Molina Healthcare Inc (MOH) — Q4 2020 Earnings Call Transcript

Good morning, and welcome to Molina Healthcare's Fourth Quarter 2020 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; our current CFO, Tom Tran, who is retiring later this month; and our current Head of Transformation and Corporate Development and CFO-elect, Mark Keim. A press release announcing our fourth quarter earnings was distributed after the market close 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 who listen to the rebroadcast of this presentation, we remind you that the remarks made herein or as of today, Thursday, February 11, 2021, 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 fourth quarter 2020 press release. During our call, we will be making Forward-Looking Statements, including, but not limited to, statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2021 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 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 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 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. Today, we will provide updates on several topics. First, we will cover enterprise-wide financial results for the fourth quarter and full-year 2020; second, we will provide initial earnings and earnings per share guidance for 2021; and lastly, we will conclude with some thoughts on our compelling strategic position and our future growth prospects. Let me start with fourth quarter highlights. Last night, we reported GAAP earnings per diluted share for the fourth quarter of $0.56 with net income of $34 million and total revenue of $5.2 billion, a revenue increase of 22% over the prior year. On a normalized basis, defined as adjusted earnings per share and excluding the net effect of COVID, our earnings per diluted share were $2.29 for the fourth quarter. This is consistent with our performance in the first three quarters of 2020, each of which produced approximately $3 per share, after adjusting for the effect of COVID. Two items significantly impacted the earnings in the fourth quarter. The first and most prominent of these items was the net effect of COVID which decreased net income in the quarter by $3.80 per share. The most significant contributor to this impact was the continuation of rate refunds already in flight and the introduction in the quarter of COVID-related retroactive rate actions in California, Michigan and Ohio. These refunds taken together more than offset the net effect of modest utilization curtailment and a high level of COVID direct cost of care. The second significant item having an impact in the quarter came from adjustments that produced a combined net benefit of $1.07 in earnings per share. The most significant of these was a net benefit from the proceeds of federal litigation which was partially offset by a charitable contribution to our foundation. In summary, we are pleased with our normalized fourth quarter performance with respect to both the continued delivery of solid earnings and the focused execution of our growth strategy. All of this was achieved while dealing with the effects of the global pandemic. Now turning to the full-year, we reported full-year 2020 GAAP earnings per diluted share of $11.23, with net income of $673 million and a 3.5% after-tax margin. We generated premium revenue of $18.3 billion, an increase of 13% over 2019, reflecting increased membership. We ended the year with four million managed care members, a 700,000 member increase year-over-year, primarily due to growth in Medicaid. Our Medicaid enrollment finished the year strong at 3.6 million members, representing growth of over 640,000 members or 22% over the prior year. This increase reflects strong organic growth of 450,000 members or 15% as the suspension of redeterminations was the major catalyst for our Medicaid membership growth in 2020. Growth of 370,000 members related to the acquisitions of YourCare, which closed on July 1st, and Passport, which closed on September 1st. This organic and inorganic growth was offset by the 180,000 member decline related to our planned exit from Puerto Rico. I will now provide additional color on our full-year normalized financial performance which better expresses the underlying strength of our business by isolating the transitory effects of COVID and adjustments. On a normalized basis, our earnings per diluted share were $12.97 for the full-year. Our normalized performance comfortably exceeded our full-year guidance of $11.20 to $11.70 per share, which was established in the absence of COVID and is therefore the most relevant comparison. With respect to medical margins, for the full-year, our MCR on a normalized basis was 85.9% compared to 85.8% in the prior year. In Medicaid and Medicare, our performance met expectations, while in marketplace, our performance is below our expectations. Our normalized G&A ratio for the year was 7.3% compared to 7.7% in 2019 reflecting disciplined cost management and the benefits of scale produced by our substantial growth. We produced a normalized after-tax margin of 3.9% despite our marketplace business underperforming. We are very pleased that while dealing with the medical cost distortions and operational complexity caused by the pandemic, we produced a normalized margin, consistent with our long-term target. Now I will comment on the item-by-item effects of COVID on our full-year 2020 results. The net effect of COVID increased pre-tax income by approximately $180 million or $2.30 per share. This result is the sum of several identifiable positive and negative factors as follows: For the full-year, the net benefit from COVID-related utilization curtailment, offset by direct care related to COVID patients was approximately $420 million on a pre-tax basis. I should note that while utilization was moderately curtailed in both the fourth quarter and the full-year, in the fourth quarter, direct COVID medical costs were higher than in any other quarter of the year. For the year, COVID-related risk-sharing corridors reduced premium revenue and earnings by approximately $555 million on a pre-tax basis. $400 million of this amount was reported in the fourth quarter as the three new COVID-related risk-sharing corridors went active and corridors already existing at the end of the third quarter remained in effect. For the year, COVID-related activities increased our G&A spend by approximately $35 million on a pre-tax basis. Without question, the effects of COVID created significant distortions to our 2020 operating metrics, but the underlying operating fundamentals and financial metrics remain strong. Turning to our 2021 guidance beginning with premium revenue, we are very pleased with the rapid activation of our growth strategy. In 2021, we project premium revenue of at least $23 billion, a 25% increase over 2020. This growth is well-balanced between a new contract win, organic growth both on acquisition benefit expansions in our existing geographies and greater penetration of our Medicare and Marketplace products into our Medicaid footprint. More specifically, our premium revenue guidance includes a full year of the acquired Magellan Complete Care businesses, which we closed on December 31st. A full year of Kentucky revenue, which commenced on September 1, 2020, a full year of revenue from the YourCare membership in upstate New York, which we assumed on July 1, 2020. Marketplace revenue growth of 25% to 30% as we begin this year with more than 500,000 members. The full-year carve-in of the pharmacy benefit in the state of Washington, which is somewhat offset by a partial year of pharmacy carve-outs in New York and California, and the revenue decrease associated