the business finances itself. We need no more capital to grow. Growing at 20% or 30% a year organically makes no sense. At ROEs of 30% and growth rates of 10%, there's huge amounts of excess capital that we will make sure we deploy in very shareholder-friendly ways. That's the long-term outlook for 2020 and beyond. Okay. The projections. A bit more granular view of the revenue and the margin story that I've articulated previously. You've seen this chart before, but it bears repeating. 2018 was a year of equilibrium.
We actually were able to accept reasonable rates from our state partners. We reshaped the marketplace business by reducing the revenues to half and expanding margins considerably. A good baseline. The unfortunate news of New Mexico and Florida, which we are protesting and fighting hard to retain, leaves over a $2.5 billion hole that cannot be replaced with growth or rates in 2019. The margin expansion you are going to see in 2019 is off a significantly reduced revenue base. In 2020, we assume a reasonable rate environment. We harvest the revenues off of Mississippi, Idaho, and Washington. We return to growth and positive operating leverage once again. We don't get back to 2018 levels, but a $2.5 billion hole is hard to fill. Showed you the chart before. It bears repeating. Good starting place. 1.5%-1.6% in 2018, which is our current guidance.
Expanding it to 1.9%-2.2% in 2019 off a lower revenue base, and then a range of 2.3%-2.7% or 2.5% after tax in 2020 off an increasing revenue base. Positive operating leverage is very powerful, as you'll just see in a moment, the manifestation of our profit improvement initiatives that we talked about a few moments ago. Let's look at a detailed bridge. Before we do that, just some specs on what Florida and New Mexico actually mean financially. It's $2.7 billion in revenue, and we are going to rip out nearly $300 million of SG&A. We've looked at it all. For the most part, the SG&A at the local plan level is purely variable with a small element of fixed cost. The resources claim, call center resources are sort of step variable, but easy to identify. It's the stranded overhead.
It's the contribution margin to overhead of $50 million that becomes the gnarly problem. We're not giving up on it, but we're going to take out $250 million of cost as we lose these contracts. $50 gets stranded, and it'll be a headwind into our margin expansion for 2019. We're not giving up on it, but we're considering it a headwind, as you'll see in a chart in a few minutes. There's the revenue we talked about, the $2.7 billion coming off, rates going in, and the $600 million of Idaho, Mississippi, and Washington. Here is the pre-tax income story. If we start with our guidance in 2018 at $370 million, if you recall in that whole portfolio of profit improvement initiatives, we said we could pull $130 million of the $500 million to the 2019 P&L, and there it is.
Now with $600 million of growth, it's new growth. It's not going to be rich margins. We've assumed a 6% pre-tax margin on the $600 million of growth, another $35 million of pre-tax contribution to the picture. Before struggling with the losses of New Mexico and Florida, we would have peaked at $535 million of pre-tax earnings. On the right side of the page, the headwind from New Mexico and Florida, the contribution margin, the coverage that I showed you a few moments ago, along with just a measure of conservatism. Whether you get a bad rate in a state, whether a medical trend runs away from you somewhere, whether something just pops out of control, it's always prudent to be conservative and have reasonable hedges in your earnings outlook.
1.9% at the bottom end of the range, 2.2% at the top end of the range, with $50 million of headwind from Florida with a $60 million contingency and only a 6% pre-tax contribution from the new revenue we're going to enjoy. We've got to execute on the $139 of profit improvement to make it work. Hopefully that's clear. Next, 2020. Very simple. Again, we assume a reasonable rate environment at about 2%. We assume it keeps pace with medical cost trend, which is around two to three today. The organic growth we're going to pull from a billion and a half to $3 billion of a pool of opportunities. Maybe Texas ABD, an additional $1 billion, maybe Florida marketplace, an additional $1 billion, maybe $600 million to $700 million combined in Utah and Wisconsin as we contemplate reentering the marketplace.
Perhaps just organic growth in our existing footprint by doing better in auto enrollment, auto assignment, by doing a better job holding on to more retained revenue. Just a variety of activities where we restore positive operating leverage going into 2020. That's the revenue story. The margin story is similar with, of course, one obvious difference, no headwind from a contract loss. If you start with the bottom end of the range in 2019, throw in the HIF, which is actually just annoying noise. I just throw it in to make sure that the numbers add up. You start with $495 million pre-tax in 2019. We're assuming a slightly higher contribution from the growth rate. It's a 9% contribution margin on the $600 million, roughly, which isn't stellar. Conservative, but reasonable. If you remember, $500 million of opportunity of profit improvement, $130 million in 2019.
There's the $170 million for 2020. Again, as a measure of conservatism, a bad rate somewhere, medical cost trend that doesn't behave the way you thought. A measure of conservatism that produces a range of margins of 2.3%-2.7%, with two and a half at the midpoint. As I said before, whether you think about that as our original guidance plus the tax windfall, or just accept the fact that taxes are at 21% and these are the margins we can produce given our trajectory of profit improvement, fighting the headwind in 2019. That's the way we're thinking about the business.
Here, keep in mind, every time we show you these earnings numbers, there's a bar at the bottom of this page which is always reminding you that because we're going to correct the over-conservative capital structure we have, that whatever earnings per share these projections and outlooks are bound to produce, there's $0.40-$0.50 of earnings per share accretion as we correct our capital structure from being overly conservative to very balanced. Hopefully, that kind of brought it all together and culminated in a picture that was pretty clear. We're on it. We've built very detailed plans. There are who, what, where, when, and how. There's people assigned to these tasks who are hard at work executing it. We're very confident that we can do it. The profit opportunities are identified, and they're being worked on. This is not theory. It's not conjecture.
It's real-time work that's being done. We only have to harvest 60% of the pool of profit opportunities in the next two years to do this. As you saw, there are no gems of wisdom on those pages. These are things that as you have traversed the managed care universe for years and years and years, you've heard about these problems in other companies before. Our management team has seen these problems in prior lives. We know how to fix them. Only having to manifest 60% of those opportunities in earnings give us a high degree of confidence in achievability. It doesn't count on a huge amount of revenue growth.
Modest revenue growth of $1.2 billion over two years, creating a little bit of operating leverage and positive momentum as we again position the company to grow in the incredibly robust world of managed Medicaid and high acuity over the next decade. Lastly, we built in $150 million of stuff that goes bump in the night in managed care. Things happen all the time. We're managing $15 billion of medical costs. Rate negotiations with states are challenging and difficult from time to time. $150 million of contingency is a very prudent measure as you forecast what you're able to produce. Our view is the plan is achievable, and we have the management team to pull it off. That's my spin to the company.
Overview of where we are, early accomplishments, the plan, and how we're going to execute it, and how it manifests itself in a very attractive earnings picture over time to position our company to grow again when the time is right. That's all from me for this morning. I'll be back with you this afternoon for Q&A. Right now, we're going to take a break, and as we come back from the break, you're going to hear from Pam Sedmak, who's going to take you on a tour of our local health plans and how this plan is being executed at the local level. Thank you very much.
Hey everybody, I think we're going to go ahead and get started. If you guys can make your way back from the foyer to the seats. All yours, Pam.
Good morning. I'm Pam Sedmak for those I have not met before, and it's wonderful to spend a little time with you this morning. Just building up off of what Joe shared with you, I head up all the health plans, all the P&Ls for the organization. I joined about three and a half months ago. I'm very privileged and humbled to be part of Joe's team. We have an amazing team, and we're just so excited about the opportunity that we see in front of us. One of the key things and the key changes that Joe made when he started in the organization is that we as an organization made a 180 pivot, and that we are here in service to the health plan.
That's where the revenue is, that's where the opportunities are. We are here in service to the health plans of the organization. Whereas maybe before, the plans would tell you that they felt maybe they were here for corporate. No, it's the other way around. We're 180 shift as an organization. I'm going to walk you through a little bit of the core competencies that we already have seen in our health plans so you can just get an introduction to them. Really amazed at the talent that we have. We'll talk through the portfolio that Joe already touched on. I'm going to walk you through a couple of the health plans and kind of what we're doing relative to our operating discipline and rigor and the margin recovery and sustainability efforts that we have underway.
