Molina Healthcare Inc (MOH) — Q2 2020 Earnings Call Transcript

Good morning and welcome to Molina Healthcare's second quarter 2020 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Tom Tran. A press release announcing our second quarter earnings was distributed yesterday after the market closed and is available on our Investor Relations website. Shortly after the conclusion of the call, a replay of this call will be available for 30 days. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today Friday, July 31, 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 directly comparable GAAP measures can be found in our second quarter 2020 press release. During our call, we will be making certain forward-looking statements, including but not limited to statements regarding the COVID-19 pandemic and the economic environment, recent acquisitions, 2020 guidance, and our longer term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause 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 for the 2019 year filed with the SEC, as well as the risk factors listed in our Form 10-Q and our Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call to 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. Today, we would like to provide you with updates on a number of topics. First, we will cover the enterprise-wide financial results for the second quarter; second and relatedly, we will discuss the impacts of the COVID-19 pandemic on various aspects of our business; third, we will convey our guidance in the context of our second quarter results and this new but temporary operating environment; and fourth and lastly, we will provide a premium revenue growth outlook for 2021 which is approximately 20% as we now emerge from pivoting to growth to activating our growth phase. Let me start with specific second quarter highlights. Last night we reported earnings per diluted share for the second quarter of $4.65 with net income of $276 million. These results were supported by an MCR of 82.3%, a G&A ratio of 7.5% and an after tax margin of 6%. Our year-to-date earnings per diluted share is now $7.54 representing 66% of our full-year guidance. The COVID-19 pandemic had an impact on many aspects of our quarterly results. Some of these impacts increased earnings while others served to decrease earnings. While many of these impacts are known and estimable, others require significant judgment to estimate. Today, we will do our best to quantify the COVID impacts on our results and separate them from the underlying core earnings power of the business. In doing so, two things are clear. Our operating metrics were substantially in line with our expectations, both as reported and as adjusted for COVID impacts and both our core earnings and the growth trajectory of our business have not been disrupted by the short-term impacts of COVID. We estimate that taken together all COVID impacts on our financial results for the quarter resulted in an increase in net income in a range of $65 million to $100 million, equating to an increase in earnings per diluted share in a range of $1.10 to $1.65. Now I will provide some highlights related to our second quarter results from an enterprise perspective. Beginning with revenue, our premium revenues of $4.1 billion increased by 8% over the prior year. Relatedly, our membership increased sequentially by 151,000 members or 4% primarily in Medicaid. With respect to medical costs with an 82.3% MCR our performance was also strong, although significantly augmented by COVID impacts. Although in many cases we were required to relax our utilization management and payment integrity regimes as an accommodation to providers. We continue to effectively manage medical costs while ensuring all of our members receive high-quality care. This MCR result was impacted by two directionally different factors related to the COVID-19 pandemic. We experienced lower than expected medical costs due to COVID related utilization curtailment, a phenomenon that may or may not recur during the balance of the year and a number of our state Medicaid customers enacted retroactive rate refunds. In the quarter the lower medical costs and the retroactive rate refunds combined to reduce our reported medical care ratio by an estimated 300 to 400 basis points, which account for substantially all of the reduction in the ratio both year-over-year and sequentially. All of the COVID impacts on our second quarter results will be described in more detail in a few moments. Next, we continued to effectively manage our administrative costs through productivity gains and fixed cost leverage, producing a G&A ratio of 7.5%. This is despite spending on specific COVID related items, which temporarily increased our administrative spending. Our net investment income usually not in earnings item with significant variability was again unusually low at $18 million compared to $34 million a year ago due to the current low interest rate environment. Our line of business results were very much in line with our expectations with strong metrics in both Medicaid and Medicare, while our marketplace results were slightly lower than expected due to a higher than expected member acuity mix. Finally in the quarter, we continued to improve our capital structure. We issued $800 million of high-yield bonds used to retire short-term floating rate debt. We also upsized our revolver to $1 billion from its previous level of $500 million. These are more than mere transactions. They are the culmination of a two-year long and highly successful restructuring and optimization of our capital structure. We are now positioned with well-priced debt, nicely staggered maturities, solid credit metrics and ample dry powder to execute on M&A opportunities if and when those opportunities arise. In summary, we continued to perform well across the many fundamentals of managed care, which has been our hallmark and we are continuing to grow revenue as a result of our focus on topline growth. Now, I will provide some commentary about the effects of COVID on our second quarter results. The COVID impacts on our quarterly results include a decrease in medical costs due to COVID related utilization curtailment, offset by direct care related to COVID patients. Retroactive rate refunds to a number of our state Medicaid customers, an