with our planned exit from Puerto Rico. The impact of the Affinity acquisition is not included in our premium revenue guidance. We expect the transaction to close as early as the second quarter, so the acquisition could provide $600 million or more in additional premium revenue in 2021. Our guidance includes membership growth relating to the current public health emergency extension set to end in mid-April 2021, with a steady decline over the remainder of the year as redetermination is activated. The Biden administration has recently indicated that it is likely the public health emergency will remain in place for the entirety of the year. If so, states could continue to receive the additional 6.2% FMAP match throughout 2021, which would likewise extend the redetermination suspension requirement for the state. Although we have been adding more than 100,000 Medicaid members per quarter during the redetermination suspension in 2020, it is unclear whether this pattern would continue should the public health emergency be extended further. Therefore, we have not included in our guidance an estimate of revenue associated with additional volumes from potential public health emergency extensions. However, any extension of the public health emergency accompanied by redetermination suspension could certainly represent upside to our 2021 revenue outlook. We estimate that for every month the redetermination suspension is extended past April, it could provide additional revenue of approximately $150 million per month. Turning now to earnings guidance, given our recent and expected continued M&A activity, adjusted earnings per share have become a more relevant measure of our earnings going forward and would be the focus of our comments today. Our initial full-year 2021 adjusted earnings guidance is in the range of $12.50 to $13 per share or approximately 20% growth from 2020 adjusted earnings of $10.57 per share. The upper end of our 2021 guidance range is essentially equal to our 2020 normalized earnings per share of $12.97. Our 2021 earnings profile reflects durable and sustainable operating improvements and earnings growth which are being temporarily muted by industry-wide challenges. Specifically, our 2021 earnings guidance reflects the following positive long-term value drivers: Continued strong performance in Medicaid and Medicare, reflecting an actuarially sound base rate environment. Margin recovery and growth in our Marketplace business which we target to achieve mid-single-digit pre-tax margins for 2021 as a result of our intense focus on operational improvements and continued competitive prices and product designs; and accretion from the Magellan Complete Care businesses into our Kentucky and Passport installation. Our earnings guidance also considers the following industry-wide environmental challenges, including another net negative impact from COVID, although at a reduced level, due to the continuation of many of the risk-sharing corridors that existed in 2020 and the direct cost of COVID-related patient care, offset by the moderate utilization curtailment. And lower-than-expected Medicare risk scores, which are an industry-wide challenge that would pressure results. Our risk scores do not fully reflect the acuity of our membership as in 2020 seniors reduced their access to health care services and therefore, risk scoring is more challenging. Referencing these catalysts and challenges, we now quantify the progression from our 2020 normalized earnings of $12.97 per share to the midpoint of our 2021 adjusted earnings guidance of $12.75 per share. We expect strong core performance to contribute approximately $1.25 in adjusted earnings per share growth, emerging mostly from Marketplace as Medicaid and Medicare margins are near optimal. And accretion from our acquisitions, along with share repurchases, will positively impact adjusted earnings by approximately $1 per share. Offsetting these positive factors are two industry-wide environmental challenges that temporarily pressure earnings, specifically, we expect the net effect of COVID consisting of utilization curtailment and direct cost of care, offset by risk-sharing corridors to continue to negatively impact earnings, but in 2021 by approximately $1.50 per share. And the temporary Medicare risk score shortfall phenomenon would pressure results by approximately $1 per share. All of these items, when combined with the initial performance of recent acquisitions operating below target margins, impact our 2021 MCR by approximately 200 basis points when compared to 2020 normalized. This corresponds to a 90 basis point impact on the net income margin. Our 2021 guidance represents solid underlying earnings growth, but it is a constrained picture of the embedded earnings power of the company. The financial profile that we can develop when COVID and industry-related headwinds abate, and when our acquisitions achieve their full run rate potential will include: first, the net effect of COVID and the Medicare risk score disruption has created approximately $2.50 of adjusted earnings per share overhang. We would expect this overhang to disappear as COVID abates. Second, once we obtain our targeted margins on Magellan Complete Care and Kentucky and once Affinity is closed and synergized, we would expect to achieve additional adjusted earnings per share of at least $1.50. In short, our pro forma run rate after the natural relaxation of these temporary constraints, would produce an after-tax margin of approximately 4%, which is in line with our recent performance and produce adjusted earnings per share comfortably in the mid-teens. I will now provide a few concluding comments that frame the compelling strategic position we have created. The execution of our margin sustainability and revenue growth strategy has allowed us to create a very attractive financial profile. Despite all of the near-term distortions caused by COVID, the achievement of our 2021 guidance implies generating EBITDA of $1.2 billion with adjusted EBITDA margins in excess of 5%, producing a return on equity of nearly 40% and which is a function of our attractive margin position and disciplined deployment of growth capital; projecting contribution margin upside as we soon expect to achieve our target margins in our acquired businesses. Generating excess cash flow, which, when combined with leverage, gives us the continued ability to acquire businesses in our quarter; producing a two-year compound annual growth rate of 20%; and to summarize, that the durable earnings catalysts being sustained and as the temporary earnings challenges dissipate, our operating profile would produce mid-teens earnings per share. Despite the challenges and near-term distortions caused by the global pandemic, our confidence in the growth, earnings power and resilience of our business remains high. The inherent growth characteristics of these businesses are exceptionally strong, and we will execute in harvesting growth through winning new states, growing market share in our existing states, increasing penetration in high-acuity populations and actioning accretive acquisitions in our core business. We will continue to sustain best-in-class operating metrics and margins, drive the top line growth and remain relentlessly focused on our value-creating mission. I will note that despite the vicissitudes of the economy and the pandemic, our management team and our associates have demonstrated tenacity, determination, and an ability to deliver. We are in the right businesses with the right people at the right time. Our future is very bright. With that, I will turn the call over to Tom Tran for some additional color on the financials. Tom.

