Molina Healthcare Inc (MOH) — Q1 2024 Earnings Call Transcript

Good morning, and welcome to Molina Healthcare's First Quarter 2024 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our first quarter 2024 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, April 25, 2024, and have not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in the first quarter 2024 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2024 guidance, Medicaid redeterminations, our recent RFP awards and related revenue growth, our recent acquisitions and M&A activity, our long-term growth strategy, our embedded earnings power and future earnings realization, and our Medicare business performance in 2025. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Jeff, and good morning. Today, I will cover our traditional quarterly topics, our reported financial results for the first quarter, which were in line with our expectations, highlighted by $5.73 of earnings per share. An update on our guidance, which we reaffirm at $38 billion of premium revenue and at least $23.50 in earnings per share, and an update on our growth initiatives, which in the quarter were mixed, but we are maintaining our $4 per share estimate of embedded earnings and our long-term growth outlook. Let me start with our first quarter performance. Last night, we reported adjusted earnings per share of $5.73, a $9.5 billion of premium revenue, supported by excellent operating metrics across all lines of business. Our 88.5% consolidated MCR reflects continued strong medical cost management with all three segments reporting MCRs in line with our expectations. We produced a 4.5% adjusted pretax margin or 3.4% after tax, a very strong result that is in the middle of our long-term target range. In Medicaid, we continue to deliver strong operating margins while growing our franchise as the business produced a first quarter MCR of 89.7%. Our expanded platform in California and our new Nebraska health plan, together, added over 0.5 million members and along with our new store additions in late 2023, drove an increase in the MCR above our long-term target range but in line with our quarterly expectations. We believe we have now experienced approximately 90% of the Medicaid redetermination impact. The acuity shift unfolded as we predicted and appears to have stabilized in most of our markets. Rate changes, both on cycle and off-cycle, largely offset the acuity shift, with risk corridors capturing any temporary shortfall. Medicaid rates remain actuarially sound with 19 states that represent over 95% of our revenue, providing acuity-related rate adjustments within 2024. Turning to Medicare. Our first quarter reported MCR was 88.7%, our performance in line with our expectations. The higher utilization we experienced in the second half of 2023 due to higher LTSS costs and pharmacy utilization continued into 2024. But the operational improvements and supplemental benefit adjustments to be made in our legacy business have thus far proven to be successful. Our first quarter experience of the newly acquired Bright Medicare plans provides us with confidence in our turnaround plan to deliver the embedded earnings. Our strategy of leveraging our existing Medicaid footprint to serve high acuity, low-income Medicare beneficiaries is working well. In Marketplace, the first quarter MCR was 73.3% and in line with our expectations. Our membership mix comprised 50% renewal members and 70% of members in our silver product. Strong renewals give us keen insight into the acuity of our membership base. We continue to expect this business to grow throughout the year as the Medicaid redetermination process provides a great opportunity to capture membership during the special enrollment period. Turning now to our guidance for the full year. Based on our consolidated first quarter results, we reaffirm our full year 2024 adjusted earnings per share guidance of at least $23.50 or 13% year-over-year growth. Our full year premium revenue remains unchanged at approximately $38 billion or 17% year-over-year growth. While we are seeing increased underlying strength in our core business, we are maintaining our full year guidance to account for any potential earnings headwind in the second half of the year from potential contract losses in Virginia and Florida. Our 2024 revenue and EPS guidance provides a strong foundation for profitable growth in 2025 and beyond. Now some comments on our growth initiatives. In Medicaid, we had mixed success in the quarter. We were awarded a large RFP win in Texas and a large reprocurement win in Michigan, but we're not awarded contracts in two other existing states, Virginia and Florida. All these impacts combined caused no net change to our embedded earnings, which remains at $4 per share. Let me provide some commentary on these RFP outcomes. In Texas, the state announced its intent to award us all seven of our preferred service areas as part of the STAR and CHIP programs. This contract is expected to begin in September 2025 and last for six years with the option to extend for up to an additional six years. The award expands our footprint and increases our market share. We successfully defended our position in Michigan and