increase in our G&A spending on activities related to COVID and a meaningful increase to our Medicaid membership. As previously mentioned, we estimate that taken together all COVID impacts on our financial results for the quarter have produced an increase in net income in a range of approximately $65 million to $100 million, equating to an increase in earnings per diluted share in a range of $1.10 to $1.65. I will now provide more color on the most significant factors contributing to this. With respect to the COVID impacts on medical costs, early in the quarter we experienced significantly lower utilization in a variety of cost categories, categories representing approximately two thirds of our total spend with utilization levels increasing slowly as the quarter progressed. By the end of the quarter, utilization in these categories was still approximately 10% lower than we would have normally expected. The medical cost categories most impacted were elective surgeries, services in ambulatory settings, ER visits, behavioral services and wellness and preventive services. We also incurred a direct cost to care for COVID patients with just over 4100 hospitalizations and an average inpatient episode cost of over $9000 plus the cost of outpatient and other professional services. The cost per COVID episode varies widely depending on the acuity of the patient. We estimate that COVID lowered our second quarter medical costs by $190 million to $240 million. As you know, as a general matter, there are fewer elective procedures performed under the Medicaid program than is the case with commercial health insurance. Since our book of business is heavily weighted to Medicaid, the effect on us of elective procedure curtailment is therefore less pronounced. Six of our state customers enacted temporary retroactive rate refunds during the quarter, with the intent of recouping the portion of our capitated rates not spent on healthcare services due to the pandemic. In the quarter these refunds amounted to $75 million pretax and related to the states of Ohio, Illinois, California, South Carolina, Mississippi, and Washington. Some items of note. The refunds in these states took various forms ranging from simple rate adjustment to a slightly more complex risk-sharing arrangement around a target medical loss ratio, as well as supplemental payments to providers. In many of our states however, it was business as usual as we continued to operate on the pre-COVID rate structure. Our position on rate adequacy has been consistent. We do not intend, nor do we want to keep state Medicaid money that was intended to be spent on medical benefits or was not due to utilization curtailment caused by COVID. In many of our Medicaid states, there are already mechanisms in place to protect against a surplus margin as there are minimum MLRs in seven of our states and profit caps in two others. The FMAP increase and potential additional FMAP increases should significantly relieve any potential rate pressure in our states and CMS has the authority to approve or disapprove proposed rate actions that are not aligned with the definition of actuarial soundness. Once the COVID pandemic abates, we believe that the traditional process of establishing prospective actuarial sound rates based on a credible medical cost baseline and cost trend of that baseline will continue. With respect to our G&A expenses, COVID related activity increased our second quarter expenses by approximately $25 million. A variety of new operational protocols, technology implementations, and benefits for our employees, all related to the COVID pandemic were established or implemented during the quarter. In addition, we have consciously managed our headcount at above optimal levels to ensure we maintain adequate service levels, but also to be socially responsible to our dedicated staff. Medicaid membership increased sequentially by 152,000 members in the quarter, a 5% increase. Much of this was due to the suspension of redeterminations as we believe that unemployment related enrollment has not yet materially accessed managed Medicaid. It remains unclear how high the membership peak will be, how quickly it will be attained, how quickly it will fall as the economy recovers and where it will ultimately settle. We have invested in many local growth initiatives with providers in branding and awareness campaigns and in social media outreach to ensure we obtain our fair share of increased membership. We believe that post COVID Medicaid membership will stabilize at an increased level as the future natural unemployment rate will likely be higher than previously experienced. In summary, as we work through this unprecedented period, we remain focused on executing on the underlying fundamentals of our business, regardless of the short term COVID-related impacts on our reported financial results. Now I'll turn to our guidance for the full year. Our full year earnings guidance range remains at $11.20 to $11.70 per diluted share with a midpoint of $11.45. Our earnings per share EBITDA is $7.54, which means through six months we have earned 66% of our revised guidance. Given the environmental uncertainty that we expect to exist through the end of the year, we are not adjusting the range of our previously provided earnings per share guidance. We intend to adjust our full year outlook as appropriate when our third quarter results are reported. The reasons for this cautious approach have always been stated, but bear repeating. The near-term outlook for medical costs, the cost of COVID and the potential elective procedure rebound are unknown at this time. There is still potential for additional near-term rate actions or voluntary company concessions to customers, members and providers. We will fulfill our obligation to make any rebate to members, CMS or our state customers related to the statutory requirements that exist today. After doing so, if we conclude that there is still a remaining financial imbalance, we will correct that imbalance. Our membership forecast has a wide range of possible outcomes as there are numerous macroeconomic variables in play and relatedly the acuity of any potential membership increase and the cost of services are also highly variable. Furthermore, we believe that any methodology for extrapolating annual earnings