Good morning, welcome to Molina Healthcare's fourth quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Molina Healthcare. Please go ahead.
Good morning, and welcome to Molina Healthcare's fourth quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky, and our CFO, Mark Keim. A press release announcing our fourth quarter earnings was distributed after the market closed yesterday and is available on our investor relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that the remarks made are as of today, Thursday, February 9th, 2023, and has not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures.
A reconciliation of these measures with the most directly comparable GAAP measures for 2022 and 2023 can be found in our fourth quarter 2022 press release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2023 guidance, our projected 2024 outlook, and revenue, our recent RFP awards, recent and future RFP submissions, including those in Indiana, New Mexico, and Florida, our acquisitions and M&A activity, Medicaid redeterminations, our long-term growth strategy, and our embedded earnings power and margins. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations.
We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC, as well as the risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe.
Thank you, Joe, and good morning. Today, we will provide updates on several topics: our financial results for the fourth quarter and full year 2022, our initial 2023 revenue and earnings guidance, our growth initiatives and our strategy for sustaining profitable growth, and our outlook on premium revenue for 2024, given our new business successes in 2022. Let me start with the fourth quarter highlights. Last night, we reported fourth quarter adjusted earnings per diluted share of $4.10, representing 42% growth year-over-year. Our fourth quarter 88.3% consolidated medical care ratio, 7.5% adjusted G&A ratio, and 3.9% adjusted pre-tax margin demonstrate continued strong operating performance.
The fourth quarter completes another strong year of operating and financial performance. For the full year, we grew premium revenue by 15% to approximately $31 billion and grew adjusted earnings per share by 32% to $17.92. Our full year adjusted pre-tax margin of 4.4% was squarely in line with our long-term targets. Medicaid, our flagship business, representing approximately 80% of enterprise revenue, continues to produce very strong and predictable operating results and cash flows. For the year, we grew membership by approximately 10% and premium revenue by 21%, driven by the inception of our Nevada Medicaid contract, recently closed acquisitions, and organic growth. The rate environment is stable, and we are executing on the fundamentals of medical cost management.
The full year reported MCR of 88% is at the low end of our long-term target range and consistent with pre-pandemic levels, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high acuity Medicare niche, serving low income members, representing 12% of enterprise revenue, continues to grow organically and demonstrate strong operating performance. For the year, we grew membership by 10% and premium revenue by 13%. Membership growth was driven primarily by our low income MAPD product, which more than doubled in 2022. The full year reported MCR of 88.5% was modestly above our long-term target range, but includes approximately 300 basis points of pressure from COVID related care. In Marketplace, the smallest of our three lines of business, we repositioned the business both in terms of its size and the portfolio and metallic mix.
On a pure period basis, the business performed at roughly break even. While the financial performance did not meet our initial expectations for the year, we believe we have positioned our Marketplace business to achieve target margins in 2023. Turning now to the execution of our growth strategy for the year. The successes in 2022 were many. On the M&A front, we closed on the acquisition of Cigna's Texas Medicaid business at the beginning of the year. In the AgeWell acquisition at the beginning of the fourth quarter. In July, we announced the My Choice Wisconsin acquisition, further adding to our market-leading LTSS franchise. Our performance on Medicaid RFPs in the year was exceptional.
We renewed our contract in Mississippi, doubled the size of our California contract for 2024, and won two new contracts, first in Iowa and then Nebraska, for a 100% win rate on RFP responses submitted. In total, we project that these RFP wins for the year will add $4.4 billion in run rate premium revenue. In summary, our full year 2022 enterprise results continue to demonstrate our ability to produce excellent margins while expanding our franchise by growing premium revenue. Turning now to our 2023 guidance. You can easily see the results of the repeatable earnings pattern we have created. We build new store contract backlog and harvest the earnings as the contracts and acquisitions mature. Meanwhile, we continue to focus on the operating fundamentals and drive operational improvements, which allows us to grow the core business at attractive margins.
With regard to our 2023 guidance, we project 2023 premium revenue of $32 billion, representing a 19% compound annual growth rate since our pivot to growth in 2019. The 2022 earnings per share of $17.92 serves as a solid high margin earnings jump off point. We expect that $1 per share of prior embedded earnings will emerge into 2023 earnings. We expect to produce $1.50 per share of core growth and operational improvements. We expect all of these elements will combine to produce 2023 core earnings per share of at least $20.40, offset by $0.65 per share of one-time contract implementation costs, which results in our 2023 adjusted earnings per share guidance of at least $19.75.
The operating improvements supporting the margins in our guidance are durable. The various elements which could impact earnings, COVID, flu, RSV, any margin impacts from redeterminations, have been considered in forming our guidance. The metrics implied by guidance are squarely in line with our long-term target ranges as our guidance produces a 4.7% pre-tax margin. With a growth rate of 14% in core earnings and 10% on a reported adjusted basis, this is an attractive growth profile in a model that is repeatable. In addition to the growth within our guidance, we continue to build an earnings base for the future in the form of our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023.
