Molina Healthcare Inc (MOH) — Q4 2019 Earnings Call Transcript

Good morning, and thank you for joining Molina Healthcare's fourth quarter 2019 earnings call. With me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Tom Tran. The press release announcing our fourth quarter and full year 2019 earnings was distributed yesterday after the market closed, and the release is now posted for viewing on our Investor Relations website. A replay of this call will be available shortly after the conclusion of this call through February 17. The numbers to access the replay are in the earnings release. For those who are listening to the rebroadcast of this presentation, we remind you that the remarks are made herein as of today, Tuesday, February 11, 2020, and have not been updated subsequent to the initial earnings call. In this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most direct comparable GAAP measures can be found in our fourth quarter 2019 press release. During our call, we will be making forward-looking statements, including statements relating to our growth prospects, our 2020 guidance and our long-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review our risk factors discussed in our Form 10-K annual report for 2019 filed with the SEC as well as the risk factors listed in our other reports and filings with the SEC. After the completion of our prepared remarks, we will open the call and take your questions. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Julie, and good morning. On the call today, I will provide highlights from the fourth quarter and full year 2019, discuss our growth initiatives, review our capital allocation priorities and provide our full year 2020 earnings guidance with detail on each of our three lines of business. Yesterday, we reported earnings per diluted share for the fourth quarter of $2.67, with net income of $168 million and an after-tax margin of 3.9%. I am pleased with our fourth quarter and full year results. For the full year, we met or exceeded our expectations. Premium revenue was $16.2 billion and in line with our expectations. The medical care ratio was 85.8%, as our cost containment efforts continued to control medical costs while ensuring the highest quality of care for our members. The G&A ratio was 7.7%, as we leveraged our fixed cost base while beginning to invest in growth. We improved our Medicaid and Medicare margins and earned exceptionally high margins in our Marketplace business. The 2019 total company after-tax margin of 4.4% was supported by 3.2% in Medicaid, 6.7% in Medicare and 10.3% in Marketplace. All in, this performance resulted in net income of $737 million and earnings per diluted share of $11.47. In a year when premium revenue decreased by 8% due to legacy contract losses, we were able to deliver 4.4% after-tax margins and earnings per share growth of 8%, a testament to our early-stage focus on margins. During the year, we improved an already-strong balance sheet and capital structure while the business continued to generate significant excess cash flow. In the fourth quarter, we harvested an additional $300 million of dividends from our operating subsidiaries, bringing the total for the year to $1.4 billion. As of December 2019, unrestricted cash at the parent company was $1 billion. In early December 2019, our Board authorized a share repurchase program of up to $500 million. Through February 7, under a 10b5-1 trading plan, we repurchased 1.9 million shares for $257 million. I will now comment on the progress we made in the second half of 2019 on our pivot to growth strategy. During the past few months, we announced two acquisitions: YourCare in Upstate New York and NextLevel Health in Illinois. These acquisitions of financially underperforming health plans have stable membership and revenue, but provide opportunities for margin improvement, operating leverage, and membership growth. As a result of the YourCare acquisition, we will serve approximately 46,000 Medicaid members in seven counties in Western New York with annual revenues of approximately $285 million. The purchase price is approximately $40 million. In the NextLevel transaction, we will serve over 50,000 Medicaid and LTSS members in Cook County, Illinois with annual revenue of approximately $270 million. The purchase price is approximately $50 million. We will fund these acquisitions with available cash and both are expected to close in the first half of the year, enhancing our premium revenue growth rate for 2020. In New Mexico, we have been working on a special situation, which is a discrete program building an unmet need. The Navajo Nation in New Mexico has passed legislation to create the first Native American managed care entity and further, the legislation stipulates that the Navajo Nation partner with Molina to operate the plan. Pursuant to that legislation, the business arm of the Navajo Nation will contract with us to develop a fully-capitated health care offering under the umbrella of New Mexico's traditional Medicaid program. The new entity will be designed to improve access and quality of health care for the largest Native American reservation, as there are approximately 75,000 Navajos in New Mexico who are eligible for Medicaid. The program is expected to be operational by 2021. Turning now to an update on our Medicaid RFPs. In Kentucky, we submitted a high-quality proposal in 2019 in response to the state's Medicaid RFP and were selected as one of the winning bids. In December 2019, the new administration canceled the awards and rebid the contracts. We have already submitted the updated proposal that details our capabilities and local community commitments that were originally successful and therefore, we are hopeful that we will be successful again. In Texas, the STAR+PLUS RFP awards announced in October were disappointing to us. While we believe we have an excellent track record of service in this program and submitted a high-quality proposal, we also believe the scoring process was severely flawed. Therefore, we are pursuing our administrative rights. Our team filed a detailed protest which points out a number of fundamental flaws in the scoring process. We have not been given a time line for a ruling on the protest. We believe that the effective date of the new contract would be no earlier than January 1, 2021, so we expect to operate under our existing contract for the full year 2020. These and our other growth initiatives are anchored by our capital allocation priorities: first, organic growth of our core businesses; second, inorganic growth through accretive acquisitions; and third, programmatically returning excess capital to shareholders via share repurchases. Now turning to our 2020 guidance. 