estimates by quarter should be suspended in one's thinking. I would now like to turn to the progress we have made in executing our growth strategy, which is having an immediate impact and which allows us to forecast premium revenue growth of approximately 20% for 2021. We have essentially checked the box on at least one initiative across all the revenue growth dimensions outlined in our growth strategy. We have retained all of our existing Medicaid contracts, won a new state contract and executed meaningful and accretive acquisitions. With the impact of the recession, organic growth would be much better than expected. Some highlights include: based on announced re-procurement schedules, the revenue associated with our current in-force Medicaid contract should be intact through 2021, plus we have significant certainty related to 2022. The new management team has won or defended all of the re-procurements that were under its control. We assumed the YourCare membership on July 1st which will increase membership by 47,000 members in the third quarter, and should provide approximately $140 million of revenue for the remainder of 2020 and $280 million for the full year 2021. The Magellan Complete Care regulatory review process is proceeding as planned. Recall that the Federal antitrust approval is complete and the state approval processes are progressing. We hope to close the transaction by the end of the year and if we do, this acquisition will provide the previously announced $2.8 billion of revenue in 2021. For every month the closing would be delayed beyond the first of the year, that annual revenue estimate would decrease proportionately. Our Kentucky RFP win will have contracts starting on January 1, 2021. Before considering any of the potential benefits of the Passport acquisition under a conservative set of membership assignment assumptions, the contract should provide at least $850 million of revenue in 2021, with upside potential into 2022 as membership organically builds. Organic same-store membership growth, and increased product penetration in our nascent Navajo Nation project would also modestly contribute to the 2021 revenue growth rate. Finally, as previously announced, we're exiting the Medicaid business in the Commonwealth of Puerto Rico. We have reached an agreement to execute an orderly transition of our members to an on-Island competitor. The unwinding will be completed by November 1, and the impact of the transaction itself and the contract exit are not financially material. Under these assumptions, we project 2021 premium revenue of approximately $21.5 billion. We are very pleased with a 20% increase in premium revenue as we move from pivoting to growth to fully activating our top line growth strategy. Another major development in activating our growth strategy was our recently announced transaction to purchase certain Passport assets. The transaction is expected to close before the end of 2020, providing us with a well-known brand in Kentucky, a turnkey operation, and the opportunity to gain additional membership. Passport represents potential upside to our 2020 and 2021 revenue guidance. The purchase price for Passport is approximately $20 million plus contingent consideration payable in 2021, based on the level of enrollment retained above a certain threshold. A few words about the Passport transaction and its benefits. We will acquire the Passport brand name, all its operating infrastructure, and we will assume approximately 500 highly trained Kentucky-based Passport and Evolent employees. The acquisition allows us to enhance operational readiness in advance of our new contract award in Kentucky and enables continuity of care for Passport members. The acquisition allows us to avoid startup losses, inevitably associated with building a Greenfield health plan, and the early lack of scale. The acquisition allows us to compete more effectively for additional membership above what we might have ordinarily received from the standard auto-assignment process related to our own contract award. From a financial perspective, we expect to recover the purchase price from positive cash flow in less than one year, as the plan would be immediately profitable and is likely to produce membership well above what we might have achieved organically. It is also important to note that the membership revenue in earnings related to Passport could all commence and begin to impact our results on or about September 1, if the Commonwealth of Kentucky approves our joint request for an early contract novation. This would be a very positive outcome, although it would impact the year-over-year revenue growth rate calculation. As I conclude my remarks, I take a pause from discussing our operating and financial performance and instead, comment on our compassion or humanity. During this unprecedented time, our company made many significant contributions to charitable and community causes. We offered financial assistance to distressed providers, and worked with our state customers to understand where they saw human tragedies unfold and offered our financial and operational assistance. We will continue to do so. In fact, we are developing plans to deepen our social commitment to build stronger communities, one life at a time. I offer another heartfelt thank you to our management team and our 10,000 associates who are executing well while dealing with their own stresses and issues related to the pandemic and racial strife. Even when facing these challenges, our associates are inspired and motivated by the opportunity to make positive change by delivering high-quality healthcare to the disadvantaged. Our associates continue to excel and I stand in admiration of their dedication and their will to sacrifice in the face of all types of adversity. In conclusion, this was a meaningful quarter for the company. Our results met our expectations, despite the turbulence caused by the COVID pandemic. We took major steps forward in our transformation. We sustained our margins, but did right by our members and customers. We fully activated our revenue growth strategy and continued to deploy excess capital in strategic acquisitions. This level of performance provides an insightful glimpse into our very bright future. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom?