The new store component of our embedded earnings, defined as earnings from achieving target margins on acquisitions and new Medicaid contract wins, is now at least $4 per share. The ongoing net effect of COVID, which at this point is the continuing earnings impact from the three remaining risk corridors, adds $2 per share of additional upside to this figure. This latent earnings growth estimate does not take into consideration any future organic growth or future strategic initiatives. Turning now to our growth strategy. We have taken major strides toward our $42 billion 2025 premium goal. At this early stage, we already have a clear line of sight to $35.5 billion in 2024. The key to our strategy is balance. A stellar record of new contract wins, Kentucky, Nevada, and now filling in the middle part of the country.
The doubling of the size of our California business, including significant expansion in Los Angeles County. Preserving and securing all of our incumbent state contracts in no large reprocurements in the near term. Continuing to build the M&A pipeline as this aspect of our strategy has already produced seven transactions for $10 billion in revenue. Not to mention organic growth, one member at a time by focusing on greater member attraction and retention, and overcoming the regulatory headwinds of redeterminations and pharmacy carve-outs. With that as the backdrop, I will now provide an update on some specific in-flight opportunities related to our long-term growth strategy.
At the end of January, the Texas Health and Human Services Commission posted a notice on its website indicating that it was issuing a notice of intent to award our Texas Health Plan a contract for all of our existing eight service areas in the state. We expect to be able to provide more of an update once these contracts have been finalized and signed. Our RFP response for the Indiana LTSS program has been submitted. It is pending evaluation in subsequent award announcement. In New Mexico, the state announced it has terminated the RFP that was in process and according to their press release, intends to issue an expedited re-procurement as soon as possible. We have many other new state business development initiatives well underway, including the potential for expanding to our former nearly statewide footprint in Florida.
Our growing Medicaid footprint still only represents half of the 41 states with managed Medicaid. With multiple new state RFP opportunities over the coming years and our demonstrated capabilities, reference ability and track record, we remain confident in our ability to win additional new state contracts. Our acquisition pipeline remains replete with actionable opportunities. While the timing of transactions remains difficult to predict, the strength of our pipeline and our track record of success gives us confidence in our ability to drive further growth from this important element of our growth strategy. In summary, we are very pleased with our business performance and the progress made in 2022 on our growth strategy, which has created a solid and growing financial profile. At least $20.40 of core earnings per share and $19.75 per share of adjusted earnings in 2023.
Current new store embedded earnings power of at least $4 per share with an additional $2 of upside if and when the few remaining COVID era corridors are eliminated, and $35.5 billion of identified premium revenue in 2024. All of this is before any impact from the continued execution of our growth initiatives. Of course, we could not accomplish all of this without our excellent management team and dedicated associates now approaching 15,000 strong, who in concert with our hallmark proprietary operating model and management process, have produced these results. To the entire team, I once again extend my deepest thanks and heartfelt appreciation. With that, I will turn the call over to Mark for some additional insight on the financials. Mark?
Thanks, Joe. Good morning, everyone. Today I will discuss some additional details on our fourth quarter and full year performance, our strong balance sheet, and our 2023 guidance. Beginning with our fourth quarter and full year results, our consolidated MCR for the fourth quarter was 88.3%, reflecting continued strong medical cost management. For the quarter, flu, RSV, and COVID related medical costs in total were largely in line with our expectations, but the impact varied by line of business, with Medicare being disproportionately impacted. Our full year consolidated MCR was 88%. This result was consistent with our expectations and was driven by the continued strong performance of our flagship Medicaid business. In Medicaid, our fourth quarter reported MCR was 87.3%. This strong performance was driven by effective medical cost management and favorable retroactive premiums.
The net effect of COVID in the quarter was a modest 30 basis points within our reported MCR. Our full year Medicaid MCR of 88% was at the low end of our long-term target range and consistent with pre-pandemic levels. In Medicare, our fourth quarter reported MCR of 91.8% was driven by higher COVID, flu, and the mix effect of our significant growth in MAPD. During the quarter, the net effect of COVID was 300 basis points within our reported MCR. Our full year Medicare MCR was 88.5%, modestly above our long-term target range, and was similarly burdened by 300 basis points of net effect of COVID. In Marketplace, our reported fourth quarter MCR was 93.8%. The MCR was impacted by normal seasonality and increased utilization in a handful of markets.
The net effect of COVID was approximately 50 basis points within our reported MCR. In the quarter, we also settled some provider balances dating to prior years, which disproportionately impacted our Marketplace MCR by approximately 300 basis points. Our full year Marketplace MCR of 87.2% exceeded our long-term target range and includes approximately 120 basis points of net effect of COVID, as well as approximately 130 basis points from the impact of a 2021 risk adjustment true-up recorded in the second quarter. Additional drivers of our strong fourth quarter and full year results include a 7.5% fourth quarter adjusted G&A ratio, which was in line with expected seasonal expenditures related to open enrollment and spending on community and charitable activities.
Our full year adjusted G&A ratio improved year-over-year to 7.1% as we remain focused on delivering fixed cost leverage as we grow, even while making the appropriate investments to sustain our growth. Fourth quarter and full year results also feature higher net investment income as expected from recent increases in interest rates. Turning now to our balance sheet. Our reserve approach remains consistent with prior quarters, and we continue to be confident in our reserve position. Days in claims payable at the end of the quarter was 47, about three days lower sequentially. The decline was driven by the increased mix of LTSS claims, which settle more quickly, resulting from the closing of the AgeWell acquisition, as well as an additional payment cycle in the quarter. Our capital foundation remains strong.