Thank you, Joe. Good morning, everyone. I’m going to discuss our balance sheet, cash flow and 2021 outlook. Operating cash flow for the full-year 2020 was $1.9 billion, reflecting the strong operating results, rose membership, and the timing of government receipts and payments. Our reserve approach remains consistent with prior quarters, and our reserve position remains strong. Days in claim payable at the end of the quarter represents 50 days of medical cost expense compared to 52 days in the third quarter of 2020 and 50 days in the fourth quarter of 2019. Prior year's reserve development in the fourth quarter of 2020 was modestly favorable and was negligible in the comparable period in 2019. We extracted $280 million of subsidiary dividends in the quarter and $635 million year-to-date. The parent company cash balance at December 31, 2020, was $644 million, a decrease from the prior quarter cash balance of approximately $1.3 billion, due primarily to the cash outlay for the Magellan Complete Care acquisition. As of December 31, 2020, our health plans had total statutory capital and surplus of approximately $2 billion, which equates to approximately 330% of risk-based capital. Through December 31, 2020, we repurchased an aggregate of approximately 760,000 shares for $159 million at an average price of approximately $208 per share. We continue to reduce our cost of capital. In November of 2020, we closed on a private offering of $650 million senior notes due November 2030 and used a portion of the proceeds to repay the $330 million senior notes. Debt at the end of the quarter is 2.1 times trailing 12-month EBITDA. Our leverage ratio is 53%. However, on a net debt basis, not considering parent company cash, the leverage ratio is 45%. Taken together, these metrics reflect a reasonably conservative leverage position. Now turning to guidance, we introduced our initial full-year 2021 adjusted earnings per share guidance range of $12.50 to $13. We expect premium revenue to exceed $23 billion, a greater than 25% increase over 2020, and total revenue is expected to exceed $24 billion. We expect the medical care ratio to be approximately 88%. The MCR increase over 2020 is primarily due to the continuing net effect of COVID, temporary Medicare risk score disruption, and higher MCR from recent acquisitions. We expect our adjusted G&A ratio to improve to approximately 7%. This reflects continued disciplined cost management, revenue growth, and fixed cost leverage. The tax rate is expected to be approximately 25.6%. And adjusted after-tax margin is expected to be approximately 3%, which is impacted by approximately 90 basis points related to the items I just mentioned, including the continuing net effect of COVID, Medicare risk scores, and initial performance of recent acquisitions operating below target margins. This concludes our prepared remarks. Operator, we are now ready to take questions.