Thank you, Joe and good morning. First, I will comment on our balance sheet, cash flow, and capital. Our reserve approach remains consistent with prior quarters and reserve positions remain strong. Days in claims payable represents 52 days of medical cost expense, compared to 49 days in the first quarter of 2020, and 48 days in the second quarter of 2019. The sequential increase was driven by lower medical expense in the current quarter due to the impact of COVID. Reserved development for the first six months of 2020 was negligible compared to favorable development, which decreased our MCR by 110 basis points in the comparable period in 2019. Operating cash flow for the second quarter of 2020 was $630 million, reflecting the strong operating result and the timing of government receipts and payments. We attracted $185 million of subsidiary dividends in the quarter, which brought our parent company cash balance to $1.2 billion, giving us ample flexibility to fund our recent acquisitions and organic growth initiatives. Debt at the end of the quarter is nearly 1.6 times trolling per month EBITDA. Our leverage ratio is 60.7%. However, on a net debt basis, net of parent company cash, the leverage ratio is only 30.7%. Taken together, these metrics reflect a conservative leveraged position. Our $800 million high yield offering was priced at 4 and 3.8%, indicating that the debt markets view our credit quality at a level that should provide a path for a ratings upgrade in the near future. As of June 30, 2020, our health plans at total statutory capital and surplus of approximately $2.1 billion, which equates to approximately 350% of risk-based capital. Now turning to our 2020 guidance. Our full year's earnings guidance range is $11.20 to $11.70 per diluted share. We increased our full year 2020 total revenue outlook to approximately $18.8 billion from $18.3 billion, mainly due to a higher Medicaid enrollment through the first half of the year, as well as revenue from YourCare membership, that is effective July 1, 2020. In taking this cautious approach to providing earnings guidance for the balance of the year, we have considered a wide range of potential outcomes from the factors that Joe previously described. Now I offer some additional items of note. The low yield environment and its drag on investment income should persist in the second half. We are likely to incur additional administrative expenses for COVID related operating protocols. We are also going to incur costs associated with the launch of our new Kentucky contract and integration costs associated with the Magellan Complete Care acquisition. Lastly, as a reminder, consistent with our historical practice, previously announced acquisitions that have not yet closed are excluded from our guidance. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thanks. Good morning. First question just on how you're thinking about the progression of Medicaid membership through the year. I think you added, you said about 4% of membership in the quarter on the Medicaid side. How do you expect to end the year on Medicaid and specifically can you delineate how much of that membership you expect to carve from this lack of disenrollment? And how are you treating that going into 2021 in terms of how you think that kind of - how long that lasts, given the FMAP and the health emergency status uncertainty?