2020 is the first full year in our pivot to growth strategy. It is a year in which we expect meaningful top-line revenue growth while continuing to produce attractive margins. In that context, some highlights of our guidance are as follows: we expect to grow premium revenues by 7.4% organically and 9%, assuming our announced acquisitions closed by June 30. For the total company, we expect to produce strong after-tax margins of 3.7% to 3.8%. We expect to continue to improve our performance in the Medicaid business as we benefit from a stable rate and cost trend environment. In Medicare, we expect to grow revenues and maintain our attractive margin position despite the industry-specific headwind of the reinstatement of the Health Insurer Fee. However, we now expect a decline in the Marketplace profit pool for 2020 as the extraordinary 2019 margin performance presents a challenging jump-off point into 2020, and it is clear to us now that our membership growth expectations were too optimistic relative to our pricing strategy. We have enhanced our earnings profile by a measured deployment of excess capital. And finally, as a result of all of this, for the full year 2020, we expect GAAP earnings per diluted share in the range of $11.20 to $11.70. Our premium revenue for the full year 2020 is expected to be approximately $17.4 billion, an increase of 7.4% over 2019. This growth is within the 7% to 9% guidance range we gave previously, which assumed a steady state in Texas and no acquisitions. Assuming the YourCare and Next Level acquisitions close by June 30, premium revenue would increase approximately 9% year-over-year, an 11% increase on an annualized basis. 40% of our premium growth is attributed to member volume and 60% is attributed to rate increases and mix of business. We have a strong and balanced business portfolio, which produces a solid baseline for 2020 and supports our future growth. Now I will provide some details underlying our guidance by line of business. In our Medicaid business, we expect 2020 premium revenue to grow approximately 6.4%. This reflects the annualized impact of the RFP awards that we implemented this past year, market share growth in underpenetrated markets and net rate increases. Our expected 2020 year-end membership is an increase of approximately 3% over 2019 and 6% when including the membership of our 2 acquisitions. From an earnings perspective, we expect to produce Medicaid after-tax margins in the range of 3.2% to 3.4%, a slight improvement over 2019. The rate environment is rational and our rate advocacy efforts are working well. We continue to manage medical costs effectively as our efforts in payment integrity, network management, and utilization control continue to offset stable, low single-digit medical cost trends, and we continue to improve our retention of at-risk revenue and improve our member risk scores. Our Medicare business is expected to grow premium revenues by approximately 12%, with our DSNP product growing by 20%. Recall, we filed DSNP products in 150 new counties in 2020, including entering 2 new states, Ohio and South Carolina, and gained market share in existing counties. We continue to progress toward our goal of having full penetration of our DSNP product in our Medicaid footprint. Our year-end membership in Medicare all-in is expected to be an 8% increase over 2019. From an earnings perspective in Medicare, we expect an after-tax margin in the range of 5.6% to 5.7%, including the Health Insurer Fee headwind of $22 million after-tax, which dampens margins by approximately 90 basis points. In this line of business, premium yields have kept pace with medical cost trend, we continue to effectively manage the high-acuity LTSS population, and we continue to improve on our member risk scores. In our Marketplace business, we served 274,000 members at year-end 2019 and produced exceptionally high margins. In an effort to be more competitive in our 2020 product set, we lowered our prices on average 4%. We began 2020 with approximately 350,000 Marketplace members, a 30% increase from year-end 2019, including our expanded footprint in two states, Mississippi and South Carolina. We expect Marketplace revenue growth of 9.2% in 2020 with after-tax margins in the 4.7% to 4.9% range. Our Marketplace membership and revenue growth outlook are below our initial expectations, as the investments we made in product design and pricing did not produce the level of membership we had forecasted. This was particularly true in 2 markets, Texas and Florida, which comprised most of the shortfall to our expectation. In summary, we had competitive pricing in many, but not all of our markets, and we saw fewer members move for the same price differential than we had seen in years prior. We do, however, expect membership attrition to be lower than in past years, and thus, we expect to end the year with approximately 310,000 members, a 15% increase over year-end 2019. In conclusion, after another solid year of performance in 2019, we look to 2020 and beyond with confidence. We have a deep management team, a strong product portfolio, a healthy capital structure and a value-creating approach to capital deployment. We are and we will be a pure-play government managed care business. We are going to stay close to the core. We believe that the government managed care business has very attractive growth characteristics with compelling free cash flow generation. Now I will turn the call over to Tom Tran for more detail on the financials.