Yes, good morning. I was hoping you could just talk a little bit about the marketplace special enrollment period. And how you expect that to impact you when you take into consideration what you have characterized this underperformance in 2020?

Sure, Matt. Our forecast for membership in the marketplace starting the year with 500,000 ending the year with just under four and a thousand and didn't contemplate the special enrollment period. We are certainly aware of it. We certainly have forecasted what it could provide. And for those 90 days, it couldn't provide anywhere from 20,000 to 30,000 additional members. We are forecasting that potentially it could provide an extra $100 million to $150 million of revenue for the year. Now in the context of our margin recovery process, it is unaffected by that. We are very comfortable with the pricing we put into the marketplace, we are very comfortable with our product designs and our benefit designs, our product positioning, and we are very comfortable in achieving our mid-single-digit pre-tax margins for the year, irrespective of any additional revenue attained to the special enrollment period.

And maybe if I may, just related to that, how much do you think the competitive environment in the marketplace impacts your efforts to get to the mid-single-digit level?

Well, it is very competitive. There are lots of new entrants, but we are very confident. And one of the reasons we are confident is the two areas of operational let down, if you will in 2020, utilization review and attainment risk scores. We have introduced operational excellence of those two operating fundamentals and our other two businesses. We are really good at it in Medicaid and really good at it in Medicare. And we were just behind in importing those skills that exist in our company to the marketplace platform. That has been corrected. And so we are very comfortable that by executing across those two fundamentals, we will get back to mid-single-digit margins.

Yes. Thank you.

Hi, good morning. A couple of questions here. Just thinking about the onetime items in 2021, just to clarify, as we think about 2022, what can we exclude from the sort of temporary onetime headwind? As we think about sort of kind of like the starting point for next year? Because it just a COVID it caused and a number of moving parts in it.

Sure. During our prepared remarks, we provided qualitative and quantitative bridging and understanding the catalysts and pressures inside our 2021 guidance, all with the goal of helping our investors understand what might be looked at as a jumping off point into 2022. So here are the puts and takes. First of all, the net effect of COVID of $1.50 per share or $110 million of pre-tax will dissipate over time as utilization comes back to normal, as the risk corridors disappear that $1.50 overhead will evaporate as the pandemic is resolved. In addition, the Medicare risk score phenomenon, last year was an interesting year. Seniors didn't access health care. And so interacting with them, getting the right codes to attain the right risk scores was a challenge, not just for us, but for many of our competitors. Next year, we will either - meaning this year, we will either attain the risk scores because they will be getting services, or if we aren’t satisfied that we can, we can include that in our bids. And last year, obviously, the bids were done far before the impact of COVID was ever known. So we are very comfortable that combined, that $2.50 overhang sort of disappears as COVID gets behind us. As we said, in addition, our acquisitions are being integrated really, really well, and we are very comfortable with the $1 of accretion that we are putting in this year's guidance, but we are also comfortable in saying that when they hit their full target margin and when Affinity is closed and hits its target margin, there is an additional $1.50 of earnings per share there. So all in, there is a good $4 of earnings per share embedded power sitting inside our 2021 guidance.

And just to follow when we think about the acquisitions, I mean, clearly, you have done multiple acquisitions in 2020. How should we think about sort of management bandwidth to continue to do acquisitions in 2021 or should we think about you kind of taking sort of a pause this year, making sure that they are all integrated getting to the target margin and then coming back to the market?