Talk a little bit about the Medicare line of business, the marketplace. On the procurement side, what we're doing. Okay. One of the great findings I had walking into the organization, we have some incredibly talented plan presidents and even second-line leadership in the organization. Very experienced. They have great depth on the government program space. They have really taken on to all the change that we're bringing at them very quickly. They are just taking it in like a sponge. They're running with it. They say, "This feels like what I used to do at other organizations" that they came from. They're loving that level of accountability and discipline that we're bringing in. We've identified some additional diamonds even below them and even at the second level below that. Promoting them up and giving them opportunities within the organization.
We have strong relationships with our state partners, with our communities, with our providers. That new leadership team that we're bringing in, even at the second or third level, also fostering all those relationships. We have strong incumbency capabilities and reputation, as you look at what we just had in Washington with the great win there. Same thing in Texas. We want to continue to build on that status. Just opportunities for long-term growth. The portfolio is a growth portfolio. We want to make sure we get the margin recovery continued and sustained. That becomes a strong foundation for growth. I want to touch on what Joe talked about on the portfolio. The portfolio actually is really strong and really good.
We have some performance opportunities that we're looking at and taking advantage of, almost 50% of the portfolio is already operating above 2%. We have some areas where it's slightly below the 2%, but with the operating improvements that we're putting in, we believe we can get them there. We have some not profitable areas that have great focus of my attention, as you can imagine. Also Florida and New Mexico as we work through our protest rights as we will in the run out of those. We have some sub-scale plans that we have to figure out what we're going to do to try to bring scale and opportunity and growth to those. Of the 13 plans that we have and states that we have, I've been to 11 of them in three and a half months.
I will get to the other two here within the coming month or so. This page is probably the most foundational for the margin recovery and sustainability efforts, I want to touch on a bunch of the bullets here. First and foremost, operating discipline and rigor. You have to be tenacious. You have to be persistent, have to be never, ever ending, you have to drive that accountability down into the organization. We're talking about it becomes muscle memory. You can never, ever let up on it. Not in managed care, especially not in Medicaid managed care or government managed care. What have we done? We have weekly dashboards that we look at very closely. We have regular forecast updates.
We do our monthly operating reviews and our quarterly business reviews where all the plan presidents, all the service functions come in the same room together and report out on their performance. Very transparent, very open discussions, very candid conversations. Anywhere they're off track, they have to have action plans to get back on track also opportunities by which they're looking to improve. Joe had talked about the performance improvement initiatives or profit improvement initiatives. Internally, we call them PIPS. Everybody's looking for their PIPS. Every which way to Sunday, that's got to be muscle memory in everything that you do every single day in this business, bar none. That's the way you get to margin sustainability.
If a plan gets off the rails at any point in time, which can happen in this business, depending on the rate environment or whatever the situation may be, we have SWAT teams ready to go in to help support them. Turn over every leaf that we can find, whether it be utilization management on the network side, on care management side, on at-risk revenue. We turn over every leaf we can look for opportunities to get them back on track. It's multidisciplinary. Again, we're all here in service to the plans, that includes any of Jim's functional areas. Any other part of the organization is here in support of that. The executive team participates in every month E=every review and quarterly business review. The plan presidents are held ultimately accountable. I thought for sure maybe that would be something that would scare them away.
They are loving it. They're loving this pivot. They're loving this accountability. They're loving actually this rigor and discipline and support that they're receiving. They're loving seeing the results that are coming out of it so far. On the shared services side, under Jim, have service level agreements. We're all in alignment. Performance incentive is all in alignment. Everybody knows where they stand. I will tell a plan president, they tell me, "Pam, I've already heard it enough. You don't need to say it anymore." That you must perform. If you have Marketplace, Medicaid, and Medicare, you must perform across all books of business. You can't live on one, even if the other two are failing. You must perform on all books of business, and we reward you for that. They all get that. We look at early indicators daily, weekly on how we're doing.
We unpack trends, literally look into every single trend, what's underlying it, what can we do about it. We always will defer to action. Unpack that trend, look at impact, take it to action, and that becomes a performance improvement initiative, a PIP. We have rigorous bid and rate reviews that were never done before. Joe, myself, and the leadership team, Joe White, now Tom, will all be involved relative to bid and rate reviews that we have. Performance incentive alignment that we've mentioned. This is the most critical thing we can do short term, and quite frankly, the most straightforward thing we can do short term to get on this margin recovery. Again, this is muscle memory. It never ends. Tenacious, persistent, review, everybody's accountable. We're all on the same page. We're all here in support of each other.
We'll bring in SWAT teams if we need to. Let me talk about two examples. Again, still early. I do not want you to take this trajectory out at this stage. I want to give you a sense of some of the impact that we're having. Let me talk about Illinois. Illinois had a very difficult year last year, almost 108% medical loss ratio. High turnover of leadership team, both at the plan president and the next layer under. Pervasive systemic claim payment issues and provider issues abound across the entire portfolio. They had facility contracts, many of which were not competitive. On the healthcare services side, we just were not hitting on all cylinders by any stretch of the imagination. We brought in a new plan president and an entire new leadership team below that.
We went in and that team went in, and I've met with them now twice. They went in and they audited the configuration of every single major contract in that market to ensure it was loaded properly. On any large claim that goes through, anything above a certain threshold, 50,000 bill charges or so, they look at that before it goes out, make sure it's paying accurately. Providers who once would not say a good thing about Molina in the market now say Molina's preferred in the market. That's how quickly this team has turned this around. They terminated a very high-cost contract. Renegotiated four others successfully. Just as importantly is they brought in and reset the entire clinical team.
They reset to what our models of care were going to be, what our policies and procedures were going to be, what the model office was going to be, and they measure and look at it every single day. Are they looking at the right cases? Are they referring the right cases? Are they managing it and working with the right cases on a daily basis? First quarter MCR was 86.4%. Staying in the Midwest, I'll talk about Ohio. Ohio is building on some positive momentum that plan already had. They had some opportunities for improvement. You had relatively new plan leadership, and also, they had some variable performance historically. Similar to Illinois, their clinical management was relatively inconsistent.
Just as Joe touched on the utilization management, complex care management, and so forth, and on Marketplace, they were underperforming, and they had some gaps in their provider network side. So far this year, what the team's done is they've brought in a new clinical leadership team, including a new CMO and a head of healthcare services. Again, they did a reset. Are we working on the right cases? Are we referring the right cases? Are we managing the best and highest-risk cases? Are we working those through successfully? They also put in very aggressive actions around looking at readmissions Short stays, ER utilization, transition to care. Those are some of your biggest cost drivers within any health plan, especially plan that also has MMP within it, the dual. They've gotten significant reductions across those.
The other major change that they made is that they really look at what could they do better on their at-risk revenue. In this case, their quality withhold. They were way under clawing back on that, and to their great credit, they were able to recapture significant portion of that going back to 2016 and 2017. They went from about an 89% MCR. That's too high in this business. They're running about 82.6%. Don't expect that going forward. Don't forget this got some prior period in it because of the at-risk revenue. This team is really just going on all cylinders and doing a great job. On the Medicare side, D-SNP and MMP is really our books of business here.
On the Medicare book of business, we had very internally focused team, not a whole lot of breadth of leadership and experience, very tactical on how they went to play, frankly, not all that connected with the health plans at the level that they needed to be. Very costly distribution structure, we're diving that into reduce the cost of sales and Stars and just overall risk management. We just weren't getting the level of risk adjustment and Stars capture that we needed to and expect relative to the peers in the space. This is going to take a little longer to turn because of the long lead time on Stars and so forth, on risk adjustment. We've already brought in a new leader, starts on June 11th, flattening the organization, really looking to restructure the overall segment to bring in the breadth of talent that we need.
We're now targeting very strategically where and how to play, that will start posturing itself into the long term, making sure it's accretive and also complementary what we're doing across our entire book of business. We're improving member identification for assessments and overall quality performance as well as for risk adjustment and the incentives around those, reducing the cost structure of our distribution strategy. Head last year, a decent MCR rate, 88.4%, around 84.8% so far this year. Again, don't take these and traject them forward. It's early. It's one quarter. You have some seasonality, you have some prior year within those, but it's going in the right direction. Health Insurance Marketplace. You guys know the Health Insurance Marketplace story for Molina Healthcare. Very difficult one. Last year, grew too fast, too aggressive. We outgrew our capacity to manage. We halved that coming into this year.