Thank you, Joe, and good morning. We report fourth quarter earnings per diluted share of $2.67, net income of $168 million and an after-tax margin of 3.9% with premium revenue of $4.1 billion. Let me provide some additional detail on the quarter. My commentary will be focused on a sequential quarter comparison. The consolidated MCR for the fourth quarter of 2019 was 86% compared to 86.3% in the third quarter, primarily due to improved results in Medicaid. Prior period reserve development in the quarter was negligible. More specifically, in the Medicaid business, our MCR for the quarter improved 80 basis points sequentially to 87.3%, producing an after-tax margin of 3.6%. We continue to perform well in Medicaid. Our Medicare business continued to perform well in the quarter. The MCR for the quarter of 85.5% was stable compared to 85.6% in the third quarter of 2019, producing an after-tax margin of 5.5%. Finally, our Marketplace business continued to perform well and generally in line with seasonal expectations as we report an MCR for the quarter of 73.5% compared to 71.2% in the third quarter of 2019, producing an after-tax margin of 4.5%. Regarding influenza, costs were higher in the current quarter compared to the same quarter in the prior year, but the overall impact was not significant. The G&A ratio for the fourth quarter of 2019 increased by 40 basis points to 8% compared to 7.6% in the third quarter of 2019, due mainly to spending on sales and marketing during the open enrollment for Medicare and Marketplace. Turning to our balance sheet, cash flow and cash position for the quarter. Our reserve approach is consistent with prior quarters, and our reserve position remains strong. Days in claim payable represents 50 days of medical cost expense compared to 50 days in the third quarter of 2019 and 53 days in the fourth quarter of 2018. As of December 31, 2019, our health plans had total statutory capital and surplus of approximately $1.9 billion, which equates to approximately 350% of risk-based capital. In December, the Board of Directors authorized a share repurchase program of up to $500 million. And during the quarter, we repurchased approximately 400,000 shares for $54 million. Subsequent to the quarter, through February 7, we repurchased an additional 1.5 million shares, bringing the total number of share repurchase to 1.9 million for $257 million. Operating cash flow for 2019 was $427 million, an improvement compared to 2018, primarily due to the timing of premium receipt and government payments. Our initial full year 2020 earnings per share guidance on a GAAP basis is in a range of $11.20 to $11.70. We have not included the YourCare and NextLevel acquisitions as these transactions have not yet closed. Our guidance assumes a steady state in Texas for the full year 2020, as we believe the existing contract will run through this year. Our premium revenue for the full year 2020 is expected to be approximately $17.4 billion, which reflects a 7.4% increase over 2019. If the YourCare and NextLevel acquisitions were to close by June 30, premium revenue would increase approximately 9% year-over-year and the earnings impact for 2020 from the two acquisitions would be negligible. We expect the medical care ratio to be in a range of 86.2% to 86.4%. The increase over 2019 is primarily due to a higher Marketplace MCR in 2020. We expect our G&A ratio to improve to approximately 7.2%. This reflects revenue growth, fixed cost leverage and productivity improvements, offset somewhat by reinvestment in growth initiatives. Our effective tax rate is expected to be approximately 31%, an increase from 24% in 2019, driven by the impact of the Health Insurer Fee. We expect after-tax margins in a range of 3.7% to 3.8%, primarily due to lower Marketplace margins that Joe previously mentioned. While we do not give quarterly guidance, I do want to point out that the first quarter earnings per diluted share will be less than 25% of our full year outlook due to the impact of the leap year and the timing of our capital actions. Lastly, I would like to announce that we will be holding an Investor Day on May 28, 2020, in New York City. That concludes our prepared remarks. Operator, we are now ready to take questions.