Debt at the end of the quarter was 1.8x trailing 12-month EBITDA, and our debt to total cap ratio was 44.9. On a net debt basis, net of parent company cash, these ratios fall to 1.5x and 40.7, respectively. Our leverage remains low. All bond maturities are long dated on average 8 years, and our weighted average cost of debt fixed at just 4%. In the quarter, we harvested $268 million of subsidiary dividends and repurchased approximately 590,000 of our shares. Parent company cash at the end of the quarter was $375 million. With substantial incremental debt capacity, cash on hand, and strong cash flow to the parent, we have ample dry powder to drive our organic and inorganic growth strategies.
2022 full year operating cash flow was lower compared to the prior year, primarily due to the cash settlement in 2022 of large prior year marketplace risk adjustment and Medicaid risk corridor payments. Normalizing for the timing of these payments, 2022 operating cash flow was $1.6 billion. Turning now to our 2023 guidance, beginning with membership. In Medicaid, we expect organic growth, the mid-year inception of the Iowa contract, and membership from our My Choice Wisconsin acquisition to be largely offset by the second quarter resumption of redeterminations. We expect this to result in 2023 year-end membership of approximately 4.7 million members.
In Medicare, based on our performance in the annual enrollment period, we expect to begin the year with 160,000 members and continue to grow during the year, ending 2023 with total membership of approximately 175,000 members. Our Medicare membership growth for 2023 is expected to be evenly split between our D-SNP and MAPD products. In Marketplace, based on open enrollment, we expect to begin 2023 with approximately 290,000 members, reflecting our pricing strategy to achieve target margins in this business for 2023. Accounting for a limited SEP and normal levels of attrition through the year, we expect to end 2023 with approximately 230,000 members. We continue to treat any Marketplace membership from Medicaid redeterminations as upside to these projections. Moving on to premium revenue.
Our 2023 premium revenue guidance is $32 billion, representing 4% growth from 2022. Our revenue guidance is comprised of several items. $1.2 billion for the full year impact of AgeWell and expected revenue from the My Choice Wisconsin acquisition when closed. $1 billion of organic growth in Medicaid and Medicare, and $900 million for the mid-year inception of our new Iowa contract. Several offsetting items include $600 million for the known pharmacy carve-outs, $500 million for the impact of the resumption of redeterminations beginning in April, $600 million for the lower Marketplace membership, and $300 million in 2022 pass-through revenue that we don't expect to recur in 2023. Turning to earnings guidance. We expect full year adjusted earnings to be at least $19.75 per share.
Our EPS guidance reflects the realization of approximately $1 per share of 2022 embedded earnings, consisting of the contribution from acquisitions and a portion of the net effect of COVID, partially offset by the impact of redeterminations. To this, we add $1.50 for the underlying organic growth, plus several operating levers, including our real estate reduction strategy, the full year effect of our PBM contract, and net investment income, partially offset by the negative impact of known pharmacy carve-outs. These drivers combine to deliver core earnings per share of at least $20.40. Recognizing the one-time non-recurring implementation cost in 2023 for our new contract wins that we now project to be $0.65 per share, yields our 2023 earnings per share guidance of at least $19.75. Moving on to select P&L guidance metrics.
We expect our consolidated medical care ratio to be approximately 88%, consistent with our 2022 results. We expect our adjusted G&A ratio to fall slightly to 7%, even while absorbing the impact of the one-time non-recurring implementation costs for our new contract wins. This reflects disciplined cost management and fixed cost leverage from our revenue growth. Excluding the new contract implementation costs, our adjusted G&A ratio would have improved year-over-year to 6.8%. The effective tax rate is expected to be 25.3%. Adjusted after-tax margin is expected to be 3.5%, well within our long-term target range.
Weighted average share count is expected to be 58.1 million shares, and we expect our quarterly adjusted earnings per share profile to be fairly flat over the year, with the first two quarters of the year at roughly $5 each. As Joe mentioned, our 2023 new store embedded earnings power is at least $4 per share, and it's comprised of at least $3.50 from our three recent new contract wins and $0.50 per share for AgeWell and My Choice Wisconsin acquisitions, achieving full accretion. We continue to carry approximately $2 for COVID-era risk corridors, providing additional potential upside to the at least $4 of new store growth embedded earnings. I'll now turn the call over to Joe for some concluding remarks. Joe?
Thanks, Mark. In looking back over the past five years, we pause briefly to reflect on our company's accomplishments. We won $5 billion in new Medicaid awards over the period and defended all of our existing contracts. We acquired $10 billion in profitable revenue. In short, we doubled the revenue base. We have produced industry-leading margins in our core products, averaging 4%-5% on a pre-tax basis. The top-line growth and margin expansion allowed us to grow earnings per share from a loss in 2017 to nearly $20 per share in 2023 guidance. We've ascended to Fortune 125 status, and we're promoted into the S&P 500. We have a pure-play government managed care franchise to grow and build upon. We only take this retrospective journey to express our excitement, enthusiasm, and energy for the next five years.