We had insufficient capabilities relative to the level of risk transfer that we had within the organization. Our risk scores that Joe already mentioned clearly don't feel that they're nearly at the accuracy and completeness that they need to be given the level of risk transfer that we have as a percent of our book, of our premium. We also had very suboptimal processes, premium collection, enrollment and eligibility, deductibles, accumulators, all those things have become very big pain points for members and providers. All those processes have really been honed and fixed going into this year, much better. Last year, we had about an 88% MCR, really high for this book of business. Again, don't take this as trajectory because again, there is seasonality for sure in this business, but we're running at about 67% in the first quarter.
We're staying very conservative relative to our risk transfer assumptions and our margin assumptions until we can show that we can sustain this book of business on a consistent basis. Most importantly is, in my view, you must retain the business that you have. You have to work on it. You don't wait for a new procurement to come up. You've got to work on this every single day. It hits home when you have losses like Florida and New Mexico, right? Right before I walk in the door. Next thing I know is that STAR+PLUS had to be submitted. Guess where I was the second week on the job? Texas. Entire week. One thing I will let you know for sure, not one RFP will leave this organization that Pam Sedmak hasn't read or covered.
Not one RFP will leave this organization that Joe and the team isn't fully supporting and bringing every ounce of resource to the organization that we need to make them be successful. Not one RFP will leave this organization that we haven't gone through third-party reviews through the various drafts of the RFP to ensure we're answering the question completely and accurately and to the best of our ability and up to where standards are. Not one RFP will go out that we haven't done our due diligence on what competitors are saying and what we could do better from our previous RFPs. Most importantly, we had a team in the procurement shop. I was a little bit shocked, quite honestly. My biggest shock was they controlled the process.
They wrote it, they controlled it, then they would share it with the plan maybe two weeks before or three weeks before it would go. In an incumbency re-procurement, the plan's got to drive that process. You've got to talk in the language of the local market and the experience of the local market. Now the plan president is leading it. The procurement team is in support of it. I'm there in support of it. Joe's there in support of it. We are all there in support of bringing all the resources to bear and make sure that these are going to be successful. The executive leadership team is fully engaged. We're bringing in all new talent and resources into this. We had Texas, we had Puerto Rico, we had Washington. A lot of RFPs going on.
Boy, there's one thing I wish, I wish I was here six months previous. This is probably among the most important actions that we can take as an organization and will have the biggest impact. Also as you look at then targeting where you want to go long term, that begins now as we start thinking about that and doing our due diligence about that, because that's a two-to-three-year cycle. As we're going through the margin recovery and sustainability efforts and getting that foundation rock solid to build and grow on, that's where this procurement process becomes just so critical. Not just on earning your incumbency and re-earning that every single day, but also having that foundation to grow. From there, you can build on Marketplace, you can build on Medicare and so forth for the overall business.
It's such a privilege for me to be here. I'm privileged and humbled Joe brought me on. Having a blast. There's so much opportunity. Glass half full type, this is the place to be. Just enormous places we can go as an organization and with this great franchise. With that, I'm going to hand it over to Joe White.
Thanks, Pam. That was awesome and just an example of one reason why I'm so excited about where this company is right now, just the future of the company is just something to look forward to right now. For the financial discussion, the place to start is with 2018 guidance. We're not starting with 2018 guidance just because that's the chronology, but we're starting with 2018 first quarter results and guidance because that has served as the first validation of the fundamental premise we're operating under here as a management team. That premise is, you've heard it different ways from Joe and Pam, but to say it again in my words, that fundamental premise is the underlying business, the underlying franchise, the underlying assets of this company are valuable. For the value to be realized, all we need to do is hard work.
There's a lot of it, and it's hard work. Management discipline, managed care fundamentals can reap tremendous value inherent in the underlying operation and the underlying assets of this company, those managed care contracts. I have the luxury, I guess you would say, of having been through in the past nine months, two independent strategic reviews of this company. Last summer, we undertook a strategic review with different set of people, generally than what we're talking to, than who you're meeting today. A lot of outside management consultants. Nevertheless, a very thorough strategic review. When Joe came on, he's been able to assemble a great team coming from the outside to help the company that he's been able to meld with people who were already at the company, strategic review of that group. Both of those reviews came to the same conclusion.
The underlying value of the company is considerable, the key to unlocking that value is managed care fundamentals combined with basic business discipline. We have those two data points. I have, from my personal experience, those two, I won't say data points, but those two assessments. Two strategic analyses conducted from different points of view by different, though very capable, groups of people. We move into the first quarter of 2018. What we've seen play out in the first quarter of 2018, what has informed our 2018 guidance is the knowledge that the turnaround we're talking about has already begun. Now, there are of course, some specific reasons behind the immediate turnaround benefit we're seeing. Yes, we've done a good job, I think, of addressing marketplace pricing for 2018.
We've got the benefit of our cost takeout from 2017, the full benefit coming into 2018, we've got the benefit of fixing the balance sheet at the end of 2017 so we're not chasing our tail every quarter now trying to explain developments from the previous year, in effect, clouding current operations. Nevertheless, though, those three benefits are just examples of basic business discipline and managed care fundamentals and how they can be applied to this set of assets, this great franchise, to drive more value. There's more to come. Again, 2018, for me, a huge validating moment, first quarter, then looking through the rest of the year, has left me very comfortable with this plan the team has put together. I'm very comfortable with the plan that's been put together.
From a personal level, I feel very comfortable stepping away from the company now, knowing my investment in it is going to be safe. It's just the 2018 events so far, again, have been very significant in supporting what we've thought all along. With that said, I want to talk a little bit about what 2019 and 2020 are going to look like. This slide, you've seen it before in two separate slides. Joe showed it earlier. A lot of the slides I'm going to go through are either the same as what Joe showed earlier or very similar, just trying to bring a financial point to what we've talked about before. This slide addresses the transition from 2018 to 2019 to 2020 at a revenue level and at an after-tax margin level.
I'll start at the bottom and work up. Obviously, we don't make any bones about it. What's happened in New Mexico and Florida from a revenue perspective creates headwinds as we go into 2019. That's $2.7 billion of premium revenue off the top from New Mexico and Florida, assuming we're not successful with our appeals there. With that said, we get some offsets in 2019. We've got the Mississippi Health Plan coming on, the full year benefit of that. We've got the Idaho Health Plan full year benefit of that coming on in 2018. I'm sorry, in 2019, going to give us a little bit of lift on the revenue side. We've also got a number of other areas, efforts that Joe talked about around risk adjustment, quality revenue, to take a little bit of the sting away from what happens with the loss of those two contracts.
2020, the growth starts again. It's not breakneck speed. Having been through that time period in the company, I'm not sure that breakneck speed is what we want in 2020. I'm real comfortable with that revenue outlook because simultaneously with that, we're going to make some major progress in terms of margins. Joe spoke to this, but I think it's worth speaking to again. Sitting here in 2018, we've got the benefit of our first wave of admin takeout. We've got the benefit of marketplace pricing. We've set the reserves right, so we're not having a bunch of negative development polluting our results for any given time period. On top of that, though, as you get to the end of 2018, we're going to bring in increasing medical cost benefits from all the stuff Joe spoke about. We'll probably start down the path of getting further administrative efficiencies.
The administrative efficiencies are out there, by the way. I know because I was so intimately involved in what we did in 2017 for administrative efficiencies. That was the first step. There are deeper efficiencies we can realize that Joe spoke to. 2019 starts to see the further benefits of medical cost improvement, starts to see benefits of admin cost takeout. It's not until 2020 where we get to the true transformation of the company, where we have the benefit of revenue is growing again. We've got the benefit of all of that work we're doing on the medical cost and premium optimization side. We've got all of the work that we've already looked into, that we've started the work streams to truly transform a lot of our core functions, administrative and medical, to drive higher profitability.