were awarded a contract in six regions. While these regions represent 93% of our current membership, the award reduced the number of payers in many of our retained regions, and thus we expect to grow our market share. We were very disappointed with the outcome in the Virginia RFP, but we are exercising our right to challenge this decision. We were also disappointed with the RFP results in Florida, but history has shown that the ultimate outcome there could be more favorable. We will continue to refine our membership, revenue, and embedded earnings estimates as we gain clarity on the new contracts, our expanding market share, and the unwinding of any lost revenue. Now with respect to future growth initiatives, our growth pipeline remains replete with opportunity. Regarding RFPs, many opportunities remain with over $60 billion of premium opportunity up for bid over the next three years. This includes in-flight RFP bids in two states, Kansas and Georgia, and a projected near-term RFP in North Carolina. The Texas STAR Kids program is likely going to RFP soon, where we now have a very strong statewide presence and great momentum. We remain confident in our ability to win new state contracts and deliver clinical and financial outcomes that align with the needs of our state partners. Although this quarter's RFP results were mixed, since we began our growth strategy, we are 7 for 9 in reprocurements and 8 for 10 in new business procurements. This track record gives us great confidence in our strategy and our continued ability to drive growth. With respect to M&A initiatives, our acquisition pipeline contains many actionable opportunities. We have executed eight transactions totaling $11 billion in revenue over the past four years, and M&A will continue to be a key component of our strategy. Next, as we look forward into 2025, two comments about the outlook for our Medicare portfolio. First, our Medicare product profile has different characteristics than mainstream MAPD business. Our business is a combination of legacy D-SNP, MNP demonstrations, and our newly acquired Bright business. With this lineup of products, factors such as rate setting, bidding, and revenue drivers do matter, but to a lesser extent. Second, the product portfolio is well positioned to contribute to our growth. Our penetration in dual eligible populations, high acuity, and dual income will benefit from further integration of Medicare and Medicaid benefits. BMS recently announced rules to closely align dual-eligible populations with Medicaid MCOs, which means our Medicaid footprint will be a growth catalyst for attracting and retaining dual-eligible membership. With our 2024 guidance reaffirmed, we remain committed to delivering on our long-term premium and earnings per share growth. With all of the successful growth activity in M&A and new and expanded contracts, even considering the potential for contract losses or reductions, we maintain our embedded earnings outlook at $4 per share. Mark will provide insight on the components in a moment, but the majority is still expected to emerge in 2025. In summary, we are very pleased with our first quarter 2024 financial and operating performance. That performance, combined with our successful track record for producing top-line revenue keeps us on track for sustaining profitable growth consistent with our long-term targets. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss additional details on our first quarter performance, the balance sheet, our 2024 guidance, and thoughts on embedded earnings. Beginning with our first quarter results. For the quarter, we reported approximately $10 billion in total revenue and $9.5 billion of premium revenue with adjusted EPS of $5.73. Our first quarter consolidated MCR was 88.5% and reflects continued strong medical cost management. The change healthcare outage did not materially impact quarterly results, and all of our segments reported MCRs in line with our expectations. In Medicaid, our first quarter reported MCR was 89.7% as expected. The new store additions in California and Nebraska as well as Iowa and the My Choice Wisconsin acquisition in late 2023 drove a higher reported MCR in the first quarter. Recall, we have added approximately 800,000 Medicaid members in the past three quarters, and these new store members typically experience higher MLRs in the early stages. Across our Medicaid business, the major medical cost categories were largely in line with our expectations and the normal quarter-to-quarter trend of fluctuations within our guidance. In Medicare, our first quarter reported MCR was 88.7%, in line with our expectations. Higher LTSS costs and pharmacy utilization continued in our legacy business but were somewhat offset by the operational improvements and benefit adjustments that we implemented for 2024. Segment results now include the newly acquired Bright plans with initial performance as expected. In Marketplace, our first quarter reported MCR was 73.3%, and we are pleased with the high renewal rates and significant silver membership composition. Our adjusted G&A ratio for the quarter was 7.1%, as expected, reflecting operating discipline and the continued benefit of fixed cost leverage as we