There are so many more opportunities to continue to grow and expand our franchise. As we say here at the company, reaching milestones is not a cause for celebration, but a cause for consternation, as reaching one merely marks the point in time to set new aspirational goals. We plan to share our view of the next five years with you at an investor day later this year. This concludes our prepared remarks. Operator, we are now ready to take questions.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Josh Raskin with Nephron Research. Please go ahead.
Hi. Thanks, and good morning. The guidance for the 2023 MLR is overall flat. I assume it would be fair to expect the marketplace MLR to be down meaningfully, but even, you know, just based on size, probably not a meaning contributor. Would it be fair to assume that the Medicaid MLR embedded in there is actually up? Maybe you could help quantify some of those absolute changes by segment, and maybe specifically how redeterminations are impacting your view of the Medicaid MLR.
Sure, Josh. That is correct. We are going to produce a consolidated medical care ratio of 88% in each of 2022 in our guidance for 2023. We get there in a slightly different way year-over-year. Obviously, with our repositioning of the marketplace business, we're projecting that, with pricing actions, with the small silver and stable strategy, we will bring that MCR down within the long-term range, at the high end of the long-term range of 78%-80%. Medicare slightly underperformed our long-term target for the year because of 300 basis points of pressure. We now project that Medicare will come into its long-term target range, perhaps in the middle of that range. Yes, because we have been outperforming our long-term guidance range in Medicaid, 80% of our revenue, we are forecasting a reversion to the mean.
Considering all the impacts of flu, RSV, COVID, any potential nuanced reaction to redetermination process, puts us in the middle of the range at 88.5%, our long-term range being 88%-89%. That's the line of business tail of the tape for MCR projection into 2023.
That's right, Joe. Josh, it's Mark. Total guidance at 88% MLR. As Joe mentioned, each of the segments I've got pretty much right in the middle of long-term guidance. Think of Marketplace, 79-80, Medicare Advantage 87.5, and Medicaid call it 88.5. For weightings, pretty similar to what we had this year, probably about 5% Marketplace, which is a little bit smaller as a portfolio, about 13% Medicare Advantage, about 82% in Medicaid. You round all that out. The only other thing I'd say is we finished full year Medicaid in 2022 at an 88.
We're obviously in our guidance staying at 88.5% roughly for Medicaid, so that's an additional 50 basis points for new stores, who knows, redetermination or just general conservatism, but that's how I'm thinking about the MLRs there.
No specific explicit redetermination, but sort of capturing it in that 50 basis points of, you know, general conservatism.
That's the way to think about it, Josh.
Perfect. Thanks.
The next question comes from A.J. Rice with Credit Suisse. Please go ahead.
Thanks. Hi, everybody. Maybe I'll just, I know it's a smaller portion, but on the public exchanges or Marketplace, your decline in enrollment, I know you've been talking about for a while that for 23 you would price for margin. Was that decline in enrollment, consistent with what you thought? It seems like as we hear from your peers and everyone, there's quite a divergence in what people are seeing. Any comment you can make on what you saw in benefits? Has this market become very sensitive to slight changes? Because some people are showing huge growth, others are not, and just trying to put that in perspective. You're saying you do not have any assumption that you'll pick up lives on the public exchanges as redeterminations play out.
Can you give us a sense of what that might look like, possibly even if you're not baking it into guidance? Do you have any view? I know there's been a lot of discussion about how those redetermined lives, when they come on the public exchanges, might affect the risk pool. I'm assuming that net net, because you don't have anything in there, you think it would be a positive for you, even if maybe they're a little sicker than your average person on the exchanges today. Anyway, just fleshing out some of the public exchange commentary.
Sure, A.J. The membership results, starting the year with 290,000 members, finishing the year with 230,000 members, will aggregate to about $1.6 billion in premium for the year. That was fully aligned with our expectations with respect to our pricing strategy. Look, we're allocators of capital, and this business has shown that due to the instability of the risk pool by the introduction of the special enrollment period and other factors, that it does have some inherent volatility. There also has been some irrational pricing over the past couple of years. Pushing the pause button and going sober, stable, and small was exactly the right approach, and the business for 2023 has landed in a good place for us to achieve our mid-single-digit margin target.
If we conclude that the risk pool has stabilized due to the lack of government movement of the risk pool rules, pricing is rational, we likely would conclude to allocate more capital to this line of business and grow it again. Mark, anything to add?
Yeah. A.J. Rice, good morning. As Joe mentioned, starting off with 290,000 members, going down, I think, to 230,000 by the end of the year, really exactly what we expected. We put 9% rate into the market this year if you look at the mix of what we got and the pricing we put into the market. With 9%, not surprised with that result at all. Now you asked about the MLRs. To the extent we pick up folks from redetermination, I'm expecting the MLRs coming over to be quite consistent with our underwriting range. Those folks will not be new to health insurance. They will not, you know, be coming in with pent-up demand. I'm expecting a pretty stable pool if they come over.
Okay. That's great. Thanks a lot.
The next question comes from Justin Lake with Wolfe Research. Please go ahead.