Really just wanted to explore the Exchange business a little bit in terms of do you believe that margins will deteriorate further going forward? Or are we at the end of it here with this year coming up? And then talk about the pricing situation with competitors. How much further do you expect price competition to impact that business' growth?

Sure, Pete. We hit our price point on our Silver product, meaning we are number one or number two in about 50% of our geographies. We hit our price point in Bronze, either the number one price position or zero premium in about 75% of our geographies. So we didn't hit our price point in all geographies. And where we did hit the price point, fewer members move for the price differential than we had seen in years prior. So we didn't get the volume that we expected to get for the 4% average price decreases we put into the market. So 2020, the earnings reset. We earned $150 million, which was exceptionally high in 2019. That will be approximately $75 million in 2020. But I would say that 2019 felt more like $125 million a year and 2020 should have been more like $100 million a year. So while the spread looks wide, I think the jump-off point in 2019 was particularly challenging. I think we need to go through the pricing cycle for 2021 to see where the margins land. We still have very high hopes for this business. It leverages our Medicaid footprint, our Medicaid network. Nearly 90% of our members are fully subsidized. So we're servicing the working poor. It fits strategically. But let's go through the 2021 pricing cycle and see how we can grow the profit pool over time.

Yes. Maybe just a little bit more on the ACA, your Marketplace membership. I'm curious, in Florida and Texas, is it a dynamic of price competition being more intense than you had expected? And you also alluded to members not moving at the same price point as you saw the move in prior years. Does that reflect the maturity in the market? Or are there other factors you might attribute that to?

Matt, on the last point, it's the question of elasticity of demand. And I think where we misforecasted was the result of members moving as prices were moving up. As price increases were going into the market, members would move for $10 and $20. And I think as prices have now moderated and even declined, I think you're seeing less movement for the same price differential as the market, as you suggested, seasons and matures. As your members become more chronic and they stay with you longer, these high-acuity members are not going to move their health plan if they're using a lot of services. So I think the maturity and the seasoning of the market has something to do with it. On your first point, yes, in Texas, in certain places in Florida, we did not hit the price point that we tried to due to a competitive force. And as we reprice into 2021, we're going to look at those markets and try to capture the market share that we think we can attain.

Maybe just a follow-up on the exchanges. I mean since the membership does appear less sensitive to price changes, is that going to change how you approach pricing next year in terms of optimizing margin versus favoring enrollment growth? And also just how are you thinking about the long-term targets on margin and revenue growth that you provided at the Investor Day?

Yes. The balance you're talking about is essential in this business. It's all about determining how many members you can acquire at the price you set in the market. The positive aspect here is that while fewer members leave, it also means that more members stay with us. Last year, we experienced about 1.5% to 2% membership attrition each month. This year, we project that to be closer to 1%. As members remain with us for longer periods, they're likely to become more frequent users of healthcare services and less inclined to leave. Therefore, I would say that, as the market evolves, while fewer members will depart, this trend is beneficial for member retention.

How about the long-term guidance on exchanges? How are you thinking about that?

I think we have to go through the 2021 pricing cycle. We'll look at all of the factors in this business. We'll look at our networks. We'll look at our broker relationships and our commission structures and then, of course, product design and price point. And we still think we can grow the profit pool, albeit off a lower base. We're not reforecasting the long-term margin picture for the business, although suffice it to say, it probably will take longer to get there than we had originally forecasted.

I have a couple of quick questions about the guidance and one about the marketplace. I want to clarify if the prior year's development is included in the guidance and if it’s at a level similar to 2019, which I believe was around $0.98 in the first half of the year.

Prior year development is not included in our 2020 guidance.

Perfect. And then the Texas STAR+PLUS. Can you give us a sense of what amount of sort of revenue and net earnings would be lost if the appeal, the award doesn't go as planned? Kind of on an annualized basis just so we have a sense of what that delta would look like?

Currently, as published by the department, the new contract will take effect on September 1, 2020, resulting in a loss of four months of revenue. The Medicaid contract is valued at approximately $350 million, and we project an earnings per share impact of between $0.20 and $0.25 this year. However, it's important to note that this amount shouldn't be simply multiplied by three to estimate the full year impact, as cost adjustments won't happen quickly enough within one quarter. We will need some time to realign our cost structure and fixed costs to accurately determine the annual effect. For this year, we anticipate a drag of $0.20 to $0.25 in the latter half of the year, alongside a revenue loss of $350 million from the Medicaid contract.