grow our business. Moving on to Medicaid redeterminations. In the quarter, we estimated a net loss of 50,000 members due to redeterminations. This was on track with our expectations and brings the total net loss from redetermination since its inception to 550,000. We estimate that our membership is approximately 90% of the way through the redetermination process. We expect to lose another 50,000 members in the second quarter, the last quarter of pandemic-related redeterminations to reach our total estimated net loss of 600,000. Our reconnect rate was 30%. We expect this rate to remain near 30% in the second quarter. And of course, some of the reconnect benefit will continue into the third quarter and beyond. We continue to see strong marketplace SEP membership growth as Medicaid members losing eligibility moved to Molina Marketplace products. Turning to our balance sheet. Our capital foundation remains strong. On January 1st, we closed the Bright acquisition at a final price of approximately $425 million, funded with cash on hand. In the quarter, we harvested approximately $110 million of subsidiary dividends, bringing our parent company cash balance to $194 million at the end of the quarter. Debt at the end of the quarter was unchanged and 1.4x trailing 12-month EBITDA with our debt-to-cap ratio at about 35%. These ratios reflect our low leverage position and ample cash and capital capacity for additional growth and investment. In the quarter, both S&P and Moody's upgraded our credit ratings based on our low debt, stable earnings profile and high transparency. Days in claims payable at the end of the quarter was 49% and consistent with prior quarters. While the Change Healthcare outage impacted our February operations with claims 20% lower than normal, we're pleased to report that our quick response through alternative clearing houses restored claims and payments to near normal levels in March. Given the mid-quarter disruption, we have been appropriately prudent and are confident in the strength of our reserve position. Next, a few comments on our 2024 guidance. As Joe mentioned, we reaffirm our full year guidance with premium revenue of approximately $38 billion. Our revenue guidance remains unchanged as we work with state partners to understand the timing and impact of any contract losses in Virginia and Florida. Our full year consolidated MCR is unchanged at 88.2%. Medical cost trends are in line with expectations across all businesses, and we remain appropriately conservative in our outlook on utilization and acuity trends at this stage in the year. We continue to expect full year EPS of at least $23.50 per share. We see underlying strength in our core business. However, we are maintaining our full year guidance of recognizing any potential earnings headwinds in the second half of the year from potential contract losses in Virginia and Florida. Looking ahead to 2025, a few observations on our Medicare portfolio. The CMS final rate notice for Medicare Advantage has received a lot of attention. For Molina, it's important to note that only 2/3 of our Medicare segment revenue or only 10% of total enterprise revenue is fully subject to these rates. With a heavy concentration in California, we yielded a more favorable rate profile than CMS national averages. The remaining 1/3 of our Medicare segment, the MMP demonstrations received rates determined by CMS and our state partners, which continue to be appropriately commensurate with cost trends. We remain confident that the rate environment and our product profile will position us to grow our Medicare business profitably. The integration of our recent Bright acquisition is off to a great start. Recall that we are expecting modest dilution from Bright this year. We expect an improvement to break even in 2025 and then full run rate accretion of $1 EPS in 2026. Looking at our Medicare segment from a different perspective. As Joe mentioned earlier, we believe that the recent CMS 2025 final rule strategically advantaged us to grow. Currently, many dual eligible members received their Medicare and Medicaid benefits from two different MCOs. CMS announced rules that will move these unaligned dual members to the D-SNP plan run by their Medicaid MCO. As such, incumbent Medicaid players will see increased growth opportunities in D-SNP. While the new rule will phase in over time, it's clear that our substantial Medicaid footprint positions us well to grow our D-SNP product to serve dual-eligible members. This shift, along with demand from state partners to service these complex populations gives us confidence that our Medicare portfolio will meet our long-term growth and margin targets. Turning to embedded earnings. We continue to guide to $4 of new store embedded earnings as we now expect approximately $0.80 from the new contract win in Texas incepting next year to be offset by our best estimate of next year's impact of the Virginia and Florida potential losses. We expect the majority of this new store embedded earnings to emerge in 2025 with the remainder in 2026, giving us further confidence in our 15% to 18% long-term growth rate for EPS. This concludes our prepared remarks. Operator, we are now ready to take questions.