Sure, Justin this is Joe. We grew membership sequentially in Medicaid by 152,000 members at 5%. We believe with really good information that most of that was the result of the suspension of redetermination; that the unemployment surge that is likely to come to manage Medicaid has not yet occurred due to a variety of reasons, spousal coverage, COBRA and backlogs in the various states. Certainly we expect that membership to be on the books for a while. We know it will hit a peak and we also know that as the economy recovers, it will begin to decline. We do not yet, we have various forecasts of how much membership we are likely to have at the end of the year as a result of all this. But I think we're comfortable in saying that our Medicaid membership will be higher than previously forecasted as a result of COVID. However, we have not put a point estimate on that. It's still way too many variables to put a point estimate on how many members we're likely to get. I will say this, through the first three weeks of July the Medicaid membership continued to grow by about 30,000 members organically in the first three weeks of July.

That's helpful. Thanks for that. And then just last question on the exchange performance. You noted a little bit higher costs due to higher acuity, can you flesh that out a little bit for us? And then, should we assume that you were able to catch that early enough for 2021 bids? And any color you can give us in terms of how you're thinking about where you did, for margins in 2021 and that exchange business that would be helpful? Thanks.

Sure. In our marketplace business, our silver bronze mix didn't change all that much. But we did have a churn in the bronze membership we took on, so we had many new members in our bronze product. The MLR ran higher on those numbers than we had expected. It's either higher medical – if you are attracting the right risk or it's either mismanagement of your medical cost line, but if you're managing medical costs effectively, which we think we are, then the risk scores just haven't been commensurate. So we'll catch up and we'll get the risk scores in line with the acuity of the membership. But that's the reason for the small shortfall in our marketplace business for the quarter. With respect to the business, yes we projected a medical costs baseline on COVID impacted use 2019 is the medical costs baseline and then trended forward without any COVID impacts. So we believe that the rates we filed for 2021 are solid and fully contemplated all the costs related to medical services for our members, as well as the scores that we will attain.

Great, thanks. I wanted to ask about the rate environment, how should we think about the $75 million number? You characterized it as retroactive? Does that mean that there's not expected to be a go-forward impact, or is there also a go forward impact on these initiatives in your guidance?

Well, the retroactive refunds that we record in the quarter really are a reflection of exactly how the rate apparatus should work. Obviously, rates never contemplated this rather dramatic curtailment in utilization. So whether states enact refunds themselves or whether the minimum MLRs in seven of our states get triggered, the money is rightfully going back to the states because it wasn't spent on benefits for their beneficiaries. So we recorded the retroactive component, either back to in some cases back to March in some cases back to the beginning of the year. Certainly we contemplated the forward-looking aspects of those rate decreases and refunds, as we provided our very cautious outlook to the balance of the year. So the $75 million was truly the retroactive component that takes us through June 30, but we certainly contemplated the continuation of those refunds that have already been enacted, and obviously the potential for more actions to be enacted by our state customers.

Okay, that’s helpful. And then, I guess it was a little bit confusing. It sounded Joe like you were saying that MCC is in your revenue guidance for 2021. But then Tom mentioned that you don't include deals until they are closed. I just wanted to make sure I understood how the treatment of MCC in that 2021?