Thanks. Good morning. A couple questions on the numbers side. First, on Medicaid membership, can you, can you give us the membership? I know it's gonna be flat. You talked about some new growth, some acquisitions offsetting redeterminations. Can you give us those numbers in terms of what you're expecting there for each of those buckets? How should we think about redeterminations from 2023 into 2024 in your mind? On the reserves, I've heard you talk about DCP, and I saw in the release that, you know, you mentioned a bunch of payments in the quarter. I did go back and take a look at fourth quarter paid versus fourth quarter kind of reserved or, you know, medical costs last year to this year.
It didn't look like there was a significant change in paid claims as a percentage of total in the fourth quarter this year versus last year. Hoping you could just flesh that out a little bit in terms of what you were seeing there. Thanks.
Great. A bunch there, Justin. Let me start with Medicaid. We'll, we ended 2022 with about 4.7 million members. As Joe mentioned earlier, I expect to conclude 2023 with about the same. What'll go in there, the moving pieces is, redetermination, probably around 300,000 or more coming off, replaced by a number of good guys. For example, the Iowa acquisition, about 200,000 members, the My Choice acquisition, about 40,000 members, California fee for service, coming in, a bunch of offsets there. Pretty much flat over the year from a membership perspective. On the DCP you're talking about and the payments related to medical expenses.
You know, in general, when I look at DCP and I look at our reserving, our purchase the same. It's the same actuarial leadership, our same approach to development and our triangles, the same external audit review. I feel very confident about our process. What has changed is in the fourth quarter, we added AgeWell, which brought in the LTSS membership. That membership adjudicates a whole lot faster and pays a whole lot faster. We also had the extra payment cycle. When I look at the fourth quarter, we actually paid more than what I recorded in medical expense. That's driving a bunch of that DCP decline from 50- 47. Hope that helps.
Great. Thanks for the call. The next question comes from Calvin Sternick with JPMorgan. Please go ahead.
Hey, good morning. Just a quick follow-up. It sounded like you said if the marketplace was stable, you could look to grow it again next year. That just sounds a little different than some of your previous comments where you kind of said you let the membership float up and down year to year. I just wanna understand that in the context of your overall strategy. Is the growth outlook for marketplace just based on your evaluation of the market this year, and that's something that you'll look to reevaluate next year? Are you saying that you kind of wanna grow marketplace going forward?
Now, in that line of business, we are gonna look at the stability of the risk pool. Chasing a moving target with respect to the government rules around who's eligible, how many people are eligible, when they become eligible, has thrown in the past couple of years that risk pool into what we consider to be a period of instability. If that should stabilize, and now we're convinced that the pricing that's put into the market by us and the competitors is rational, I've always said we could put this business back into the growth category, allocate more capital to it and grow it, but grow it in a very responsible and measured way.
I'm not sure we're saying anything new, but right now, keep it small, silver, and stable until we conclude that we should allocate more capital to it and grow it in a very measured and responsible way. That's been our strategy all along.
Got it. I know you're not forecasting growth in the marketplace from redeterminations, but just curious if you have a sense for what the recapture rate was pre-COVID. When someone got redetermined in Medicaid, how long did they typically go uninsured before they got coverage elsewhere? I guess, how often were you able to recapture some of those members in a Molina marketplace product?
The way I would answer that is one of the reasons we haven't forecasted the capture is because the data around how it's worked in the past is pretty imprecise. I mean, we could create all the models with various scenarios. We decided not to forecast it. We have operational protocols in place with member outreach in the states that allow that through text, phone, and mail to help members reestablish eligibility. If determined that they are ineligible for Medicaid, but eligible for a highly subsidized marketplace product, we will then warm transfer them over to our distribution channels for marketplace and capture them in that manner. Because this is uncharted waters, it's never been done before. We chose not to create a model and forecast it, but consider it as upside to our membership growth.
All right, great. Thanks.
The next question comes from Scott Fidel with Stephens. Please go ahead.
Hi, thanks. good morning. I guess I'll use my question just to try to fill out a couple of the other modeling elements for 2023. just interested if you could give us your thoughts on operating cash flow, and then also investment income and interest expense for 2023.
Sure. Scott, it's Mark. When I think about operating cash flow, I focus on cash flow at the parent, because that's what restokes my firepower. I expect to take pretty meaningful dividends. I've got a few acquisitions to pay for this year, and I've got some growth organically that I need to fund. All told, as a parent, I expect to have more than half a billion by the end of the year. Interest expense, you can model going forward. You know my bonds, you know my rates. On income, that's a wild card, right? We're all guessing on that. I'm finishing 2022 with about seven and a half billion of cash and investments.
I expect to cross 2023 to end the year with about $7 billion of cash and investments, including everything at the subs. The wild card here is what kind of an interest rate to put on that, right? We've had one Fed raise already this year. If you look at the Fed funds future rates, we've got maybe one more raise coming and maybe one or two declines back half of the year. How do I think about that across the year? Not quite sure. I think you could model any place between mid and high two's on a yield basis and come out with a pretty credible interest forecast there.
Okay, thanks. Just one quick, follow-up question. Just, on the M&A side, how you're thinking about, you know, the pipeline and sort of the pacing of engagement in 2023. Obviously, you've got some significant installations of new business in flight. Interested in how you're thinking about, you know, layering in M&A as well. Thanks.