That path from 1.5% to roughly 2% to something around midpoint of 2.5%, it's very doable. It is purely, I am convinced, a function of proper business discipline and proper application of managed care fundamentals. Something else Joe spoke to, again, just in terms of the capital management opportunity. Again, Joe said it very well. I'm not going to belabor this. We now have the profitability reinstalled in the company. We have the benefit of better planning, better understanding of our cost structure so we understand the subsidiaries better. We simply don't need any more to carry the redundant capital, the redundant cash we needed to carry before. We deploy that. That's going to be an incremental benefit on top of everything we're talking about operationally.
It's a very virtuous cycle, if you will, of improved operating performance enables us to be more traditional in capital management, which further improves earnings. One of Joe's repeated sayings is that a plan is a commitment, and it sums up very well. A plan is a commitment to deliver results. The management team is here to make that commitment. For this plan, we also have a commitment to be transparent with you as investors, to make sure that when we report quarterly, we are delivering information that is usable by you and understandable by you and isn't burdened with a lot of noise that obfuscates what's actually happening with the company. We also have the commitment to you to deliver the information you need in order to do your modeling, do your projections to make your assessment of the company.
I've got 4 examples up here I'm going to whip through pretty quickly. The first two have to do with medical claims and benefits payable or IBNR and marketplace risk adjustment. These two areas are examples of where we need to make sure that we can provide you with information on a quarterly basis as we report back on our plan that you can understand and is not burdened by a bunch of noise from prior period. Basically, if you look back to 2017, to be honest, we spent a lot of time chasing our tails trying to explain stuff that related to prior periods. That makes it very difficult. I'll be honest, from a management perspective, it makes it very difficult to monitor the company.
When Joe came in in November, we spent a lot of time just tearing away all of that noise and rebasing the company's performance. You deserve the same clarity. We've gone back and we've looked at medical claims and benefits payable. We've looked at marketplace risk adjustment. I'll talk for a second. We've put in new procedures that should reduce the likelihood of out-of-period development, reduce the downward volatility in earnings from prior period adjustments, and essentially let you just see the company's progress without so much noise around it. Last two areas up there are more, I would say, just the informational input you need as you model and project the company forward.
A company like ours with the impact of non-deductible expenses, our effective tax rate's hard to understand. It gets more confusing when things like the HIF, the Health Insurance Fee from the Affordable Care Act, jumps in and out, added some stated, then put on holiday, then reinstated. Share count we've also talked to is also a little bit confusing at times. We're going to refresh on that a little bit. First of all, in the area of medical claims and benefits payable, which is really IBNR, Incurred But Not Reported claims. Last year, again, I'm not going to belabor the point. Due to a number of issues, this area caused a lot of confusion, I think, to the investment community last year.
We recognized in 2017 a lot of expense that had our reserves been more accurate in the previous year, we would have captured in 2016 and would have given a much cleaner impression of where we were for 2017. With all of that happening, what we did is we went back starting in late 2017, we went back, and we really revisited our claims estimation process. That process was helped, frankly, by some improvements we've already made in the accuracy and consistency of claims processing. I think everybody here understands that the first key to setting reserves appropriately is to understand your payment stream. We have a lot more visibility into that, really a lot more visibility starting the end of last year than we had previously.
We've also essentially done a lot of work to create a more integrated, collaborative approach between various functions of the company so that the input of all of the business leaders, all of the SMEs, the functional experts in the company can inform how we set claims. The result of that, you can see in this chart here on the left. What we're showing in this chart here is the degree to which the reserve set at the end of the previous year was in excess, or in the case in 2017, in deficit compared to what we actually paid out. If you were to move left to right on this chart, what you will see that in 2015, the development of the previous year's reserve, the reserve set up at December 31st, 2014, the actual payments were 11.8% under what the reserve was.
Same story again, in the following year, in 2016, ultimate claims expense or ultimate payments in 2016 related to the prior year reserve were about 11.5% underneath what we'd reserved. 2017, the fact that that number is not just dropping so much compared to the others, but it's going negative, just speaks to the problems we had. The amounts we paid in 2017 for 2016 dates of service actually exceeded what we had accrued at 12/31/2016 by about 2%. Again, frankly, that just speaks to reserve misestimation. The good thing to see as you look at this chart is when we look at what we know or what we knew at the end of the first quarter, and nothing has come up since then changes our opinion of this.
Based on what we saw at the end of the first quarter of 2018, it looked like payments in 2018 related to 2017 were going to be about 11% less than what we had accrued. Again, you can see in 2018, we're returning very much to the practice of what we saw in 2015 and 2016, and it gives us a lot of confidence that the challenges we had last year with not setting reserves robustly enough are behind us. It's pretty much the same thing on Marketplace risk adjustment. It's the same concept, so I'm not going to belabor it. Again, in Marketplace risk adjustment, 2015 and 2016 results were harmed by the out-of-period development from the previous year. The result of
[audio distortion] pre-tax income.
Fixes in, it's sustainable before we enter the revenue pipeline aggressively. Hopefully, if we can achieve this recovery plan sooner rather than later, we'll be back into the revenue flow soon.
If I could, just one more.
Please.
PBM contract renewal, maybe just looking ahead a bit, but how do you think about CVS and Caremark potentially being merged with Aetna?
your former organization, dealing with their, in some instances
into consideration at all? Maybe just more broadly, is it just a matter of the capabilities that they bring to the table and the pricing that you're looking at for contract renewal?
On the issue of consolidation in the PBM industry, look, the big three are owned by health plans, and whether you contract with Optum, whether you contract with Express or contract with CVS, they're going to be part of a health plan business. You really can't avoid it. We have a great relationship with CVS Caremark. I enjoyed that relationship in my prior life, so we know them really well, but we're going to make sure that they put their best foot forward. It's not only unit cost. Who manages rebates, and how can you manage those more effectively? We don't think we're doing everything we can managing specialty utilization. As you know, that's a 20% trender, and until you arrest the rate of growth of the autoimmune drugs, the oncology drugs, you really can't arrest the rate of growth in RX.
We're going to look at every aspect of our PBM operation. We're going to look for the capabilities of CVS Caremark and their competitors, the fact that they're owned by health plans, to me, is a non-issue.
Thank you.
Justin?
Thanks, Joe. First on your marketplace footprint for 2019, I know these decisions need to be made pretty soon. Curious if you could share anything in terms of how you think that plays out, and specifically on Florida. How does the loss of the Medicaid contract there, assuming that it is lost, impact your contracting on the provider side, your scale, and your decision-making on Florida specifically?
You're right. We have to file rates soon. We're right in the middle of all these rate reviews in the various states. The way it actually works is if you want to play in a state, you have to file the rates now, but the decision to actually play can be made at the end of August or early September. We've already decided to file rates in Utah and Wisconsin, two states that we withdrew from a year ago. We're going to file the rates. Doesn't mean we've decided to play. We hold that option open for the rest of the summer. Our strategy going into next year is really simple. I'm bullish on the business. The risk pool is stabilized. The Fed stopped changing the rules, which changes the risk pool dramatically, so you're always chasing a moving target. Seems to have really stabilized.
It's incredible what a 60% rate increase actually does to your earnings. As Pam mentioned, we actually now have the infrastructure to monitor and manage it more effectively. I love where we play in the business, highly subsidized. That Medicaid network, to your point, is important. This is not the year that we should aggressively grow the marketplace business. I have instructed the team to develop a rate strategy, looking at the elasticity of demand in the market to make sure that we're optimizing contribution margin dollars and not necessarily heads. Members are important, but contribution margin dollars, if we're going to hit this plan, are still critically important. The pricing strategy going into next year is to maximize contribution margin dollars. The point you make on Florida is a valid one.
Without a Medicaid network in Florida, we don't know if we can build a marketplace network standalone and have the negotiating leverage that we need in order to be successful there, but we are evaluating it. We haven't concluded yet whether we're going to play or not. Let's see how the Medicaid protest unfolds. Certainly, if we ended up with some revenue, Medicaid revenue in Florida, it would give us a heck of a lot better chance of building our marketplace business.
Thanks. Then just on capital management, the slide you laid out with the $0.40 to $0.50, maybe I just wasn't following, but it wasn't clear to me how you get there in terms of that accretion.
Sure.
Is it just getting down with the $600 million in capital that you're there?