I wanted to begin with the guidance. You mentioned the strength in the core business and that the MCR is aligning with your expectations. Should I understand that this strength is primarily coming from G&A? Looking ahead to the second half of the year, does the current business outperformance allow you to maintain your guidance? Additionally, considering the potential loss of certain contracts, will you need to target further SG&A savings in the second half to balance those losses? Any insights you can provide would be appreciated.

Okay. We are clearly saying that if we have a revenue loss in the third and fourth quarters due to the contract losses and the related earnings, the strength of the core business will produce enough earnings power to offset that. And it's no one thing. It's just general performance from all our portfolios. The loss ratios in our Medicaid and Medicare business get better as the year progresses for a variety of reasons. Obviously, in marketplace, it's higher in the back half due to the normal seasonality of that business. But there are 90 basis points of improvement projected in the Medicaid MCRs in the last three quarters of the year and 90 basis points of improvement in the Medicare MCRs in the second, third, and fourth quarters. So it's just general performance of the business. The seasonality happens for a variety of reasons, general strength of the business to offset any potential earnings drag from potentially lost contracts.

Got it. And then I wanted to ask about the SNP regs as well. Specifically, how does that change your strategic thinking about M&A? I mean, I think the Bright deal is really the first big Medicare asset begun purchased. Does this change the way you think about whether you'd be more biased towards MA or Medicaid? Or is it really just more motivation to sort of double down on the organic growth?

It doesn't really change our M&A strategy. I mean, we look for opportunities across all of our segments. Most of our M&A activity has been in Medicaid, but the Bright acquisition represents the first M&A opportunity that we actioned in Medicare. But what we're really saying is the fact that we have this 20-state footprint in Medicaid and growing. The dual eligible opportunity is just one more way to monetize our significant Medicaid footprint. And the fact that we have a very robust and operationally excellent dual eligible business. Those two platforms combined will allow us to participate in the dual eligible population growth rate that is going to happen here over the next number of years. So we're very, very pleased with the final rule that came out from CMS, which basically says that Medicaid will be the anchor tenant for action in the dual eligible population.

Just to go back on the Virginia and Florida. I heard the $0.80 from Texas and then the offset Virginia, Florida. Is that $0.80 an annual number? And is it, say, $0.40, $0.45 for 2024 specifically? And then just a second question on the M&A pipeline, a follow-up there as well. I'm curious if your experience with the acquisition of Bright and then the 2025 rate update has that changed the way you thought about Medicare Advantage?

I'll kick it to Mark for the question on the Florida and Virginia earnings. Go ahead.

On Virginia and Florida, just to set the stage, we think right now, that's about a $2 billion revenue run rate and about $1.10 on EPS full year. Now the simplifying assumption is we lose both in the fourth quarter, the headwind would be $0.5 billion on revenue and $0.30. But look, we're still working that through. Those are under protest and exactly what the timing is, is somewhat unclear. But if you deposit that assumption, it would be a $0.30 component to this year's guidance, which, as we mentioned in our prepared remarks, is offset by the underlying strength of the business. So if the full run rate is $1.10, we recognized $0.30 this year, what's left is $0.80 for embedded earnings, and that is exactly offset by the $0.80 of accretion we see in STAR and CHIP.

Josh, and your second question related to Bright now that we've owned the business for a full quarter, we are very optimistic and confident in the $1 of ultimate accretion. The way to think about that business is actually very simple. Operationally breakeven in year one with a slight earnings drag related to the carrying costs, breakeven in your operationally breakeven in year two. And full $1 accretion in year three. We get there by inheriting a 95% MCR in the business. We've managed it to 87%. We inherited a 13% G&A ratio in the business. We've managed to 8%, that's 1,300 basis points of turnaround, which on $1.6 billion of revenue would show you how we get to the full accretion. The G&A savings will likely happen sooner as we need to go through two pricing cycles to get the MCR down to 87%. But now that we've owned it for a quarter and have excellent line of sight to the operating metrics and the dynamics of the business, we're very confident in producing that portion of our embedded earnings.

Two questions for you. Just first, I was hoping you could potentially spike out the new store Medicaid impact to MLR? And then when you think about the 90 basis point improvement that you're talking about, how much of that is normal seasonality versus maybe new store coming down or maybe just getting back some of the last bit of acuity adjustment? And then the second question is just on the Medicaid deal pipeline. I think your last announcement on that front? I know they still take a long time to close was in July, I think, 2022. I was just wondering if you could give us an update on the pipeline there? And it seems like maybe there's been some slowdown maybe as reformation distribution, maybe it's now just kind of hear when you think about the pipeline in Medicaid over the next six to twelve months.