We have created the bandwidth. We have an expert M&A team that finds the properties and knows how to action them and close them. We have built a world-class integration team. The Passport integration is going really well and the early read on the Magellan integration is going really, really well. That is why we are so comfortable in affirming the accretion targets that we have given you. We have actually very fortunately laid out quite nicely on a timeline. By the time Magellan is fully integrated, we would just be closing on Affinity, perhaps by the second quarter. And so if we action one, two or who knows how many more this year and they close either late in the year or early next year, the timeline couldn't be more amenable to being very effective at integrating them and harvesting the accretion that we promised our investors.

Thank you.

Great. Thanks for the questions. I guess maybe just two on the bridge and I appreciate you guys breaking out a lot of these components, it looks like the core growth off of that 2020 baseline of $12.97 would be somewhere in the 9.5% range. I'm not sure how much of the HIF benefit would be flowing through. But obviously, that is below the long-term target of 12 to 15. Just wanted to see if you could maybe walk through some of the moving pieces here and probably more importantly, how you are thinking about the timeline to get back into that range of 12 to 15.

I want to make sure I understand your question. You are talking about the puts and takes within our 2021 guidance or beyond?

Yes. Sorry, just in 2021, it seems like if you look at the core growth that you have laid out in these slides of $1.25 on top of the kind of $12.97, obviously, that would be below the long-term targets. Just curious if you could talk through kind of getting back towards that range. And obviously, it sounds like there are some tailwinds that are not necessarily baked in yet, which I'm sure would be helpful. But I just wanted to get your thoughts on the growth you have laid out here at the core versus getting back to the long-term range.

Sure. Well, bear in mind that the core performance here is irrespective of the net effect of COVID, which is tracked in a different place as the way we have articulated this. So the $1.25 is mostly the marketplace since that was the business that underperformed last year. It was just about breakeven in 2020, and we are targeting mid-single-digit pre-tax. And if you look at the potential for $1.9 billion to $2 billion of revenue, you can start to formulate a picture of how that is a significant contributor to the $1.25 core performance tailwind into this year. There are some puts and takes there, but with Medicare and Medicaid margins where they are, we are going to grow the top line and obtain the margin position there is. But there is not a lot of margin upside in Medicare and Medicaid. So we are very comfortable with the position that we presented here from a core business perspective. Medicare and Medicaid are pretty much optimized with respect to margins. The marketplace is a first step to getting back to where we said we would be. A mid-single-digit pre-tax margin would be our target for 2021.

Now, that is super helpful. I guess just one follow-up on the bridge, the dollar you have here for acquisitions and repos, and if I remember, I think you guys had called out $0.50 to $0.75 expected from Magellan. It sounded like YourCare and maybe the Puerto Rico exit would roughly net out. So $0.40 for repo and I think fast forward would be the other swing factor. I guess, first, does that math make sense as far as trying to bridge to that dollar and then how should we think about the split between repo and Passport to make up that $0.40 balance?

Yes, you are generally in the right area. If I were to break apart the dollar, I would say that $0.75 is Magellan, which is the top end of the range that we committed to for the first full-year of ownership, $0.10 on Kentucky. It would be very close to breakeven in the first full-year of ownership, and we will drive it to peak margins after that and about $0.15 on buyback. That is how you get to the dollar.

Yes, hi thanks for taking the question. Joe, I just wanted to just follow-up to just to clarify one other thing. I apologize if I missed that. When we talk about the net effect of COVID in the $1.50, is that pulling out all the effect of COVID you have been for acquisitions? I guess the question is in your assumptions for accretion here in 2021 for something like Kentucky, are you factoring in the impact of COVID or Passport within the acquisition bucket or is it all in the COVID bucket?

We have attempted to capture all COVID impacts in the COVID line item. And just to sort of reframe how we track that, our estimate of COVID impact is the amount of medical cost suppression we believe we have observed offset by the direct cost of caring for COVID patients. And then, of course, both offset by the impact of any liabilities generated due to the retroactive rate refunds or corridors. That is how we capture it. And if it related to an acquisition is captured in the COVID line.