Yes, Scott. Even with the significant backlog of both integrations on in-flight acquisitions and new contract implementations in our new wins, we have continued to aggressively pursue the M&A pipeline. Nothing has really changed with respect to the appetite of, you know, single state operators, not-for-profit plans to listen to the Molina story and wanna be part of this larger enterprise where they can continue to fulfill their local mission and have access to the broad and deep capabilities and financial resources that we bring. It's a great story, and nothing has really changed there. I would say, given the size of the pipeline, and the level of activity and the maturity of some of the opportunities, we feel very confident in some announcements here in 2023.
Okay. Thank you.
The next question comes from Michael Ha with Morgan Stanley. Please go ahead.
Hi. Thank you. Just wanted to touch on the marketplace again and ask about, like, what happened in 2022. At the beginning of the year, you're expecting 79% MLR, but 2Q, I think there was a large miss, raised all your expectations to 84%. This past quarter, even excluding the 300 basis points of settling past provider balances still ended up higher than expected. Now you're at 87% to end the year. I thought pricing was more disciplined, and you went through this major recalibration of your metal peers to silver. I would have expected more MLR stability than what we saw. Could you walk us through about just, like, what happened with marketplace and why the large divergence from initial expectations?
Sure. As we said in our prepared remarks, we even with the exclusion of the one-time items, the COVID-related items, the risk adjustment true-up in the middle of the year, and in the fourth quarter, the significant settlement of some prior year provider balances, we did not meet our expectations in marketplace. The continuing MLR drag from that significant SEP membership that renewed into the current year continued to drag on the MLR. We now believe that the special enrollment period might produce this year 3,000-4,000 a month, where it was producing 20,000-25,000 a month in the height of the SEP, gives the risk pool more stability, and we'll price for it. We did not meet our expectations even while ignoring the one-time items.
This year, we feel that with the high single-digit price increase, low single-digit trend, good visibility on our re-renewal membership to make sure we get appropriate risk scores, that we're in good shape to hit mid-single digit margins in 2023.
The next question comes from Stephen Baxter with Wells Fargo. Please go ahead.
Hi, thanks. Wanted to follow up on, you know, the Medicaid MLR question. Appreciate the color on your expectations. How should we think about Medicaid MLR? I know you don't probably wanna guide it too close quarterly, but do you expect to generally operate around that, you know, 88.5% level, you know, kind of consistently throughout the year? Or is there any slope to that line, you know, that we should maybe be thinking about? Just to kind of put a bow on, you know, the question on DCP, for the AgeWell business, can you just give us a sense of what the DCPs would look like on a standalone basis? We can try to put that into context. Thanks.
I'll turn it to Mark. Yes, given the mix of the business has changed and many of the dynamics of the businesses have changed, the seasonal patterns of how MCRs emerge, has changed slightly over time. I'll turn it to Mark to give you a view of how Medicaid might perform over the quarters.
Yeah, I'm expecting pretty flat. If you look historically, we've run pretty consistently on Medicaid, certainly more so than Medicare in the marketplace. I think you can model that one pretty straight line. On the AgeWell, we'll follow up with you offline. I don't have a discrete number on that. I know what it does to my weighted average, but we can follow up with that. Thank you.
The next question comes from Nathan Rich with Goldman Sachs. Please go ahead.
Great. Thanks for the questions. You mentioned the $2 of per share of earnings power from the three remaining COVID risk corridors. What's the timeline to potentially realize these earnings? Then just more generally on state rates, you know, how do you think the process plays out for states potentially revisiting rates as redeterminations occur and potential changes to the underlying risk pools take place? You know, how do you think the states are gonna approach that? Thank you.
Sure, Nathan. We actually, consciously, separated, the two major components of our embedded earnings because one of them is, in our view, entirely controllable, harvesting the $4 of Earning our target margins on latent contracts and M&A is something we have a proven track record of doing. We separated that from the $2 of lingering COVID era corridors because eliminating them is outside our control. They were put in place during COVID. They are articulated as being related to COVID. There are three remaining, two that matter, State of Washington and Mississippi. We believe over time they will either be compressed or eliminated, but we don't control that.
With respect to rates, I would say that states, our customers and their actuaries are very at least aware of the potential for an acuity shift somewhere due to the redetermination process. The fact that they're aware of it, and if they're not, we will certainly make them aware if we experience it, leads us to believe that if there is a significant shift in acuity somewhere in the book of business, that the actuarial soundness principle will prevail, and we'll be able to have a productive conversation about that.
Nathan, just to build on that, a number of our states, we're in 19 on Medicaid now. A number of our states have told us if and when there's any impact from that redetermination, they are quite willing to reopen that to revisit it. We feel good between that commitment and our advocacy efforts that the rates will move as they need to.
Thank you.
The next question comes from Gary Taylor with Cowen. Please go ahead.
Hey, good morning, guys. Most of my questions are answered. Just two quick ones. One on the exchange membership loss given by, driven by repricing. Is there any particular state you'd point out in your footprint, or is that pretty evenly distributed, that rate increase in the enrollment decline? Just secondly, because 99% of all the incoming investor angst about Molina is around redetermination risk and potential impact on margins, et cetera. Just wondered if you could share with us any additional work you've done on low utilizers, zero utilizers, people, populations most likely to be redetermined, et cetera. I know you've shared, you know, some of that before and just anything else you might add to, you know, provide some comfort around your Medicaid MLR guide would be helpful, I think. Thanks.