Stephen, I'll answer the first question first and then kick it to Mark on the Medicaid MCR. The Medicaid MCR of 89.7% in the quarter was as expected and heavily influenced by 20% of the member month volume in the quarter was on new business, either new business that came in from California and Nebraska on our second half of the Iowa contract from 2023 in the My Choice acquisition. That new business runs in the '90s. So you can do the math. That created pressure on the Medicaid MCR in the first quarter. As we work through the Molina playbook, operational improvements across all the dimensions of managed care, that performance improves, second, third, and fourth quarter, which really creates a very different tilt to the way the earnings pattern is emerging this year versus prior years. It starts out high and improves throughout the year. As I said, the MCRs in the last few quarters are 90 basis points better than the first and we're still on target to hit 89% in our full year guidance on Medicaid, which is at the top end of our long-term target range. Mark?

Stephen, I'd just add to that. A year ago, our Medicaid MCR was 88.4%. This quarter, the legacy NCR was very close to that. So as Joe mentioned, coming out at 89.7% is a function of that new store MCR, which comes in high. And recall, we said that this year, margins and earnings were a little bit back-end loaded consistent with our expectations. We came out really right where we expected. On the deal pipeline, I wouldn't say it slowed down. It's always fits and starts. What's most important to Joe and I is we constantly have a pipeline of advanced stage discussions. Sometimes they're banker processes, but just as often, they're one-off bespoke discussions, relationship development where we're out selling the Molina story, which is very appealing to many not-for-profits. So we've got a good pipeline of both. If we could wave our wand and time them exactly where we want it, you might have seen one this quarter. But look, we are always hopeful that the pipeline is developing. We like what we see. So stay tuned on that.

Can you talk a little bit about how redeterminations are going, both from the Medicaid and the exchange side of things? It sounds like you're 90% done, but you still expect strong growth on the exchanges. I guess when should that tailwind kind of be fully into the numbers? And then on the Medicaid side, you talked about a 30% recapture rate. Just trying to see any details about the acuity of that population.

I'll start off and then I'll kick it to Mark, but just to recap the entire redetermination process from start to finish. We estimate that at the high of the PHE, we have grown 1 million members due to the pause in the redetermination process. We are now projecting to lose 600,000 of those, with 550,000 lost to date, and another 50,000 in the second quarter. We have been experiencing a 30% reconnect rate. And once the redetermination process stops, that reconnect rate will continue on into late spring and perhaps even into summer. We are seeing a significant increase in our special enrollment in marketplace. Now whether you're coming in from Medicaid or not is a self-reporting feature. So we don't have exact statistics on how many are coming from other companies' Medicaid roles. But we've been averaging 12,000 to 15,000 SEP members in prior quarters, and that's double. It's up to 30,000 now, which is obviously being heavily influenced by members coming off of Medicaid into the marketplace. Mark, anything to add?

Yes. If you look at our marketplace, we reported 346,000 members in the first quarter. We'll go to 370,000 per our original guidance. That's unchanged. And that's on the continued strength of folks coming in from redeterminations, which is obviously an anomaly this year. Remember, Marketplace always had normal lapses through the year. So typically, marketplace volumes declined through the year. In this case, they will increase through the year to our guidance of 370,000. I think you asked about the reconnect rate. We're still seeing 30% on reconnects coming back in. And both the folks coming into the marketplace as well as the reconnects, we're not seeing an anomaly on the MORs that would really change our outlook for the year. So pretty much right on track, Kevin, right where we want to be.

Thanks. Hi, everybody. To build on that previous thought with a slightly different perspective, as we approach next year, the redeterminations will decrease as we progress through the summer. The full impact of any changes to the acuity risk pool for legacy individuals remaining on Medicaid will be evident. At this early stage, you mentioned that you've received reasonable rate increases proactively in 17 states this year. Do you believe a second consecutive year of above-average rate increases will be necessary once the acuity is fully accounted for in the run rate for next year? Additionally, when can we expect to know if the rate increases for next year will be sufficient?