Great. Thanks. Just wanted to make sure that I understand, you talked a lot about redeterminations this year. But I guess in theory, it is a headwind in 2022 guidance. It is not something that you guys spiked out as something that would be contrary to that $4 of earnings power. I wasn't sure if that was included in your kind of net COVID number when you thought about 2022 or that is something that we should separately identify if it is separate, are there any other kind of factors we should take into account?

No. I mean, since we did not include any impact, if there is a positive impact from redetermination in 2021, since it is not in our guidance, we did not create a headwind in 2022. So just to be very clear, I appreciate the question, any impact from the extension beyond April of any additional membership or a slower attrition of membership is not in our revenue guidance. And any profit enjoyed by additional member months in 2021 is not in our guidance. So as I said, we are really comfortable to it, there is only upside to 2021 on the redetermination suspension.

Hey good morning Joe. I just wanted to make sure I understand what you are saying about your reverification assumptions. So when we look at, for example, the bridge between 2020 and 2021, that $1.25 of core growth, you are saying most of that is from exchanges. But if you are anticipating at this moment that you are still going to have reverifications in mid-year start to take place and some of your Medicaid enrollment rolling off, I'm presuming there is like a net negative number embedded in there. Is that the right way to think about it and I just want to make sure you are suggesting if that doesn't happen this year, whatever the embedded negative number is that comes back and can you size that for us?

Sure. It is interesting because it is all about your assumption of how fast membership roles will attrite once the states turn redetermination back on. But I would tell you, in our numbers, the way the membership flows, both in 2020 and 2021, there is actually a member month increase in 2021, just based on the timing of both acquisitions and redetermination. So no, I would say that the redetermination process is with the 100% upside to our revenue and earnings picture in the year. We just felt it wasn't prudent nor did we have any credible way of estimating how many more members we would get if the redetermination pause was extended, and then how fast would they actually roll off depending on how states plan to implement the reintroduction of the determination. So I would just say that the redetermination issue or phenomenon is upside to both our revenue and earnings guidance for the year.

Thanks, good morning. A couple of questions here. First, Joe, a lot of people at JPMorgan got the impression that the COVID headwind was going to be materially less than the $2. So I'm curious if there is something that happened between then and now to push that number up closer to $2. And then you did a great job of kind of laying out for us the 2020 components within the COVID headwind. Can you do the same for 2021 and specifically on utilization? Can you tell us where you expect COVID cost to be versus normal utilization? Thanks.

Sure, sure, so let's provide the context for 2020. Our estimate of medical cost suppression for the entire year was about $620 million. That was offset by approximately $200 million of the direct cost of COVID care for COVID patients, netting to a $420 million surplus, we hesitate to call it a benefit, a surplus due to the impact on medical costs from the COVID pandemic. And this is not an estimate, it is an actual number, recorded $565 million of rate refunds, risk-sharing quarter of liabilities in the year and that combined with additional G&A of $35 million resulted in a net $180 million cost of COVID in our company for the year, which is $2.30 a share. Juxtaposed against that, to answer now your direct question, we are forecasting a more moderate, more modest level of suppression. And the reason is both the supply and demand side of the health care economy were shutdown last year for a while. Patients were afraid to go in for services. And if they wanted them, there were many executive orders and direct mandates not to provide elective and discretionary procedures. The supply side is open for business this year, but we still think there would be a demand side softening and will result in utilization suppression of somewhere around $200 million for the year, which is one-third of the amount of suppression we experienced in 2020. We will incur direct costs of COVID care. And the net of all that is somewhere between $140 million and $150 million. Most of this, we forecast will happen in the first half of the year. Hopefully, the vaccinations in the vaccine and social distancing will cause all this to really dissipate in the later half of the year. Now against that, we are also forecasting approximately $250 million of impact from risk-sharing corridors, which nets to about $110 million, which is your $1.50 a share. So the gross numbers are a lot less dramatic, but it is still netting to $1.50 a share. One of the reasons we are very comfortable of this estimate is really we focus on the net impact. Because if utilization is higher or lower than expected, there would be some flex up and down with the risk-sharing corridors. There is actually sort of a natural hedge between the suppression and the corridors themselves. So we look at the net number, we are very comfortable with that net number. And as the pandemic goes away, we think this goes back to normal times, and there would be no impact from COVID on a going-forward basis, obviously. So I hope that helps that tail with tape. I know that was pretty detailed, but that is what's included in our $1.50 estimate for the cost of COVID for 2021.