In a very summarized way, when you've got $800 million of cash earning 1%, deploying it anywhere is accretive. The way we laid out that chart, half of the earnings accretion is in earnings, $12 million of interest expense on the revolver, nearly $6 million a year of fees on the bridge facility. There's actually earnings that are produced by de-leveraging your balance sheet and eliminating a facility that you deem no longer necessary. The other piece of it is in share count. If your strategy was to take out the dilutive effects of the converts, your share count goes down, earnings per share goes up. It's share count reduction, if you are actioning the converts, earnings accretion by paying down the revolver and eliminating the fees on the bridge facility.
Is that paying down the converts, or is that just trading them for stock like you've been doing and therefore absorbing the dilutive effects down the road?
We're hesitating to pre-announce capital markets transaction because you really shouldn't do that. Deploying the cash where we don't have to use stock because we have $800 million of cash and more going into next year, you should think of it as using cash.
Thanks.
You're welcome. Josh, and then we'll go to Kevin. Edip Yoakari. Thank you. Yes, sir.
Thanks, Joe. Two questions. I guess the first is, it seemed pretty clear that M&A was off the table the next two years. So I'm curious on two fronts, which is, one, if there are real strategic opportunities that exist for you guys, is it just simply We're going to let the Meridians and the Fidelis' go, and that's the fact of where we are today. Then secondarily, are there capabilities, some smaller deals, things that you think Molina needs right now in order to be more effective on RFP responses, et cetera? Again, do you feel kind of hamstrung on that front as well?
That's a fair question. Look, right now, M&A just isn't in my vocabulary yet. I brought my transformation team in from my prior life to unpack some of these complex contracts, and develop business in a different way than what you would call a traditional M&A. A pharmacy recontract deal, a joint venture, a co-source relationship kind of looks like an M&A deal, and has a lot of the same financial attributes. On the capability front, our strategy right now, until our stock price recovers and gives us the capacity to use our capital to purchase, our strategy right now is what we call rent to own.
If there is a niche capability, oncological management, radiology management, NICU, and we believe our internal resources can't be built fast enough, there are a myriad of partners out there, and you know who these guys are, that have broad-based capabilities in the fundamentals of managed care and care management. Because we want to produce the accretive effects of this plan early, rent to own means contract but build alongside. Initially, you're going to see us enter into contracts with vendors and partners that produce these results as a stepping stone to us actually obtaining the capability when our stock recovers.
All right. Maybe not optimal, certainly better than where you are today.
Absolutely.
Okay. Just a second question. Joe White mentioned the strategic reviews that went on sort of prior to your arrival, then more recently. It sounds like the conclusion was, we've got a great opportunity, internal assets, good base, starting at 1.5%, we can get there. Was there an attempt to validate that externally in terms of what the value in the market was? Was this just an internal review, not bringing in external consultants, bankers, et cetera? We're pretty comfortable with what we know now.
It was internal operational review, is really what it was. It really told the story that we're telling here, that there were so many of the fundamentals of managed care that were under-managed and over-costed at the same time, that value could be harvested pretty quickly. They were more operational and financial reviews aimed at administrative costs. In fact, I'm glad you raised the point. Most of it was aimed at administrative costs, and there were hints and suggestions that medical costing wasn't being effectively managed. That wasn't the thrust of the exercise. We have found tremendous value, as we've shown you.
In fact, that administrative platform that we shut down the implementation of last quarter, the reason we shut it down was it was going to save a couple of million dollars of administrative costs, it didn't do anything clinically to help the nurses manage medical costs. There's tens of millions of dollars of value to extract there. To me, the next generation of this, the next phase of this, is really getting at the utilization controls, the network, et cetera. The thrust of the external studies was mostly SG&A.
I'm sorry, one last one. Just on Florida and New Mexico. Of the $800 million, how much of that is Florida and New Mexico capital freeing up?
Joe White, was it three or four?
Three to four, depending on what our presence is in those states.
I think the model has $350 million. Kevin?
I wanted to ask a question about the revenue growth that you're starting to build over the next couple of years. Usually, we're used to a managed care company not being profitable on that initial revenue growth when you do business, but it looks like you're looking for a 3% margin and a 5% margin in 2019 and 2020. What gives you the confidence on that? Not only is there often not really earnings initially, but there's usually business investments that have to be done as you enter a new product or enter a state. Are those incorporated in here? Or if you really do ramp up that RFP process into 2020, 2021, should we expect some sort of offsetting investments?
On anything we've had, if we displayed a profit improvement initiative, a $500 million, 300 million of which comes through in two years, think of that as any cost to implement those has been netted in the benefit. If Jim needs to allocate more money toward chart chasing, it was netted in the benefit it's going to produce. That's the way to think about it. If something is a major restructuring item, and it requires a one-time charge, buying out leases can be accretive, it can be expensive. That's not in the projection. We don't have an SG&A problem. We have a misallocation of resource problem. All of this can be accomplished by moving our costs to be aligned with where value is created, not adding more cost.
One of the reasons why we are comfortable with, whatever it was, 6% and 9% contribution from those new revenue streams, one, they weren't totally brand new. They were in markets we knew and were already in. The scale benefits, the leveraging of a fixed cost base is significant. We think we are still pretty cautious and conservative. It's the leverage of the $2 billion and $1.8 billion of SG&A this company has that allows us to produce those margins on that new revenue.
Sorry. Just want to drop a quick correction there. Josh, I think you were asking on Florida, New Mexico. I think you asked specific to 2018.
That's not in the 2018 number there, it's in the 2019 number. Yeah.
Okay.
Just one more question on the cost side. You outlined a number of costs coming in and saves coming in at 2018, 2019, 2020. What are the ones that we're going to see over the next 12-18 months? There's a lot of different initiatives in there. How do we think about timing? Do they all contribute a little bit now, or is something really happening sooner than something else?
I can take you through a few of them. We think we can drop value from our pharmacy contract in advance of the actual contract renewal date, with market checks and utilization controls, which are being very effective. Anything that we called SG&A transformation, like if you're going to truly outsource your IT operation, that's like an M&A effort. It's big teams of people, operational complexity. That takes a while to do, but once it's done, it's incredibly accretive. Things that require a great deal of operational complexity are going to take longer. Things that require bilateral negotiations with counterparties are going to take longer. A lot of this stuff is internal. The fact that we have inconsistent business processes in all of our health plans that are trying to do concurrent reviews doesn't require anything other than just better management of a business process.
That's the kind of stuff that's going to drop through early, actually has already started to benefit us in 2018. Sarah, then we'll come back to you, then we'll go to Peter. Yes.
It's clear that there's a lot of conservatism in your guidance, I wanted to touch on a couple points where you were a bit more optimistic. First is on Stars. You laid out at-risk revenue, there could be up to $125 million. Stars was listed as one of those. Historically, it's been challenging to get high Star ratings on duals. How confident are you? How much of that $125 is from Stars versus just cleaning up risk adjusters on your other books?
Of the three that we mentioned, Stars is the hardest one to achieve, think of it as on the back end of the projection. The quality withholds are highly achievable. We have plans that are achieving very high revenue retention targets and other plans that are not. Certain states have more aggressive targets that you have to hit, admittedly, that would emerge first. The risk adjusters. That can be maybe not immediate, but that can be harvested during the projection period. I would think of it as quality withhold is the easiest to execute in near term. The risk adjustment would be the second piece, further out and more difficult is the achievement of Stars.
Thank you. Another piece of optimism that was in there was looking at the revenue build, there seems to be assumptions for rate improvement. I'm just wondering, as you think about the out years, have you had any discussions with states about how they're viewing tax reform, whether or not they're factoring that into actuarial soundness? Do you include keeping all of that benefit in your 2020 outlook?
First of all, the outlook that we've put up here, which is both a projection in 2019 and an outlook for 2020, assumed the tax rate is at 22%, everyone knows that. If you notice, we also put in $150 million of contingency. Whether it's for taxes or whether it's for arguing about trend, it doesn't matter. If a state thinks you ought to have 100 basis points of continual improvement, managed care savings every year, you can only achieve 75 basis points, there's a 25 basis point drag. If you think pharmacy trend is seven and they're willing to give you six and a half, there's a 50 basis point drag in pharmacy.