Gary, I'll answer your second question first and then kick it to Mark for more detail. The analysis that we've shared with you and investors, is the same one, because we're looking at all the data, and there's so many theoretical arguments of why an acuity shift could happen. We focus on the numbers and the data. We look at members, greater than one year duration, less than one year duration. We look at the MLRs for members with less than one year duration, greater than one year duration. We look at members with 0-25% MLRs. We look at the lapse rate of membership, which hasn't gone to zero. There still is a dis-enrollment rate that occurs in the Medicaid book.
We look at all that data, and it leads us to believe that while maybe somewhere there could be a slight acuity shift, probably in the expansion book, not in the TANF book or the ABD book, but manageable and will be easy to deal with, particularly because the states are aware of it, and we believe we'll have a productive rate discussion if and when there's a shift in acuity that makes the rates actuarially unsound. Mark?
We update this analysis every quarter, and the conclusion's really not changing. Joe mentioned a couple of the data points. You know, the folks with us more than one year versus less, the folks in the 0%-25% MCR bucket. Expansion, we're seeing a little bit of an increase, but across the board, it's not much. Remember, expansion's just 30% of our total revenue. The other data point that some folks have been talking about is coordination of benefits or duplication of benefits. Do we see any increase in that population? You know, once again, not really. A little bit of expansion. Across the board, is there something here? Maybe, but it's really minimal. Again, not expecting much of an impact here to the extent it plays out.
You know, I refer back to the previous question, where I think the states are quite amenable to revisiting it. On your first question, are we fairly even distributed on our marketplace? Yeah, I don't see any real state density in any outliers of one state being, you know, disproportionately dense. We've got pretty good distribution across our 14 states here.
Thank you.
The next question comes from Steven Valiquette with Barclays. Please go ahead.
Great. Thanks. Good morning. Just a follow-up question on the exchange business. You know, you mentioned the shift from bronze to silver has been the right move. You know, the better margin profile demonstrates that. Yeah, I know you talked about this more a year ago, but just remind us again why, you know, bronze has proven to be more tricky from your point of view. You know, has that gotten better or worse currently versus a year ago? What would have to change within that just to give you comfort to re-explore bronze on a greater level? Thanks.
Steven, it's really an anomaly of the product design, not anything that we designed, but the way the product is priced from an industry perspective, where, you know, one thing I can point to that is absolute fact is for the same member in bronze and silver with the same acuity level, the same services, and therefore the same HCCs, the risk score produces less revenue in bronze than it does in silver. There are other aspects of it that make it just slightly less attractive. Mark?
Yeah. I'd say a couple of things just building on Joe's thoughts. It's a lower actuarial value product. Sometimes that attracts folks that don't think they're gonna use a product but do. The way the rules are set up, the valence on risk adjustment's a whole lot better on gold and silver than it is on bronze. Finally, just at a lower revenue load, it becomes slightly less attractive from a G&A perspective and some of our other operating ratios. You take those things all together, it's more volatile, and we just don't see the margins there.
Okay. Thanks.
The next question comes from George Hill with Deutsche Bank. Please go ahead.
Yeah.
Mr. Hill, I'm not sure. We're having some trouble hearing you. All right. Your connection may have gone down. We'll go to the next questioner, who is Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks. One quick clarification question before I jump into the real question. The $6 of embedded earnings, it wasn't 100% clear to me. Is that in addition to the $0.65 coming back, or is that $0.65 in the $3.50?
The total of $6 is $4 of new store EPS, $2 of net effect of COVID, and there's two other items in there that cancel each other out. There's the implementation costs, which are a bad guy in the current year of $0.65, but go away next year, right? There's also the remaining hit on redetermination I'm expecting in 2024, which is also $0.65. Those two cancel each other out. You're looking at four and two .
That $6 is on the current guidance. It's not on the 2040 earnings power number.
Correct.
Okay. All right. All right. I just wanted to go back one more time to the redeterminations because it's interesting 'cause on the one hand, it sounds like you thought about redeterminations as a potential MLR pressure in your Medicaid MLR guidance, which is different, I think, than how you've talked about it in the past. Throughout the call, you've kind of dismissed it as a potential pressure to MLR. Just trying to understand a little bit finer, like, you know, are you saying you've put it in, but you think it's at most 10 basis points or something like that, something kind of immaterial? Or how exactly are you thinking about, and what exactly are you including in this year's guidance?
I guess to build on that, if it is a pressure this year, would you expect that pressure to be higher or lower next year? Higher because more members are being redetermined or lower because states have more time to adjust rates? Thanks.
Kevin, I'll kick it to Mark. You know, we are not and haven't parsed, you know, all the specific trend factors that go into an MCR forecast for the Medicaid business. We have been outperforming even the low end of our range, a range which produces best-in-class industry margins. We just think it's not prudent to continue to forecast that we'll continue to outperform that range. We call it a reversion to the mean. We're forecasting an 88.5% for the Medicaid business, which is right in the middle of the range, citing medical cost pressures due to any of the items like flu, COVID, RSV, and then, of course, any pressure that might be experienced with an acuity shift, knowing that a significant acuity shift will probably be absorbed by retroactive rate increases.