Super helpful. Then just on the Marketplace. Wondering if you could comment on the MLR that's embedded in the guide?

I'm sorry, can you repeat the question?

The Marketplace MLR for '20 that's embedded in the guide?

Yes. It's approximately 74%, up from 68% in 2019.

I was hoping you could walk through your capital and balance sheet projections for the end of the year. Assuming the deals closed, did you expect the share repo that's in the guidance? Just trying to get an idea on the end of the year capital flexibility.

Sure, Justin. To summarize, in 2019, we worked on retiring costly convertible notes in our capital structure, which were becoming more expensive as our stock price increased. Over 18 months, we eliminated $1.7 billion in these notes, and now they are largely gone. As you're aware, these notes could dilute our share count, so removing them is a positive factor for our share dynamics going into next year, along with our share repurchase program, which has already seen the repurchase of 1.9 million shares. Additionally, we ended the year with $1 billion in cash at the parent company level, which represents our free and excess cash flow. We also have $900 million in undrawn debt capacity, giving us a total of $1.9 billion available to fund acquisitions, repurchase shares, and grow the business as planned.

The only thing I would add here, as Joe said, is that we expect to continue to attract dividend from our subsidiary as we continue to generate profit in 2020. So that additional dividend structure will also give us additional flexibility there to do other things.

That's helpful. Can you tell us what you expect to spend on these acquisitions? I mean, we could figure out the share repurchase number pretty easily.

Well, the tip we have under contract will be $90 million. $50 million for one, $40 million for the other. So a total of $90 million for the two acquisitions. And then we still have $250 million left in our current share repurchase authorization, but we could top that up at some point in the future.

I have a couple of quick questions related to numbers. First, could you provide an investment income assumption for 2020? Secondly, Joe, regarding your comments on taxes, I want to clarify that you mentioned it would be $0.25 dilutive for this year, but it would actually be less than that. We shouldn’t multiply $0.25 by three to estimate $0.75 because there would be some cost-cutting, so the full-year impact would be lower once the debt is financed.

I'll answer the second question first. Yes, that's correct. There would be a $0.25 impact if we lose the contracts on September 1. However, we are assessing how quickly we can reduce our cost structure. I don't have a complete annual figure, but I anticipate it will be less than three times the effect seen in 2020. Tom, what is the status of the investment income?

Sure. On the question of investment income, we love to get investment and other income. And if you look at 2019, it's $132 million. Third quarter happened to be higher than normal as we went through some restructuring of our portfolio. Typically, you would see roughly about $30 million a quarter. I would say that for 2020, you should see that number to be lower because yields have dropped significantly over this past year due to the Federal Reserve having decreased a couple of times. So I don't have the number right in front of me. So let me just follow up with you right after the call. I'll give you the exact number.

Question, I just want to ask something maybe a little more thematically. And Joe, interested in just your thoughts on just looking at the Medicaid RFP process more broadly and what transpired in 2019. It was a pretty messy year in terms of how the RFPs played out in a number of states when we think about North Carolina, Kentucky, Texas, Louisiana. Just interested if you think holistically, there's any broader takeaways around what we've seen play out in the Medicaid RFP process. I mean one could certainly look at each of these from a bit of an idiosyncratic sort of one-off dynamics in each state. But clearly, when you aggregate it together, it was just a difficult, much more difficult year for RFPs in general than we've traditionally seen.

I think that's a fair point. And the specific sites you mentioned certainly have a lot of intrigue around them in terms of how they all unfolded. We don't view it any differently than we always have. We think nonincumbents have a reasonable chance of displacing an incumbent, which means you need to protect your turf and go after the new ones hard. We still think the ground game works. You have to be in a state a year or two before an RFP has dropped in order to hold the provider relationships, the regulatory and political relationships and really get to know the landscape, and we're doing that. So while I think this year, as you mentioned, might have some idiosyncratic noise to it, we still believe that the pipeline of Nevada, Missouri, Iowa, Indiana, Tennessee, Georgia, a little further out. We'll evaluate all of those through the screens we put them through, the friendliness of the regulatory environment, reasonable rate structure, the strength of the incumbency and ability to develop a network. And we'll take our shots and go after the ones we think we can win. So long term, I don't think my view of the growth aspects of new state wins has changed even though, as you suggest, 2019 was a bit noisy.

Okay. And then just one quick guidance question. Just your thoughts on the good range for operating cash flow in 2020?