That's a fair point. I think I'm going to use that as the opportunity to make sure we clarify the outlook we're giving for premium revenue in 2021. First thing, I would say is, you know, our revised forecast for 2020 is $17.8 billion of premium revenue, which is a 10% increase over 2019. That's a pretty strong pivot. Now as we really activate the growth strategy, projecting a 20% growth rate off of 2020 is certainly something we're pleased with. Yes, it does contemplate the Magellan Complete Care acquisition closing on January 1. For every month it would be delayed you can proportionately reduce that. But we expect it to close at the earliest by the end of the year, but no later than the end of the first quarter. We also included the organic component of our Kentucky contract, meaning an amount of revenue in Kentucky that we estimate we would get through the normal auto assignment process. We did not include any potential benefits of additional membership that we'll get through the ownership of the Passport brand and the potential innovation of that contract early in the fall. Also, it's important to note that we've decided to exit Puerto Rico, which leaves $400 million of revenue in 2019 will not be in the 2020 rate, and of course, a modest, very modest and cautious forecast of organic growth. So that's sort of how we compiled our rather conservative outlook for 2021 and we really wanted to just begin framing the story as we really activate our growth strategy, we wanted to give a forward look, a leading indicator, an outlook of where our revenue line is headed.

That's supposed to clarify the last point. My last question here, we say for next year modest organic growth, what are you assuming as far as unemployment next year versus this year?

Yes. We have various forecasts on where, as I said, in the previous question, I was asked where the Medicaid membership will go. As I said, we're taking it week-by-week. Membership grew again in the month of July. We expect it to grow again in August and perhaps through September as that unemployment surge comes through. But it's just really hard to project. The way I would think about it is, and what I'm holding my team accountable to, we should do no worse than our market share in those markets. Hopefully, we'll gain market share on this process, but if you take our market share, that would be a good proxy for if Medicaid enrollment grows by a certain percent we should at least get our market share.

Yes, hi. I was hoping maybe you could just elaborate a little bit further on your outlook for Medicaid and the rate actions. I understand you're saying that when we get past COVID-19 you expect we'll continue to have rates set according to actuarial soundness. But, and also recognize referring to a number of states where already existing risk sharing mechanisms have kicked in, where you have exceeded or I should say, come in well under the medical budget target. But what do you have – if anything to send off at this point, and how are you doing that in terms of states under fiscal pressures? Well, you guys clearly are doing too well with this rate right here, proposals to cut and so forth.

Sure. Well, Matt, the conversations with our various state customers have been very balanced and very rational. They do understand the principle that it has the force of federal law of actuarial soundness, which in the CMS approval process they take very seriously as well. Clearly, the actions that have been taken are related to COVID. That has occupied the conversation. We clearly understand that there are other budget pressures in the states that are causing them to look at Medicaid with a very sharp pencil. But you can't recoup money in Medicaid rates to balance your budget. That violates the concept of actuarial soundness. The rates have to reflect that the services that we intend to allow members to have, and I think the rate environment will persist through all this. As I said, we'll go back to a point where on a prospective basis, we agreed to statistically credible medical cost baseline, a reasonable trend off that baseline. That has served managed Medicaid well over many, many years.

Understood. And, I realized that the timing is in different places for different states. But when would you expect to get into the most intense period of discussions over new rate proposals?

Well, as you know, our rates contract years span from January 1 to July to September. So we're always in some type of discussion with our customers about rates. As we emerge through this COVID period, we have to adjust for the effects of COVID. Are the effects of COVID going to last into the 2021 baseline? Right now, they could, but we just don't know. I wouldn't want to divulge any particular conversation we're having with states, but the discussion about how long COVID will last, and what that medical cost baseline needs to reflect is just an ongoing state-by-state discussion.

Good morning, guys. Thanks for the question and all the color today. I guess one thing I wanted to follow up on was just, Joe the $21.5 billion outlook the greater than and as it relates to Kentucky, I just wanted to get a sense of first, I guess, maybe confirm the math. I think if the state approves that you guys can keep Passport 315,000 members it would probably add another billion dollars of premium revenue on top of this outlook based on how you guys have assumed it right now. So first I want to understand if I have that right, and maybe if there's anything else you can tell us about what Kentucky said so far with respect to whether they'll allow you to keep those numbers in place.