Hi, thanks. Good morning. First question, Joe, I just wanted to just talk a little conceptually about the long-term margin target. It looks like you gave us a crosswalk back to that 4% level that you had been guiding for us, the long-term view for the last couple of years. And just interested, though, in maybe taking the other side that a bit just in terms of comfort with that sort of longer term, just when we think about the exchange margin profile, you have rebate that since your Investor Day a couple of years ago, you guys are doing more inorganic growth, acquiring lower-margin businesses. So there is sort of a consistent mix impact that will likely come from that. And then also just at some of these risk corridor programs, the states end up liking them a bit light and end up keeping them. So I just wanted to just get your thoughts on sort of framing some of those maybe longer-term headwinds against that 4% long-term target.

Sure, Scott. As we sit here in the second year of this global pandemic, we are not going to update our long-term margin guidance. We are just sort of going to go as you go, as you plow through this, start to form your views of what the landscape is looking like as you plow through it. I think that is the more prudent approach. But having said that, when you actually look at the pro forma impacts of many of these phenomenon that we consider quite temporary, you can pro forma this thing back to the high 3s or close to 4%. To the second part of your question, I actually hope that we always have a decrement sitting inside our margin for acquisitions that do not perform in their first year. That is a good decrement to have because if we can buy properties that are underperforming and with sweat equity, get them to perform, that is just another form of accretion. So the 40 basis points, this 40 basis points in our margin in 2021 in our guidance, that is literally related to the underperformance in the first year of our acquired properties both on the G&A line and on the MCR line. In the last part of your question, related to the risk corridors, look, when they were introduced in 2020, they were clearly related to pandemic. They were presented that way, they were retroactive because they had to be because they were introduced mostly after the pandemic started. As they were reintroduced for 2021, they were presented as pandemic-related. The feeling was that there could be strange effects from the pandemic additional COVID costs, the cost of the vaccine, additional suppression, and that is why they were introduced on a symmetrical basis. You are protected on the downside and the state is protected on the upside. In CMS' approval guidelines, they have clearly stipulated that when they receive these for approval, they are viewing these as being attributed to the utilization impacts related to the pandemic. So it has been pretty clear to us that they were presented as relating to pandemic. CMS is approving them on the basis of relating to the pandemic. And we believe when the pandemic dissipates that these will disappear as well and will be back to the traditional rate-setting environment where rates are set prospectively using a credible medical cost baseline and a trend off that baseline.

Hi, thanks for taking my questions. Joe, good morning. I wanted to follow on Gary's line of questioning on the redetermination. Last time around that when it was turned back on, there was kind of this realization that the risk profile or the margin on those folks redetermined off was pretty attractive, like maybe even included a lot of zero utilizers. I'm wondering if you think that is likely to happen this time around when that finally gets turned back on. And have you made that assumption in your guidance or in your estimates?

The answer to your last part of your question, Dave, is no, we haven't. But it still remains to be seen what it does to the acuity of the population. Now because we haven't introduced many more members in our forecast, so our guidance only includes 100,000 member growth in the first quarter of the year and then the attrition starts in the last three quarters of the year. But we certainly have not forecasted a continued softening of the acuity profile of our membership base. And in fact, if that in fact happens and it happens in a quarter, say, it will go back against corridors anyway. So net-net, The impact of the extension of the redetermination suspension is a net positive, on any dimension, it is a net positive to our guidance. We did not include any members past the first quarter, we rolled them off pretty quickly. As I said in my prepared remarks, if you take 500,000 members, which is sort of what we got in redetermination for every month at $300 PMPM, there is $150 million of additional revenue. What is the margin profile of that revenue, you can speculate that it is very, very good as the acuity population improves as you get more members. But we have not included any of that impact in our guidance for the year, either the membership flow or an acuity improvement that is sort of a positive jolt to our earnings and earnings per share.

Thank you, operator. When we started this transformational journey over three years ago, the work ahead moved pretty large. We knew that if we form the right team, that we could succeed, so we sought to recruit Managed Care industry veterans, battle-hardened veterans, if you will, who would know exactly what to do. Tom Tran personifies that. We developed a durable financial infrastructure that has been instrumental in our early success and which will have lasting impact. The team we built is a high-performing one, and we are very confident in their continued success. Tom's tireless energy, steady hand and good nature will certainly be missed by us all. Tom, on behalf of all of our constituents, and from me personally, thank you for your immense contribution to our success, and we wish you the best of luck and good health in your retirement. Operator, with that, we will end our call today.