Operating cash flow can vary significantly, primarily due to the timing of government payments. While we are optimistic about achieving positive operating cash flow moving forward, fluctuations are expected each quarter as a normal aspect of our business.

Quick ones on guidance as well. Just as we think about adjusted EPS. Any difference in amortization expectations for next year? And then the share count reduction, sort of that 5% boost you're seeing. Is that share buybacks? I think it feels like it almost assumes a reauthorization of the buybacks as well.

Josh, I'll answer the second question first and then hand it over to Tom. In 2019, we were retiring the very expensive convertible notes, which, as you know, end up in your diluted share count. So about 1/3 of our share count reduction is just the spillover effect of all the convert retirement activity in 2019 hitting full run rate in 2020, and the remaining portion is the actual reduction in the share count as a result of the share repurchase program. It does not anticipate any top-up to the existing $500 million authorization.

Yes. On the intangible amortization. If you look at the table we disclosed in the earnings release, it's approximately $17 million pretax for 2019. That number is going to drop a little bit in 2020. So I expect to be roughly about $0.17 to $0.18 per share for the full year versus this year, but roughly about $0.20.

Okay. Perfect. You mentioned last quarter some specific Medicaid markets, cost pressures, and high-cost claims. There's been no indication of that in the press release. Can you provide any insight on what the potential drivers were or what you observed, or if any of that was still present this quarter?

It really wasn't. In the second and third quarter, we did note some cost pressure here and there. The one that we were most aware of and concerned with was in Ohio due to 3 things: the behavioral carve-in over a year ago; the inclusion of IMD facilities in the behavioral benefit; and then, of course, due to redetermination, the acuity mix shift. As we've often said that rate advocacy is a very important part of this business, and we and the other participants in Ohio worked with the state, got a rate increase in mid-2019 and then got a very significant rate increase for 1/1/20 going forward. So that was the one we are most concerned with, and we think that has largely been solved with our rate advocacy efforts and a nice rate increase on 1/1/2020.

Just two quick questions. One, going back on the marketplace. If you're seeing fewer members move because of pricing, is there anything beyond pricing that you can do to really differentiate the products to drive growth?

Yes. We have made some changes to the design of our dental, vision, and other ancillary benefits, many of which we are implementing for this cycle. Additionally, we are considering the competitiveness of our broker relationships and commission structure, as well as how broker loyalty can influence membership growth. We are taking all of these factors into account in our pricing cycle for 2021.

Okay, great. Going back to Kentucky, you mentioned that you resubmitted the bid. Were there any major changes in the revised RFP? Can you provide more details on the changes you made in your bid when you resubmitted?

Sure. The only changes to the RFP were two. I'll call them administrative matters, really. The questions on the capabilities did not change at all. But what we did, and I would imagine all of our competitors did, is you went back and looked at where you could absorb better and tried to shore up your RFP response, which we did. And as I said, I'm sure the competitors did as well.

So a couple of questions around the Marketplace. I guess, first, for the 2020 memberships that you mentioned, that Texas and Florida in particular were soft relative to your expectations. Is there any chance that maybe just the unfavorable headlines from Molina around your initial outcome in the Texas STAR+PLUS award may have hurt your Marketplace membership growth in Texas? And do you have any thoughts, I mean, on why you think Florida may have been soft? And then I have a follow-up after that.

No. The dynamics in Texas and the two businesses are quite separate and distinct from each other under different regulatory regimes, et cetera. So no, we do not think that the Marketplace and Medicaid business had anything to do with each other. It was competitive pricing. You do the best you can. It's a blind bid. You try to predict where your competitors are going. And as I said, I think the good news is we did hit in 50% of our Silver geographies and in 75% of our Bronze geographies. So we hit the price point in many places. We'll try to do better next year. And hopefully, the attrition rate will stick, and we'll have sticky membership and be profitable moving forward.

Okay. And then just quickly again for Marketplace. I mean you mentioned last month in January that 80% of the 350,000 members are renewals or retained, which you mentioned gave you stability and visibility on the MLR. Just to kind of explore this a little for this whole discussion around less new members for '20 leading to lower margins. I mean, is it possible that just a larger percent of your marketplace book, because it's retained members, is maybe hitting up on MLR floors in 2020 than what you expected and that is what is mechanically making the net margins come in a little lower than expected? Or is that not really what you're seeing?