Let me recap where we are in the rate environment, and then I'll kick it to Mark for some more color. We couldn't be more pleased with the way our state customers have responded to having rates be commensurate with normal cost trends and trends that have been influenced by the acuity shift. We received acuity-related adjustments in 19 states, representing 95% of our revenue. We had five retroactive rate adjustments, and we're actually anticipating perhaps four more. So the states have been very responsive, and rates have been actual very sound. Look, we're guiding to the top end of our MCR rate for the entire year at 89%, and that's with two very unprecedented phenomena going on in the book of business. One is the unprecedented shift in the national risk due to the redetermination process, and the other is bringing on 800,000 new members that committed higher MCRs. With those two factors influencing how medical costs emerge, producing an MCR at the high end of our long-term range is something we're very, very pleased with. The answer is no. We expect rates next year to be actually sound, we expect them to be commensurate with the medical cost trends we're experiencing, fee schedule increases, benefits carved in and out, that's the normal process, and we have every reason to believe that rates will be actuarially sound going into next year. Mark, anything to add?

You mentioned that the rate increase is somewhat proactive, but they tend to be more reactive, as many states respond to observed trends rather than implementing changes proactively. I wish it were different. However, as Joe noted, we are comfortable with the rate increases this year. The increases we have observed align with the trends we anticipated. The acuity impact on the trend has stabilized, which I believe correlates with the volume. Up to now, we've had 550,000 members leave, with only 50,000 departing in this last quarter, indicating stabilization. We've noticed a similar effect with the reacquity and redetermination acuity impact. Currently, I would say that rates appear satisfactory for the year. If there are any concerns, the positive aspect is that 50% of our revenue is up for new rates every January 1, which means if there’s any pressure in the latter half of this year, it will align well with the next rate cycle starting January 1.

Okay. And maybe if I could just ask on the Marketplace product. Obviously, the last one, 1.5 years, you've been focused on repricing and margin. Now that you sort of have gotten that in place. Any update on your long-term strategy toward marketplace and growing that? Or what's your thought on that?

Sure. The small silver and stable strategy was a response to the need to reposition the business to sustain a profile of single-digit to mid-single-digit pretax margins. This was a temporary way of viewing the business. We invested about 300 basis points of excess margin from last year into the business this year, which is why our membership is growing at 30% and premium revenues are increasing at 20%. We appreciate this steady progression of the business and expect it to continue growing. However, having been in the insurance business for a long time, I know that you should never aim to grow any portfolio organically too quickly, especially when underwriting is constrained, as it is with this product. You have to be cautious about where you're bidding against the market, who else is participating, and what your results are compared to the previous year. We will proceed with caution. Nonetheless, the steady growth we've experienced this year is encouraging, allowing us to maintain high single-digit pretax margins while growing at this pace, which I believe is what we can expect going forward.

A couple of questions here. First, last quarter, Joe, you mentioned an expectation that the company had visibility to grow EPS at the low end of your 15% to 18% outlook for 2025. Is that still the expectation? And then secondly, Joe, you mentioned that you're assuming in Texas or it looks like you're assuming in Texas that you get an average amount of share of the state from your new wins meaning there's four plants in a region, you get 25%. First, is that correct? And then second, what are the levels of visibility here? The reason I ask is that your local regional market share in Medicaid varies pretty broadly by state across plans. Texas, your share currently appears to be in the high-single digits versus a state like Washington, where I recall you have way above average share. I'm just curious on your visibility on getting that.

Yes, Justin. Last quarter, we provided the foundational elements for our outlook into 2025, and our perspective on those foundations remains unchanged. While our embedded earnings are still at $4, we have slightly adjusted the composition and the timing of how they will materialize in the coming years. However, the core elements remain intact. We continue to generate earnings from our existing operations. We have discussed operating leverage and embedded earnings, and we anticipate a natural challenge from declining interest rates next year. So, the foundational elements have not changed, and that remains our perspective for 2025, which is not guidance but rather an outlook. Regarding Texas, we are uncertain. We employed very conservative estimates for our market share in the seven regions we won, using average portfolio margins. I don’t think there is much more to interpret beyond that. We consider this to be a conservative and reasonable projection of what that business will yield.

So can you share that market share assumption?

I don't think it's the right time to discuss that, and we prefer not to get ahead of our customer. We'll need to wait for more clarity on how membership will be distributed. I believe that's the sensible approach to take.