At some point in time, for me, the conversation moves away from taxes and moves to just the general actuarial soundness of rates, are you getting paid for the benefits they're carving in, for the benefits they're taking out, for managed care savings that they're going to negotiate, and for core medical trend. When medical trend is rising, rates tend to lag. When it's falling, the lag helps. To me, the fact that trend is nice and stable at 2%-3%, it doesn't seem to be inflecting one way or the other, gives us great hope that this is an incredibly stable rate environment over the next couple years.
Last, if I could. You included staying in Puerto Rico in your projection.
Yes.
I know that there was a really tight turnaround there between when you get the regional risk adjusters and when you had to commit, it seems like from the guidance that you're pretty confident profits could potentially improve, or that that's a contract you'd like to stay in. How do you get confidence around how the regional risk adjusters will play out? I guess you have a lot of confidence that they're set appropriately.
From the moment we bid on Puerto Rico, I always qualified my comments by saying they've introduced some financial mechanisms that are a little more difficult and challenging to deal with, that is true. The regional rate structure creates a mix effect that could hurt you or harm you. If they introduce a minimum MLR, which they're talking about, could be an issue. It really was an action-forcing event. Group procurement comes up, Puerto Rico is a challenging environment. What do you do? You dive deep into it, and you unpack it, and you figure out whether you can beat your cost of capital on a consistent basis. I would actually argue that one of the big learnings was it was really hard in 2017 to tell what you were actually making or not making.
When the storm hit, everybody stopped going to the doctor, then when they lifted the rules, everybody started going to the doctor. You never kind of knew where you were. I actually don't think Puerto Rico was as bad as a lot of people thought it was. When we unpacked it and looked at the challenges the Commonwealth put in front of us on rates We feel we can beat our cost of capital. As I said, it's never going to be the gem of the portfolio. It might be dilutive to the overall margin, but accretive to our cost of capital, and that's the view we're taking. Peter? We'll go to you.
You talked about subbing out the IT business or portion of your G&A and maybe some other costs. When Health Net did that, they talked about doing that some couple of years back, it came with some costs up front, then it came with some savings further out. Do you have any of that baked into these numbers? In terms of scale, how does it compare to what Health Net was trying to do?
Depends. First of all, it's sort of the same thing, which is why having Mr. White on board is a real benefit because he's seen the movie play out before, knows the operational complexity, knows how to negotiate these types of contracts with our transformation office and Mark Keim. We have the right team that knows how to do it. If, in fact, we were able to turnkey this over to a partner without severance, then I think it'll be a very smooth, almost cashless transition. If it requires some type of tumultuous shift, then it might require a charge, which is not in these numbers. Granted, if there is a one-time cost of doing it's not in the numbers. If there's redirection of SG&A to just get it done, it's netted in the benefits we put in here.
The savings you would expect to get from it is in the numbers, though. Is that correct?
That SG&A transformational bucket that has $75 million-$120 million, the outsourcing of IT is one of the things contemplated in that bucket. Yes.
Okay. Then in Puerto Rico, the new contracts will be island-wide. You have to contract with a wider network than you've had in Puerto Rico in the past. How confident are you in being able to get that done in time for when that starts? Are those costs for recontracting in Puerto Rico baked into the numbers here?
They are. We've already started down that path. We have what I'll call LOIs, for lack of a better term, with many of our providers. Our policy is never to bid blindly. You have to go into a bid having a decent understanding of what your network's going to cost, but we would never bid blindly. We're confident. We're moving toward that October 1st date. I don't know how you're going to make an announcement in June and actually implement an island-wide program by October 1st, but we're planning on doing that. Bearing in mind, a lot of the other players in the market have to contract in other regions as well, since it's only a regional model now. We're confident, and the cost of doing that are netted in our Puerto Rico results in this model.
Thank you.
You're welcome. We'll go to Anna first, then we'll go Dave over here. Anna?
Thanks. Some short-term questions first. On the HIX risk adjuster, last year again, you had a couple of negative surprises. You're so conservative, I'm assuming that whatever it is, you've assumed it into guidance. In July, typically, something comes out and it's true up, right? How are you thinking about that? It's small, but on your income, it could be huge.
No. Look, Joe answered it correctly. Not only did we improve the process to build up the underlying number, we had a really good ability to predict what our risk score was at the end of the year. It's almost to a dollar, a dime. What we were really bad at predicting is where the market would be. That's what we missed. We've done our process, get data more effectively, look at it more critically, and effectively put an IBNR reserve on top of our risk adjustment liability. I know it was frustrating for everybody. Marketplace is bubbling the line. It looks okay, and then second and third quarter, bang, there goes your revenue number. We've not only improved the underlying process for estimating where the market is relative to us, but actually put a margin on top of it.
Got it. Just a clarifying question on the cap deployment, the $0.40-$0.50. I'm assuming that entire thing is excluded from your net income margin.
Correct
projections.
Correct.
What is the timing on that? Might we see something in 2018?
Well, the revolver.
Is that the 2019 that we have?
The revolver was repaid two days ago. Our bridge facility is still in place, and we're not yet announcing or even deciding when we would terminate that, if we do. Then depends on the capital markets for the other stuff. I would say, think of it over the next two to three quarters. It's not going to happen in a big bang. It's not going to take two years. I would say over the next two or three quarters, you'll see us take those incremental steps.
The 40 to 50 over the next three quarters.
Yes.
Okay, great.
You're welcome.
On the prior period development, you say no prior period development in guidance. Is that just assuming the 11.5% or so excess reserves you have stays? What type of cost trend are you observing, and is that likely to exceed your expectations, and what type of upside might we see, if any?
We expect our reserves to run off favorably in terms of end of year 2017 into the first quarter. Our process called for at least intending to reestablish the same level of conservatism at the quarter-end reserve so there was no P&L benefit. If reserves run off favorably in the second quarter, we would intend to do the same thing. Always reestablishing the same level of conservatism so there's no P&L benefit, and your balance sheet remains very strong. Oh, you asked about trend.
Yeah, trend.
As I said, there's no such thing as trend. It's all a sum of the local events. Trends on inpatient are running okay nationally. On pharmacy, they're running hotter than our forecast. The fact that pharmacy is only $45 PMPM, you'd rather have that trending unfavorably in that facility. Inpatient's running fine, pharmacy's running a little hot. In various geographies, when we talked about New Mexico's underperformance in the first quarter, it was behavioral. When we talked about Washington's underperformance in the first quarter, it was high acuity inpatient. There's soft spots everywhere, but I would say generally speaking, inpatient's running well nationally, pharmacy's running a little hot.
Okay. One final one. On worker requirements, are you expecting any type of one-time G&A spend on systems in any of the states that may be considering it, maybe in 2019 or beyond? We're hearing that states are potentially-
Yes
They are looking for plans to meet that.
Yes. It is a concern, right? The states sometimes look for plans to do more work and not get adequately paid for it. We think it's going to be operationally complex. Right now, the states in our portfolio that have filed waivers or are contemplating are Ohio, Michigan, Utah? Yes, Utah, to some extent. It's a watch-out, but my view is if we're going to be required to build something, we got to get paid for it, whether it gets paid in the fees that they pay us over time or pay us upfront. We can't build stuff for free and do work and not get paid for it. We didn't put anything specifically in our projection that contemplated having to spend a lot of money on it.
Got it. Thanks, Joe.
You're welcome. Dave?
Over here.
Thank you.
Hi, thanks. On Texas STAR+PLUS. First of all, is $1.5 billion about the right revenue number? Secondly, you and Pam both talked through changes to the procurement process. You also mentioned that it could be delayed. If the Texas STAR+PLUS does go forward on the expected timeframe, on the current timeframe, do you feel like that procurement process is kind of fully reformed and baked and ready for that? I got one more.
Pam, you want to take that one? Do you have your mic on?
On STAR+PLUS, as you know, Governor Abbott, due to the CHIP contract, is really redoing everything within the state agency to make sure that they've got the right people and the right training, and that they score things appropriately, don't have spreadsheet errors like they had before. That may delay what's going on with STAR+PLUS on the announcement of that award, they have not yet formally come off the date of October 2018. It's an effective date of 01/01/2020. We feel really good about this. We're the market share leader in STAR+PLUS today. We bid statewide. We view it if we had our equal share and did get awards statewide, hypothetically, that's the $1.1 billion or so extra revenue that we could capture that Joe talked about. We really feel good about our position and our franchise on the STAR+PLUS side and the response to the RP.