In 2019, we reached the minimum Medical Loss Ratio in New Mexico and have maintained that for two years. The year 2017 was particularly challenging, and as we mentioned, 2019 performed exceptionally well. This may create some pressure regarding the new Medical Loss Ratios in a few other states, but it is not significant to the overall margin narrative. The primary focus is on the volume and pricing dynamics, which are more influential than the minimum Medical Loss Ratio.

Most of my questions have been answered. I just want to go back to Medicaid margins for next year a little bit. I think up 10 basis points is your guidance. And you had mentioned some rate increases in Ohio. So I've noted those. I guess my question is, what have you contemplated for 2020 in terms of just the redetermination environment in general, getting better, worse, staying the same? And with this Trump public charge rule now being allowed to take effect at least while it's being litigated, what are your thoughts on whether that has any impact in terms of enrollment and margins?

Gary, on the last part of your question, the public charge redetermination, the impact on 2020. We certainly took all of that into consideration. And we saw membership stabilize in the last half of the year. The quarter-over-quarter sequential membership in Medicaid has pretty much held steady. And so many of the significant redetermination efforts that were going on, on Michigan and particularly Ohio, have moderated. Certainly, the public charges, we're aware of it. 3 of our states, California, Texas and Illinois in particular have high concentrations of the populations that are subject to it. But the Department of Homeland Security only estimates that 140,000 people nationwide are really affected by it, but the chilling effect is something we're aware of and we certainly considered in our guidance. With respect to rate and profit improvement. It was not just Ohio. We actually did well on rates in many of our geographies. As I said, the rate environment is stable. It's very rational. It's actually really sound. And in just about all of our geographies, rate not only kept pace with low single-digit medical cost trend, it exceeded it in some places. So that helps margins in 2020. And also, we continue to pound away at our profit improvement initiatives. Payment integrity, utilization control, better risk scores all contribute to the profitability of both the Medicare and the Medicaid book of business. So we're pretty confident we can maintain this margin position in 2020 and perhaps beyond.

One other question regarding prior year development. Your GAAP earnings guidance is roughly flat year-over-year, factoring in nearly $1 of excess development that you're expecting not to happen again. I understand that $0.98 is higher than it has been historically over the past few years. Could you please remind us which lines of business contributed the most to that $0.98 or approximately $1, so we can consider that as we approach 2020?

Sure. Most of the favorable development that we have reported throughout 2019 were related to the Medicaid business.

Great. So I just want to go back to these changes for a few minutes. It sounds like you're saying that the delta versus your expectations on the Exchange is really about membership rather than margin. So are you saying that the margin is more or less in line with kind of what you expected when you were pricing the business last year?

No, Kevin. We anticipated the margin to be closer to our long-term guidance range. So we are definitely coming in lower. However, as we have mentioned multiple times, discussing margin or membership requires considering the overall context. Our aim is to expand the profit pool, and growing it from the $75 million base will be crucial for our earnings growth moving forward. Each year as we enter the pricing cycle, we will evaluate the competitive landscape and collaborate with our broker relationships, with the intention of increasing the profit pool over time. Whether we can return to the originally forecasted 8% after-tax margin will take some time. But as we approach the 2021 pricing cycle, we will have a clearer picture.

And is it the minimum MLR? I think you said the minimum MLR was not a big issue. So if it's not minimum MLR being a big issue in 2020 that caused the margins to drop, what is it? Just growth in lower-margin markets than you expected?

Yes, Kevin, MLR does play a factor in the lower margin in 2020, but it's not really the major factor, if you will. As Joe mentioned before, we come off the 2017 bad year, off of your 3-year rolling calculation. So 2020, we expect to have higher minimum loss, higher, I would say, the rebate and more state than just New Mexico.

But all of those factors played into the margin compression for the year. Number one, off of the higher revenue base, the operating leverage is significant. Let's not forget that. Your variable cost in sales expense is certainly there, but you're leveraging your fixed cost base. So the fact that we didn't hit revenue really, really hurt us in the operating leverage in this line of business.

I have a couple of questions regarding the acquisitions. Joe, you mentioned the relatively low margin, which presents an opportunity. I believe Tom mentioned that if they close by a certain date, they would be neutral to earnings this year. I'm curious about how much of your approach relies on that assumption. Are these acquisitions inherently financially neutral, suggesting that your operational execution could improve their performance? Or does it depend on some required operational execution? Additionally, you’ve executed your approach effectively and swiftly in the organic business; how quickly do you think you can implement it in these acquisitions?