Your math is precisely correct. We assumed through an auto assignment process that we’d likely get 140,000 members, which is why we put an estimate of $850 million into our forecast. We just didn't want to be presumptuous. We're buying the Passport operating assets and the brand name. The membership has to be assigned to us through the state approval process. But you're absolutely right. If we obtained all 350,000 members that would represent a little over $1 billion of upside to the $21.5 billion estimate that we've given you. I will say this, while we're still in the approval process, I don’t want to go into any particular conversations we've had, continuity of care is really, really important to our customers, stability of the network, continuity of the care plans, particularly for the high acuity population is really, really important to our customers. So we believe that one of the potentials for this transaction is to keep either all or many of the 350,000 members that are now in the Passport plan. That was certainly the intention that we had in mind when we bought the Passport assets. So continuity of care, is really, really important to the customer and stability of network, and if we are able to keep many of those members, those objectives will have been met.

Great, that's really helpful. And then I guess just as a follow-up on this point, it sounds like Magellan Complete Care at least inside this initial target is good for about $2.8 billion. Obviously it can move around a little depending on the close, but we can use that and back into I think that that level of organic growth you spoke to and framed as conservative, I think it's about 5%, correct me if I'm wrong, but how do you think about that 5%? I mean, what is the potential for upside there? And how conservative do you think that is? Maybe talk about where it comes from Medicaid, Medicare, et cetera?

We continue to believe that we'll grow our marketplace product. Our DSNP product is doing really, really well. We clearly have plans to grow market share, as I outlined at our Investor Day over a year ago, putting in the operational protocols to make sure that we have less leakage on redetermination than we've had in the past, and that through additional branding and awareness campaigns at the local level, we attract more membership through the voluntary process. Improving our risk scores and our quality scores I should say, to move up higher in the auto assignment algorithms. So we have plans to grow organically. I would call it small bolt-on acquisitions as good as organic, particularly at the prices we're paying. So, I'd stay at the cautious and conservative estimate, and that's the way I would think about it.

Yes, hi, good morning. A question on Magellan and Passport. Magellan is in the guidance, Passport is not, what's the rationale for that?

The rationale is, we did not feel it appropriate. We want to be deferential to our regulatory customer in the state of Kentucky. We're buying the Passport brand and the assets, but the membership actually needs to be assigned to us. If we get more than 140,000, we projected we get about 140,000 in an auto-assignment process, which I think is a reasonable estimate. But we do not want to be presumptuous that we would get all or most of the 350,000 and we're trying to be deferential to the regulatory approval process. The Magellan acquisition still needs regulatory approval. Once it's approved and we take over the legal entities, we will have the membership lock, stock and barrel. That was the reason.

Okay. And then just on the bolt-on acquisition, I understand you're bullish on the opportunities there. But just going back to one of the earlier comments, so a bolt-on acquisition, I think you referred to as sort of part of organic growth. So should we assume that they are included in the guidance?

Well, it's an interesting question. I believe in a quasi-organic way, if you want to point of term, that anything done with generated cash flow is as good as organic, particularly with the prices we're paying. When you can recover the purchase price of an acquisition in the first year of positive cash flow at a purchase price of what is likely to be somewhere around 12% of premium, that's as good as organic, even though it's technically an inorganic play in the case of Passport. So to me, if you're buying bolt-on tuck-in acquisitions particularly membership migrations where you're paying per member or for the members retained, even though you're outweighing a modest amount of capital, it's just as good as organic.

Got it and then lastly, when we think about the new Medicaid members that are onboarding. How do you see stuff like that margin profile compared to existing population?

Since many of them are coming either through or staying on through the redetermination process, the way I would describe it is, those members are an average acuity of our existing population, not materially more acute, not materially less acute. Now when the unemployment surge happens, I think you might get a slightly different story, since people that need healthcare generally seek it. So you could have a slight acuity shift there, which is one of the reasons why when we gave our guidance, A, we don't know how many members we're getting and B, we don't know their level of acuity or the cost of service. So it's clearly just another factor of uncertainty for the back half of the year.