One of the things that Joe did, even before my arriving, make sure that the RP team was co-located with the plan as they wrote the RP. That never had happened before. Also, I went in my second week, and read every single word, and we also brought in the third-party reviewers to look at the various drafts to make sure we are fully, completely answering those questions to the best of our ability and bringing in our impact as not just statements, but are proof points, if you will, throughout the RP along the way. We really feel good about where we are on that. As you know, STAR CHIP is now in process. It's due at the beginning of July. Award announcement is still tentative at January 2019. We're announced for a 01/01/2020 date.
Also, that may be impacted due to the changes that the Governor's made throughout the agency and the oversight and additional oversight he's bringing into the agency.
Just to clarify, you said $1.1 billion of incremental opportunity, the amount that you're defending, one and a half-ish?
Yes.
Yes.
One and a half is right.
Yep.
Okay.
Then on STAR+CHIP, if we had our equal shares statewide, if we looked to potentially bid on that would also be incremental potential revenue.
The last question, I think there's some mention, maybe some anticipation of Texas reducing the number of plans that it awards in each region. Is that consistent with your understanding, and how do you think about your competitive position, both in the six that you're currently in and the other seven, given that potential two, not more? Thanks.
We feel very good about our position.
Okay. We'll come over. We'll get to you next. Yep, right there, we'll come over here next.
Thank you, Jim. Just thinking about the contribution margin that you've laid out, 2019 versus 2020. Obviously, a step up in 2020, hoping for maybe a little bit of more color on sort of the nature of those revenues. Is that maybe related to Marketplace in 2020, or how should we think about that?
We weren't very specific except to say that if you look at a $1.5 billion-$3 billion of a pool of opportunities, we ought to be able to scrape and pull through $600 million of that. I can't tell you the $600 million is a little bit of this, a little bit of that, but the pool was seven extra regions on STAR+PLUS in Texas, a Florida Marketplace business that is near Florida levels of a year or two ago, a re-entry of Marketplace in Wisconsin and Utah, and then perhaps small incremental share gains in various of our geographies. That was the $1.5 billion-$3 billion pool, and we just assumed we could pull $600 million out of that pool.
Got it. It's helpful. Just lastly for me, just thinking longer term, do you feel like the company's at a sufficient scale right now to make any investments that you may need to make in tech capabilities or otherwise to continue to compete, just given, obviously, a lot of larger players in the space five years out, six years out? Do you feel like you really do need to scale up to continue to execute?
I think, with $15 billion of revenue, growing to $16 or $17 in two years, we've got clearly the operating leverage. The capability scale that you're referring to me, gets into high acuity populations. There is no question that whatever profit pool you follow, managing high acuity populations, chasing revenue's interesting and fun, but once you get it, these are very complex cases, multiple comorbidities, neighborhood outreach services, all types of things, behavioral, integrated with medical and pharmacy. It's complex. We are good at integrated care management in many places in our business. We're just not consistently good at it.
The fact that MMP and D-SNP do as well as they do, and the fact that we have a $2 billion LTSS business buried inside those lines of business, and we're printing mid-80s MLRs, while we may not be great at it, we're not horrible at it either. We understand our competitors and what they've built. We have our own realistic view of our own operating assets, and we are not as far behind as a lot of people think we are. I don't think it requires any aggressive M&A approach. This rent-to-own strategy that I explained a few minutes earlier, I think makes a lot of sense. It's capital light, it doesn't require equity, and you bring investing class partners, and you learn from them.
You give them the work to start, you learn over time, and when you believe you're as good at NICU as they are, you begin doing it yourself.
Thank you.
You're welcome. Terry, right up here. This gentleman right here.
Thank you. As you get out to 2020 and get more aggressive on the top line, you listed potential opportunities you could look at. How do you prioritize those, and what characteristics are you looking for in markets as you start getting to that point?
Our ability to manage and build networks if we're not there. The natural comeback to that is, well, geez, don't the big commercial players who are already there have an advantage? Yes, which is one of the reasons why we didn't go to North Carolina. There was no way we were going to be able to build an effective network fast enough with the entrenched commercial players already there. The ability to build a network, what other lines of business can you potentially leverage? A reasonably friendly, reasonable regulatory environment, a projected reasonable rate environment, you go in. That's our strategy. It's probably not different from everybody else's. By the way, competitors and incumbency. Who are the incumbents, and are they just going to win it, and you're going to be trailing them? Because I don't want to waste our time.
You can only do two or three of these at a time. That it may be a stretch. You'd better pick your spots and know you can win. I think as we look at these markets, those are generally the criteria that we think about before we go.
All right. I just want to follow up. On the political environment, if you go back 12 months, a lot of uncertainty. Now you've got Virginia expanding. How do you think about the political environment for potentially more expansion, the opportunity? Are you thinking, in general, the market's going to be pretty stable?
I think, yeah, you guys do more research and are going to be more expert at this than I am, all the chatter around different changes, to me, are incremental and marginal, that as I evaluated this opportunity, I sat back and asked myself, "Is anybody going to defund healthcare for poor people?" Whether it gets funded with a block grant or through the FMAP program, doesn't really matter that much to me. When you look at the political winds and the way they blow, there's no doubt that more high acuity is going managed. It's tremendously under-penetrated. Two-thirds of the lives are in managed care. Two-thirds of the money's not. Expansion appears to have a strong foothold. Margins are really good there, and we were fortunate to have seven of our states actually expand. Others might. The marketplace has stabilized.
It's a $350 PMPM product, and at loss ratios, we can produce something close to 70% or 75%. There's money to be made in leveraging our Medicaid network footprint. As you look at the political environment and the legislative environment, I consider all the things that are being discussed marginal, not cataclysmic, catastrophic, or game-changing. They're all marginal, and as long as you have the government affairs and the public policy team that knows how to help you navigate your business so that you're following the puck, we're going to be fine. Anything else?
Anna.
Yes, Anna.
On the ancillary benefits, and you said it's rent-to-buy kind of strategy, but other plans, and it seems like a lot of decisions are being made on integrated capabilities that are really state-of-the-art, and we've seen that with Centene and maybe even WellCare to some degree, and so on and so forth. What is your thought on how you might
Remain competitive while you put a pause on new contract bids for 2019. As you go into 2020, try to grow contracts, and that means-
What your thoughts are on building that out.e
I think the rent-to-own strategy is practical and realistic. It's where we are in our maturity. If we don't have the capital base to buy these things aggressively, then rent-to-own is fine. Your question's an interesting one. Rent-to-own, because you don't own it, doesn't mean it can't be integrated. We've integrated, and lives before integrated outsourced resources in a comprehensive, cohesive product that can create value for members and for our state customers. I don't think it's an accurate characterization that because we don't own it, we can't have a proprietary, fully integrated product if we're outsourcing NICU as a very specialized niche that costs me $200 million a year when I'm managing billions and billions of dollars of healthcare costs with own resources. Think of it as very nichey, esoteric types of skills that why would I build a transplant unit?
We have our own transplant unit in the company, and we spend $50 million in transplants. They're very complex. Why are we doing that internally? We have a transplant doc. Clearly, we look to outsource that type of thing. Think of it as discreet, esoteric, and nichey things. We can still have a comprehensive integrated product. Kevin, and then we'll go here.
You outlined the steady improvement in margins over the next few years, and just try to build in conservatism along the way. What leaves you worried about this? If we find out that in two years you're operating at a 1.6% margin, how did that happen? What would be the biggest one, do you think? It sounds to me like you're saying they're relatively straightforward. You've got conservatism in here, where could it go wrong? What are you worried about?
Well, because you're not rate makers, you're rate takers, the rate environment is always something to, not to worry about, but to be aware of. Most of our state partners are very reasonable, actuarially sound when it comes to presenting us with rates, but you never know. To say that, well, if trends two and they give you 1.8, it doesn't matter. 20 basis points does matter when your margins are 2%. I would say the rate environment, if the economy's still good, if state coffers are still generating revenues, they will fund their Medicaid programs adequately. That's always a watch-out. I think trying to do too much too soon is another risk, and we're very disciplined about picking our spots and doing things that create value very quickly.