We believe we can get these to run rate to our target margins after 1 year of operating them, whatever that year is. 12 months of operating them. And bear in mind, it's not just getting the $550 million of revenue to our target margin. I hate to keep talking about operating leverage, but it's real. These two properties in particular, 1 in Upstate New York, is basically just folded into our existing infrastructure, and same with Ohio. We have a very large Illinois health plan. We need no more management. We fold it in, and we get the operating leverage off it. So it actually produces north of your target margins because of the operating leverage you get, and we plan to get to our run rate after 12 months of ownership.

Got it. Okay. And am I right that approximate delta from where you're acquiring them to your target margins is a good 200 basis points or more?

Yes. These two properties in particular are basically breakeven.

Okay, breakeven. And then just for simplicity. To the share count question and the reduction in share count in 2020, can you give us after the retirement of the convert, after the buyback that you did in the fourth quarter, like what was the ending share count for the year as opposed to the average for the fourth quarter?

Yes. The ending share count is going to be lower than what we provided to you on the guidance table. So because as you buy shares, it's going to flow throughout a number of quarters. And the number is probably roughly about a little bit less than 61 million shares for the end of 2020.

Okay. Great. And last question, regarding attrition. Joe, you mentioned fewer movers. I'm interpreting that as movement during an open enrollment period and during shopping. Do I also understand that you're suggesting that your retention for the year is expected to be higher? And is your thought process the same for these two different periods?

Good point. Our retention during open enrollment was north of 80%. So we ended the year with 274,000 members. 80% of those are now members inside our 350,000 beginning of the year membership. We also saw this last year. And you can see it in the medical cost. You can see higher use of pharmacy, chronic conditions using expensive drugs. So the members are clearly more chronic. You see it in the risk scores. You see it in the retention rate and the open enrollment retention rate. And therefore, we are projecting that we'll only lose about 1% a month, where in the past, we've lost 1.5% to 2% a month.

For 2020 guidance in Medicaid and Medicare margins. They're both well above peer average and your long-term guidance that you gave at I-Day. But the net margin of the company is still well below the midpoint of long-term guide. So I'm wondering if the 3.8% to 4.2% is still what we should be thinking about for long-term net margin guidance for Molina as a whole? And how sustainable are the heightened Medicare and Medicaid margins that you're experiencing in '20?

Well, certainly, in Medicaid with a projection for 2020 of 3.2% to 3.4% after-tax, we believe that the Medicaid margins are sustainable. And again, all based on a reasonable, rational and actuarial rate environment. So that's the context for being able to sustain those margins and our ability to manage medical costs. On the Medicare side, bear in mind, our book is different. It's not traditional Medicare Advantage. It's DSNP and MMP. These are high acuity members, heavily burdened with LTSS benefits, and we're very good at managing those. So it's a $2.5 billion book of business with starkly different characteristics than many of the larger Medicare players. So I don't think the comparison to traditional MA is the right comparison. But we believe these margins are sustainable in this area. And yes, you're right. It's really the margin rebalance in 2020 on Marketplace that has caused us to operate at the lower end of our long-term guidance range. And as we go through our 2021 pricing cycle for Marketplace, we'll make the determination as to whether that long-term guidance still stands or not.

This is Tom. There's a question from Justin Lake on investment income before. I just want to provide you with the data. 2020, we expect investment and other revenue to be about $35 million less than 2019.

I believe most of my questions have been addressed. I have one more regarding the Marketplace environment. If your team implemented a 4% price decrease but did not achieve the expected churn, can you share what the overall churn looked like across the market, including your own? Additionally, what insights can you draw from these numbers about the market's economic sensitivity? What level of price reduction do you think may be necessary to increase churn in that segment and enhance market share? I understand there are many variables involved in this business.

Yes. There are a lot of moving pieces. And one thing I would say is that, first of all, we did retain an open enrollment, 80% of our members. So we have at least our own data point. Hard to say what the competitors saw. But we believe this is sort of a dynamic as prices have now stabilized or even moderated and decreased the $5, $10 and $20 price differential. Keep bearing in mind these are nearly fully-subsidized members. So the Marketplace, 10 million members wide. We're serving a niche. We're serving these highly subsidized members. 86% of our members have some subsidy. About half of those have a full subsidy. And the dynamics, I think, in that market might be different than the Marketplace at large. The members are high acuity, and they're using services. They're less likely to move. That's a dynamic we've always dealt with. But I think as prices have moderated, members are not leaving for the same price differential they have left for in prior years.