I wanted to ask on Florida. Joe, I think you talked about the protests and the ultimate outcome could be different. I guess I'd be curious to get your view. Florida kind of shifted to more of a comprehensive care model in the state. And in your view, does that create, I guess, more friction than normal for the appeals process and potential changes there? And then as a follow-up, I wanted to ask if you had an updated view on the $46 billion revenue target by 2026. Obviously, that included some assumption for RFP wins, but there are a number of other factors in that bucket. So just curious if you still feel like that's the right shooting point for 2026 revenue.

In Florida, we're not making a prediction on how the process will unfold. We're citing historical precedent. Historical precedent would suggest that this is not the end, it's sort of the beginning of the end of the process. There are more discussions that will take place. So I don't want to, again, get ahead of the state on this. But if you look at the past two procurements in Florida, there have been extended conversations, and there are regions in Florida that still do not have maximum awards given. So again, just citing historical precedent. On the $46 billion of revenue, we have a $60 billion new contract pipeline. Kansas and Georgia are sitting out there currently live and in process. As I mentioned, Texas STAR Kids, we have great momentum in the State of Texas. North Carolina, we didn't bid on North Carolina last time because it was too early in our turnaround plan to bid on anything. So we're looking at the $60 billion pipeline and feeling pretty good about our prospects there. Look, we're 7 for 9 reprocurements and we started our growth journey. We're 8 for 10 in new business wins. We have 8 M&A transactions totaling $1 billion in revenue over the past four years. We're feeling really good about the long-term revenue target here and our ability to produce continued 13% to 15% revenue growth and 15% to 18% earnings per share growth. Nothing's changed. And our trajectory here, even though we're disappointed with the two RFP situations in the first quarter.

I had two policy questions actually. One, just because I get asked a lot just about the expiring ACA credits for 2026, maybe leaving aside whether or not they get renewed and the politics of that. Just wondering, from a technical basis, how are you guys thinking about sort of elasticity of demand for exchange product, if some of the income level categories see a fairly material percentage change in the premium that would be required, just what you're thinking now, if end of the worst case, those went away. What the impact might be, and how much is retained. And then the second question would just be the big Medicaid rule that was out earlier this week, managed care, Medicaid rule. I think we were primarily focused on the state-directed payments changes there, but I know there are a few things on MCO transparency and MLR reporting changes. I just wanted to see if there's anything that you felt was material to you going forward.

Regarding the enhanced subsidies for the Marketplace, it's difficult to predict. They are set to expire unless legislation is enacted to extend them, which is often misunderstood. The enhancement was meant to be temporary, and without an extension, they will be discontinued. There are various political scenarios regarding this, and while many believe it could be easily traded for extending the Trump tax cuts, I’m not drawing political conclusions here. It's likely a 50-50 chance of extension. We did not experience significant growth when the enhanced subsidies were introduced, as we primarily focus on our Medicaid footprint and serve low-income members who are already highly subsidized. Therefore, we do not see this as a major concern for membership loss. This addresses your first question. As for the second part regarding the ruling, I want to ensure I fully understood your inquiry.

The managed care, the Medicaid managed care access finance quality accrual that was out earlier this week.

Not significant. We're still analyzing it and are aware of the situation. There are many different features involved, some of which span extended periods. There's no immediate action required, and nothing in that guideline affects the long-term direction of the business. I've frequently been asked if there are any political, legislative, or judicial issues that raise major concerns about the viability of our businesses, and the answer remains no. Regardless of the election outcome or whether Congress is divided, we believe that the legislative and political environments are fairly neutral for the sustainability of our businesses.

Gary, the one thing I would point out is certainly when they streamline Medicaid and CHIP eligibility and all the procedural items that folks have to go through to maintain or get eligibility, it just makes it easier for the appropriate coverage to go to the right people, and we think that's obviously a good tailwind for our business.

Joe, just a high-level question. One of your peers this week talked about a normalized individual MA margin of 3% or better. I know that your book of business is a little bit different. But I was just wondering if you guys would be willing to kind of speak to what you think the normalized margin profile of individual MA is and kind of how you think that varies between the D-SNP book and the individual book. And I know that you guys have a heavily subsidized population. So the book is a little bit different, but I appreciate any color.