Not going to parse it, but that's why we were somewhat conservative in forecasting the middle of our long-term Medicaid range rather than continuing to forecast that we'd outperform it.
That's exactly right. We finished last year at an 88 for the year. Our guidance anticipates an 88.5, and we don't attribute any specific basis points to a driver. In general, reversion to the mean, flu, RSV, number of different things we could think about in there. Don't forget, we also have some new stores coming along, Iowa, the acquisition of My Choice Wisconsin. In general, just a little bit of conservativism, reversion to the mean, not attributing any basis points specifically to redetermination. Look, we've all had the conversation enough. We're acknowledging that that's something that's potentially in there in our reversion to the mean. You also mentioned maybe what happens next year.
To the extent any of this starts to manifest, it'll largely be back-end loaded in the year just given the way redetermination is gonna play out. I think that gives all of us a lot of time to anticipate it, but just as much work with our state partners to make sure that rates and the concept of actuarial soundness anticipate the same thing.
All right. Thank you.
The next question comes from George Hill with Deutsche Bank. Please go ahead.
All right. Guys, is it working better this time around?
Yes. Thank you, sir.
Yes, we hear you.
Okay. Thank you, guys. Joe, I think you kinda just touched on this in the last answer, but my question was around the $0.65 in implementation costs in 2023. I guess, could you kind of break out the buckets that they're typically gonna fall into? Again, this was just comment on, but I assume no part of that repeats in 2024. That all goes away, and there's no part of that cost structure that's durable.
I'll answer the last part of your question first. On the costs for, obviously, for Iowa, California, and Nebraska, yes, those once spent should not repeat themselves. As I said many times, and not tongue in cheek, I hope in the future we continue to have one-time implementation costs on new contract wins. Can't have a better, a better spend than that. There are technology implementations which are fixed in nature, and then of course you need to hire the people that are gonna service these businesses in advance of the revenue stream, which is a major part of the $0.65 implementation cost. Mark?
Ray, I'll just build on that. If you think about the $0.65, the way I think about it, about a third of it is IT, sort of a fixed component, and about two-thirds of it is staffing, mostly. Highly variable, right? We have to staff up ahead of day one membership. That's the way to think about it. It obviously comes to us ahead of when we start booking revenue. I wouldn't say that it goes away specifically. What it does is it goes into the anticipated margin once we run these businesses. We've talked about $3.50 of new store embedded earnings here. That $3.50 is of course after operating costs. The reason we have $0.65 is we're not booking revenue yet.
$0.65, one-third of fixed, two-thirds variable. That's the right way to think about it.
It goes away as a one-time item, but it becomes consumed into the run rate of the new contracts, is the way to think about it.
That's helpful. Thank you.
Our last question comes from David Windley with Jefferies. Please go ahead.
Hi, good morning. Thanks for taking my question. I hope you can hear me. I have a few small ones. In your discussion around the state's willingness to revisit these rates as redetermination progresses, do you have a sense of the urgency around that? Meaning will they do that on relatively short notice, or will they want to have that discussion in the next rate cycle or after the majority of the redetermination in their state has played out?
We don't know that specifically. All we know is that they're aware of the theoretical possibility that there's an acuity shift in the book, likely could result in prospective rate changes, but also retrospective rate changes. It all has to be data driven. You know, to the point on timing, the data has to mature, the claims have to complete, the data has to be analyzed, and then reasonable people will get in a room and figure out whether a rate change is necessary. I would look at it, I don't know whether they're gonna wait until the entire redetermination process is complete, but it's gotta be data driven, so the data has to complete and it has to be verifiable, and actionable.
David, it's Mark.
Hi, there.
The fact that a number of these states have also led with this thought unprompted, to me is encouraging that we'll be somewhat proactive here.
Okay, that's interesting. Second question is, any thoughts on trends post-COVID in medical costs that are more durable and, you know, maybe distinction as to whether you're betting on that or not? Thinking about things like lower ER utilization and that type of thing.
I think the medical trends we've experienced late in the year seem to have fallen into a nice pattern of lack of volatility and understanding what COVID is actually costing, sort of like on a run rate basis. It's almost evolved into a $40 million-$50 million monthly run rate. As long as it stays stable, as long as we know where the COVID infection rate is spiking, it certainly is the inpatient costs are certainly the more costly component, and that certainly hits the Medicare book more than the Medicaid book. We have pretty good line of sight into what those services will cost us. Late in the year, it sort of settled into a nice pattern of $40 million-$50 million a month.
Lastly, Joe, appreciate your comments on your it sounds like your M&A pipeline is still very robust. Does the cost of capital change in the environment, impact cadence or, you know, appetite? Has it impacted expected valuation on the seller side?
No, not at all. you know, we obviously, you know, measure the returns against our weighted average cost of capital. obviously we're earning more on the free cash now than we were before, so there's, you know, less of a drag. No, it hasn't caused any change in momentum in terms of the appetite for counterparties in the market, to wanna speak to us and think about becoming part of the Molina enterprise.
Great. That's all I had. Thank you.
This concludes our question and answer session and Molina Healthcare's fourth quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.