Molina Healthcare Inc (MOH) — Q4 2025 Earnings Call Transcript

Good morning, and welcome to Molina Healthcare's Fourth Quarter and Full Year 2025 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky, and our CFO, Mark Keim. A press release announcing our fourth quarter and full year 2025 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, Friday, February 6, 2026, 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 fourth quarter and full year 2025 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance, the medical cost trend and our projected MCRs, Medicaid rate adjustments and updates, our recent Florida CMS, RFP win and contract inception, our M&A pipeline and deal activity, upcoming RFPs, our expected future growth, Medicaid, Medicare and Marketplace membership levels, earnings seasonality, the transition to Medicaid, Medicare integrated product designs, our G&A costs, our credit facility and the estimated amount of our embedded earnings power. 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, we will provide you with updates on our reported financial results for the fourth quarter and full year 2025. Our top line growth initiatives and our full year 2026 premium revenue and earnings guidance. Let me start with our fourth quarter performance. Last night, we reported an adjusted loss per share of $2.75 on $10.7 billion of premium revenue. Our fourth quarter results fell well below our expectations due to continued strong trend pressure in Medicare and Marketplace, and two, retroactive items in Medicaid, which totaled $2 per share. While disappointed in the performance for the quarter, we continue to remain confident in our durable and sustainable operating platform as the rate environment returns to equilibrium. In Medicaid, the MCR for the quarter was 93.5% and was impacted by unfavorable and unexpected retroactive premium rate actions taken by the State of California. Adjusting for these retroactive items, we produced a 2% pretax margin and the MCR was favorable to our prior guidance even as we continue to experience higher utilization of professional office visits, behavioral health services, LTSS and high-cost drugs. In Medicare, the MCR for the quarter was 97.5%. We continue to experience elevated utilization for LTSS and high-cost drugs and slower-than-expected margin improvement in our MAPD product. Finally, in Marketplace, the MCR was 99%, which was impacted by elevated utilization and several prior period provider claim settlements. For the full year 2025, we reported premium revenue of $43 billion, representing 11% year-over-year growth. Adjusted earnings per share were $11.03, and our pretax margin was 1.6%, which is below our long-term target range. 2025 was clearly a tale of two halves as the company earned over $11 per share in the first half, largely tracking expectations. Trend pressure worked against us in each of the third and fourth quarters. Our fourth quarter performance resulted in our full year performance falling below our most recent guidance. As we compare our initial 2025 EPS guidance of $24.50 to our final result of $11.03, nearly half of the underperformance for the year was attributable to the unprecedented trend and increased acuity in our Marketplace segment. A very disproportionate outcome given that the segment is just 10% of our total premium. The rate and trended balance in Medicaid accounted for approximately one-third of the underperformance, while the remainder was due to persistent higher utilization in Medicare. In Medicaid, our flagship business, representing 75% of our total premium revenue, we reported an MCR of 91.8% and a pretax margin of 2.8%. Rates increased from 4.5% in our initial guidance to 6% for the year, but medical cost trend continually increased from 4.5% in initial guidance to 7.5%, an unprecedented inflection in such a short period of time. 250 basis points of this 7.5% trend is attributable to the acuity shift from membership declines related to the final stages of redeterminations. While we are disappointed in our fourth quarter and full year results, many published reports indicate our Medicaid performance is industry-leading by 300 to 400 basis points in pretax margin. We believe the medical cost trend in 2025 was an aberration, an anomaly by historical standards. The important point, which I will get to in a moment, is what all of this means for 2026 and the longer-term outlook for the business. But first, turning to our growth initiatives. Despite the short-term margin challenges, 2025 was another extraordinary year for securing future growth for our flagship Medicaid business. We continued our successful track record of winning renewal and new RFPs. During the quarter, Molina secured a historic RFP win in Florida where the state awarded Molina the sole Children's Medical Services or CMS contract. This contract is expected to yield $6 billion in annual run rate premium and is expected to go live in late 2026. This award in Florida complements our previously announced contract win in Wisconsin, where we renewed our Wisconsin MyChoice LTSS contract in Regions 2 and 7. The significant win in Florida in our previously announced Georgia and Texas star ship wins represent over $9 billion of Medicaid premium and significantly contribute to our embedded earnings. Since we embarked on this growth strategy, we have achieved an RFP win rate of 90% on renewal contracts, representing $14 billion in retained revenue and 80% on new contracts representing $20 billion of new revenue. We are engaged in active RFPs in several states and have an active pipeline of $50 billion of new opportunities over the next few years. On the M&A side, our acquisition pipeline contains a number of actionable opportunities. The current challenging operating environment is a catalyst for many smaller and less diverse health plans to consider their strategic options. We remain opportunistic about deploying capital to accretive acquisitions. In this temporary period of rate and trend imbalance, we will work to acquire as much Medicaid revenue as possible, as we have done in the past, to manage it to target margins. Turning now to our 2026 guidance. We project 2026 premium revenue of approximately $42 billion, which is slightly lower than 2025. The premium growth from the new Florida CMS contract in Medicaid and higher revenues in our Medicare segment are more than offset by the planned reduction in the Marketplace segment. Our 2026 adjusted earnings per share guidance is at least $5. This guidance is burdened by $1.50 of new contract performance of the Landmark Florida CMS contract and a dollar due to the underperformance of our traditional MAPD product. We have determined that the MAPD product does not align with our strategic shift to focus exclusively on dual eligible members in Medicare and we will exit the traditional MAPD product for 2027. After adjusting for these two items, our 2026 guidance produces underlying earnings of approximately $7.50 per share. There