Our goal for the Medicare business is to achieve mid-single-digit pretax margins. I'm not certain if you meant pretax or after-tax figures. Our Medical Care Ratio for the products we offer is between 87% and 88%. We expect to reach 87% within the next couple of years. We maintain our target of mid-single-digit pretax margins in this sector. We see potential in the D-SNP business not only for generating strong profits but also for leveraging our Medicaid presence with the dual-eligible population, which will be a significant growth area for us over time. We are in a strong position to capitalize on the growth in the dual-eligible population, and we continue to aim for mid-single-digit pretax margins, with Medical Care Ratios in the 87% to 88% range.

The only thing I'd add is that comparing Molina's business to that of our larger Medicare competitors is quite challenging. We focus heavily on dual eligibles, which represents a significant portion of our business with high acuity members costing between $1,800 to $2,000 PMPM. If you excel at managing medical costs, there is a substantial opportunity to improve margins on those high-cost members, even amidst some challenges. Therefore, making such comparisons to others is quite difficult.

Two questions. The first one, just if you've gotten the scoring results yet from Florida and have been able to start to develop the factual points that may be the basis of your appeal in Florida is definitely interested in your thoughts on that? And then just second, on the HICS side, just if you want to refresh us at this point after seeing results so far, what you're expecting for full year MLR and pretax margin for 2024 for the HICS business.

On these protest processes, I think I've said about all I really should say about them. They are legal processes, and we have to see how they unfold. But of course, through various requests, I'm sure everybody's got the information they need to document their findings and to put their case forward. So that's all I'll say about it. Your last question was about market to marketplace. As I said, we, last year, having good visibility into the business, having priced up, we were producing pretax margins in low double-digit 10%, 11%. We decided consciously to invest 300 to 400 basis points of that margin into growth, which is why membership grew 30% and revenues grew 20%. So we're well positioned to continue to produce our target MCR range, which is 78% to 80%. And this year, we expect to finish the year at the low end of that range, which would produce a high single-digit pretax margin. It's right where we want to be. And as somebody suggested earlier, a very now stable position, half the membership being renewal membership, 70% of it being silver, a nice platform off of which to grow measurably and modestly.

I think I heard you say that you're prudent in your reserves due to change. Was there any favorable PYD in the quarter? And if so, did you reestablish that into your reserves?

It's Mark. Yes, absolutely, there's favorable PYD, and you'll see that in the earnings release where we showed the prior year development on current year reserves. It tracks about as it normally does, not higher, not lower. And of course, we always replenish that. So we feel very confident. I showed a 49% days claims payable, which is right in the middle of our standard range. We feel very good about our reserves even with a little bit of noise from the change situation that happened back in February. So very confident, reserves replenished, we feel adequately reserved.

Was there any P&L impact in the quarter from the PYD?

There always is. That's a normal part of a reserving cycle. Typically, the way you reserve is in the current period, you pick a number, which is generally a little bit conservative. And typically, prior periods develop favorably. That is a standard cycle of the actuarial and reserving process and how we recognize earnings. Nothing unusual there in this quarter.

I wanted to clarify the mix on the 2026 revenue guide. So I.D.A., you guys talked about it being about 1/4 organic, quarter M&A and 50% contracts. Do you still see that as the mix? And then could you give us any clarity on your rate renewal timing? What percentage of your book renews in January versus April and September?

I'll answer the second question first. We have a really nicely laddered renewal pattern in our portfolio, which is great from a risk management perspective. About half of our revenue renews on January 1st. 21% renews in the fall. The rest of it is mid-year. So the renewal pattern is nicely better throughout the year. Right now, given our guidance, we know 82% of rates, we know the rates on 82% of our revenue for this year's revenue guide, which leaves us very little rate risk to our forecast. That's how we have great visibility. And as Mark said, if you get pressure, cost pressure in the second half of the year. In fact, at 52% of the revenue then cycles into January 1, or we capture that nicely. Your other question was?

Yes. On the $46 billion premium revenue in 2026, do you think of it as the buckets that you laid out at I-Day, which was about 50% of the growth being from contract wins, 25% from M&A, and 25% from organic?

Yes. I think that's nothing has caused us to change that outlook. I mean, it’s a very high-level outlook and more of it comes from M&A, that's fine. When you're buying the properties with the capital efficiency we buy them at, which we buy them, but that actual mix could change, but that's probably the way to think about it. That is the way we think about it. But again, if the mix changes, if we have more contract wins and more M&A, it's all very accretive and as long as we're refilling the bucket of embedded earnings, we feel good about it.