Actually, other than our own ability to execute what we said we were going to execute, there's very few sort of exogenous factors that I think cause you to think differently about our achievement in this plan. I would say rates would definitely be one, and trying to boil the ocean would be the next. My job is to make sure the team stays focused, disciplined, has the right resources, and we pick our priorities the right way. There's another hand went up somewhere here. Right here up in front.
I think in one of the slides, you had said if you hit 60% of your goal for cost reductions or expense management, et cetera, you will get to that projection. You still have a 40%-
upside in those numbers. Is that the right conclusion, or am I too optimistic, or what?
Your statement is mathematically correct, that we've harvested 60% of that opportunity in the first two years.
Okay.
40% of it is still there. It doesn't mean we won't get it, but as I said before, whenever you're going after these opportunities, you're never going to achieve it the way you thought. Something that you thought would work doesn't, and something that you thought would create $20 million of value is going to create $40 million. I think we are being appropriately cautious and conservative. If you remember the charts, even on top of that, we put in $150 million.
Right
Of conservatism for things that just happen in managed care. Getting a bad rate somewhere, having a medical cost trend reflect on you when you didn't expect it. Cautious, conservative, prudent, put whatever words around it that you'd like, but measured is probably the best way to approach it.
There is quite a bit of room. That's without the revenue improvement. That's without the capital managing it.
I'm sorry?
Managing the capital.
Capital.
Yes.
The capital, the clearest line.
Performance on top of it.
Yeah. The clearest line of sight that you have to anything, which is totally in our control, unless if the capital markets do something crazy that we don't expect, is we've got $800 million of excess capital.
Okay.
If we hit the plan, we're going to produce another $600 million. I got a drawn revolver, a bridge facility that I may not need, expensive debt that's growing in value every day. Those are facts. It's not conjecture. It's not projection. Those are facts. To me, the easiest one that I personally get my arms around that has very little execution risk is getting the capital structure back in order.
Okay. I don't want to look backward, could you go through just the key elements why Florida was lost?
Sure.
What was it really that caused this big
Sure.
Thanks.
Well, if you read our protest, we're never sure exactly, I don't want to talk about it too much, how the evaluation process affected us, but you can read the protest and see what everybody wrote. I'll leave that one alone. Our proposal was not responsive to what the state was looking for. It just wasn't a well-written proposal. I can make up other things, but that's essentially it. We did not put our best foot forward. Our performance in Florida has been good. I wouldn't call it stellar. There is no way, in my opinion, that a company that was performing where we were performing in Florida could have scored that badly. When you read the proposal, you kind of put two and two together and say that was the issue.
Let's be pessimistic on this regard. If your appeal does not work, et cetera, what can you salvage the operation there? If there's salvage, can you sell it? Can you do something with it? What do you want to do?
When you lose-
In Florida.
In Florida. When you lose a contract, you either run it off. There are other businesses we have in Florida and in New Mexico. We're in the marketplace in both places. We could stay. We're evaluating that. You either run it off or you try to transfer it to an incumbent. I can't talk specifically, but those are the two avenues you have, and we're exploring both. Justin?
Thanks. Just a couple more questions on the exchanges, Joe. One, in your 2019 guidance, that revenue number that you put out there, what do you assume exchanges do on the revenue side year-over-year that's kind of built into that? Is that the net total revenue you want?
In 2000 and-
'19
2019. Other than rates, the only revenue increases we put in for 2019 were full year Mississippi Medicaid, full year Idaho D-SNP, Washington behavioral carve in, Washington RX carve out. That was it. We didn't put in Marketplace Utah, Marketplace Wisconsin, or we're going to try to double our membership somewhere in the marketplace.
You don't have a decline in the area?
We don't have a decline.
Okay.
Correct.
Memberships just stable.
Correct
They just do whatever they do.
Correct.
In terms of the margin improvement trajectory, I know you said you did to about a 4.6% margin for 2018. Is that the margin you're assuming is kind of the right run rate going forward, or does that margin go higher as overall margin?
I would say we're obviously still fussing with our rates going into next year. I would say that 4%-5% pre-tax range is a good way to think about the business. There are places we could possibly earn more than that and places where we might earn less. I think as an overall profile of the business, because I don't want to talk about what we're filing for next year, I don't want to get into that trap. That's a good baseline profile to think about the profit potential of that business.
Okay. Just lastly, thanks for all the color on the capital. As you get to 2020, do you have a particular number in your head in terms of where your debt-to-cap is at that point, given where your capital level and how much capital you've generated and all that?
We've put in our model assumes we get it to 50% and hold it there. It could go lower, but 50% seems to be about a range that we're initially comfortable with. Obviously, we aspire to a higher debt rating. In our discussions with our partners at the rating agencies, we'll sort all that out. Right now in the model, we have a 50% debt to total cap, and we held it there.
With that number, given the cash you generate and the cash on the balance sheet, do you feasibly get there by using all the cash to pay down debt and then you're at 50% kind of coming out? Is that the way to think about it? That's the number that you're willing to kind of run at?
Yeah, exactly. By 2019, we're at optimal capital structure, and if we hit these earnings, we're going to start to throw off excess capital. I can't tell you that in this model we did anything fancy with excess capital that this is going to throw off. If you're only growing at 7% or 8% a year and you're hitting 2.5% margins, your levered ROE is 25%-30%, and you're only growing at single digit, there's more cash flow into play. I would actually say that if you remember that last page of the capital section, we were showing the long-term potential to demonstrate that once we get our margins where they need to be and we're at our optimal capital structure, it's going to throw off excess cash.
Just lastly, I'm sure you've seen a couple of your peers have done some fairly material deals.
Yes.
I know this is down the road for you. If your capital structure assumes a 50% debt-to-cap, is that your max number, or is there a higher number that you can go to do a deal, as we think about that?
I think obviously, if you go to do a deal, you push it within the constraints of your rating, then you agree to take it down over time. If we were to get back into the M&A game, we would then have to reevaluate what the capital structure looks like, how far we could push our debt to total cap. This really didn't contemplate any M&A activity. I think your admonishment's a good one. If we were to get back in the M&A game, first of all, your excess cash is spoken for. You know what you're going to do with it. You have to think about how hard you push your balance sheet to get a deal done.
Just lastly, the North Carolina, I noticed wasn't on your opportunity set. Is it just too late to build the infrastructure you need to get into that bid, given it's probably going to happen later this year, or is there some other reason why it wasn't on there?
No, I think we built out this chart for sort of 2020 and beyond, and we've already made the decision not to go. I haven't changed that decision. I think it's way too early in our recovery phase here to be distracted with a major new business development initiative. When you wake up one day and you realize that your worst fear is winning, and not losing, you shouldn't go. I just don't think this company can absorb another huge operational implementation when all the stuff we need to fix still needs to be fixed.
Thanks.
You're welcome. All right. I think that's it. Okay. I'll make just a couple of closing remarks, so you guys can have some lunch and mix with the management team. Before I do that, maybe slightly unusual for the end of an investor day, but sometimes you just need to say thank you. Joe White has been an incredible resource to this company. Our board of directors relied on him during a time of incredible change and tumult. He's been a steady hand during a time of an unsteady ship, and he's been a great help to me. I want all of you to know that he's always had the shareholders in mind as he's discharged his responsibilities. Joe, good luck in your retirement. God bless you. I'm not going to belabor the point. We have an investment thesis. We think it's sound.
There are very few opportunities in the investment world where there's a turnaround story that can turn into a robust growth story almost immediately. The inherent growth rate in the Managed Medicaid business and high-acuity populations is irrefutable. It's there. Even though we're maybe at the smaller end of the competitive set, we have enough girth, we have enough capability to participate in that growth rate once we've turned around these margins and gotten to the point we've suggested we're going to get to today. Where we're starting, I think is de-risking the execution. That's our investment thesis. Thank you for being here today. Thank you for support. We'll talk to you again at the end of the second quarter. Thank you.