Thank you. Can you walk us through how pricing actions would have impacted the Marketplace margins ex-COVID and what long-term margins are, what your goals are for that product? And then the comment, I just wanted to clarify your comment on risk scores being off from what you expected. How much of that is really related to industry trends or challenges because of COVID in getting new members evaluated and scored versus the population that Molina holds having a difference in the health of the population? Thanks.

Sure. I'm going to answer your last question first and ask you to repeat the first one, I'm not sure I understood it. But, we clearly think this is a case where the new bronze membership we took on, we did not either have or get quickly enough the risk scores that we needed to service that population. There could be just a lag by when you get all your coding done, when you get all your interventions done, we'll catch it up. We have a very good operation when it comes to risk scoring, so was the churn in that bronze population that caused us to have risk scores that lag. It will catch up and it's not a long-term concern. I think I need for you to repeat the first part of your question, it was about medical - it was about Marketplace rates, but I didn't follow it.

Yes, so I just wanted to understand with the Marketplace margins, I mean in some of the change there was the pricing actions and some was related to COVID. So just trying to understand ex-COVID, how do you think margins would have ended up, given your pricing actions? And how do you think about your margin goals for that product, long-term?

Okay. We haven't changed our margin outlook for the product and we still have a strategy of growing the profit pool. As I've said many times, on a year-by-year basis, me and my management team will make the call on whether we ease up on margin to grow membership or whether we pull back, ease up on membership to grow margin and we'll make that decision, geography by geography with a thorough analysis of the competitive landscape. With respect to the performance of the business, the COVID pandemic utilization curtailment did not have as significant impact on Marketplace as it did on other businesses. Initially, utilization was down in late March and early April, but it bounced back very, very quickly through May and June. So, it did not have as steep an impact on Marketplace as it did on Medicare and Medicaid.

Hey guys, thanks for taking this and sorry to come back on. I guess, I just in part wanted to clarify a point I made that I think is now wrong. I hadn't factored in Puerto Rico when I looked at organic growth, and so I just wanted to walk through the math of the bridge to '21 revenue. So if you have $17.8 billion of premium revenue in '20 and $21.5 billion in '21, obviously there is a $3.7 billion increase. Magellan Complete Care good for $2.8 billion. YourCare steps up $100 million and then you've divested Puerto Rico, which is $400 million. So I'd call all of those non-organic and so M&A seems to be contributing about $2.5 billion which implies about $1.2 billion net organic, which I think is organic growth of about 6.6%, which still, is a little bit conservative. But I just wanted to say is that math right and is that kind of how you guys are thinking about it or is there anything else you'd want to steer us there?

You have the right model in your thinking. That is the model we've used, and again, it's an outlook. It's not a pinpoint estimate. We believe, not believe, we couched it as conservative. We wanted to give you and our investors a very clear indication of where the trajectory of our top line is going. We will refine this estimate as we go forward when we go through the third and fourth quarters. Who knows where our Medicaid membership will be. We could have another 150,000 members by the end of next quarter. We just don't know. So we will refine the organic aspects of this, but the inorganic aspects are pretty clear. And you're right, you have to factor in the $400 million Puerto Rico exit as an offset to some modestly calibrated organic growth.

Yes, I missed that. And I guess just lastly, when might we learn about Kentucky and whether they're going to let you keep Passport's enrollment?

Well there is - I don't want to comment on the regulatory process, but we're working through the regulatory process on the contract novation and on the process of getting approval to buy the Passport infrastructure. Open enrollment starts, I think it's mid-October. So we're hoping to have this whole thing included either by the end of the summer or early in September, but I can't predict when that will actually happen. But we're working hard on it and the earlier it can get done, the more stable that membership will be. Those members love the Passport brand. They like being in that plan. The state understands that. So I think we're all aligned in our intention to want to keep those members in the Passport brand, in the Passport care plan and in the Passport network.