are three aspects of the business that represent significant upside to our guidance. First, our view on Medicaid cost trend could moderate from our initial estimates. Second, Medicaid rates may develop favorably due to on and off-cycle adjustments as they did in 2025. Recall that every 100 basis points on the Medicaid MCR from this current rate and trend relationship are worth nearly $5 per share. Finally, Medicare and Marketplace are both going through transformations for very different reasons. Our guidance assumes these segments combined for a headwind of $1 per share in 2026, but both contain significant upside as we priced conservatively. Mark will take you through the detailed 2026 earnings guidance build in a few minutes, but let me highlight the major assumptions underlying our $5 per share guidance. In Medicaid, 2026 rates are expected to average approximately 4% and will not offset medical cost trend projected at 5%. This trend outlook for 2026 is comparable to the 2025 trend without the 250 basis point impact of the redetermination related acuity shift. In Medicare, members are transitioning to new integrated product designs, which we expect to produce lower margins in their first year before reaching their full margin potential. Finally, in Marketplace, we made the conscious decision to reduce our exposure and stabilize margins in this highly volatile risk pool, which we expect to yield a 50% decline in our annual marketplace premium. Early enrollment results drove a larger mix of renewal members, which we expect will improve the stability and predictability of our member acuity profile. In summary, our 2025 results did not meet our expectations, but I am pleased with our team's focus on managing through these industry headwinds and producing in the fourth quarter a normalized pretax margin in Medicaid of 2%. There is little question that Medicaid rates and medical cost trends are in balance. We believe our 2026 forecast for Medicaid is the trough for managed Medicaid margins. In this margin trough, we expect that Molina Medicaid will produce a low single-digit margin, not losses, and that the market is underfunded by 300 to 400 basis points. We are confident in the outlook for this business and that rates and trend will eventually reach equilibrium. Even at this low point in the cycle, we remain optimistic about the future earnings trajectory of the enterprise, which is a function of anticipated rate restoration and future embedded earnings. Of note, we anticipate that actuarial soundness will ultimately prevail as Medicaid rates are restored by state actuarial processes, and that will allow us to achieve target margins. This potential is significant as every 100 basis points on the Medicaid MCR is worth nearly $5 per share. Then our existing new store embedded earnings, which represent future contract revenue at average target margins, are additive to the earnings accretion implied by the rate restoration cycle. Embedded earnings are now greater than $11 per share. The intrinsic value of our businesses remains unchanged. Modest capital requirements, mid-single-digit pretax target margins, robust parent company cash flow, and ample organic and inorganic growth opportunities will combine to yield significant shareholder value. The cycle will turn, and these underlying valuation parameters will again become apparent. Finally, we look forward to updating you on our outlook for sustaining profitable growth at an Investor Day event on Friday, May 8. We will provide you with our long-term goals as well as the detailed playbook for achieving our growth rates and maintaining industry-leading margins. 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 some additional details on our fourth quarter and full year performance, the balance sheet and our 2026 guidance. Beginning with our fourth quarter results. For the quarter, we reported approximately $10.7 billion of premium revenue with an adjusted loss of $2.75 per share. Adjusted earnings were approximately $3 below our expectations with approximately $2 driven by unexpected retroactive premium items in California Medicaid and the remainder due to continued trend pressure in Medicare and Marketplace. In Medicaid, our fourth quarter MCR was 93.5%. As Joe mentioned, this result includes both a retroactive risk corridor and a retro rate reduction in California, totaling 160 basis points. Both were driven by new and unforeseen state actions impacting the full year but introduced late in the fourth quarter. Adjusting for these retroactive items, our reported MCR restates to 92.3%, and our pretax margin was 2%, both better than our expectation for the quarter. For the full year, the reported Medicaid MCR was 91.8% and pretax margin was 2.8%. We take some comfort that even in this unprecedented medical cost trend environment, the state filings continue to show our Medicaid margins remain best-in-class. Simply put, rates have not kept up with trend over the past six quarters. Looking at the state filings for all MCOs in our markets, we believe Medicaid plans are underfunded by 300 to 400 basis points. In Medicare, our fourth quarter MCR was 97.5%, and our full year MCR was 92.4%. Our results for the year reflected elevated utilization of LTSS and high-cost drugs among our high-acuity dual populations. Margin recovery in the MAPD product was slower than we expected. In Marketplace, our fourth quarter reported MCR was 99%, and our full year MCR was 90.6%. In the quarter, the MCR reflected elevated utilization across nearly all services, particularly behavioral health, high-cost drugs and professional outpatient visits and several prior period claim settlements with providers. The adjusted G&A ratio for the quarter was 6.9%, and our full year was 6.5%. Our cost management remains disciplined, and we continue to harvest fixed cost leverage as we grow. Recall, the full year G&A ratio reflects added expense for implementation costs in the new integrated tools products, offset by a reduction in management incentive compensation expense. Turning to the balance sheet. Our capital foundation remains strong. Positive full year earnings continue to add to our capital base and drive parent company cash via dividends. In the quarter, we harvested approximately $337 million of subsidiary dividends, and our parent company cash balance was approximately $223 million at the end of the year. RBC ratios, which test the level of capital at the subsidiary level compared to regulatory requirements, are 305% in aggregate, more than 50% above state minimums. In November, we closed a bond offering of $850 million of senior notes due 2031. The proceeds were used to repay the outstanding term loans and for general corporate purposes. Debt at the end of the year was 3.7 times trailing 12-month EBITDA, and our debt-to-cap ratio was about 49%. Based on our current guidance, we took action to address any issues with our debt covenants. We have secured an agreement with our bank syndicate to appropriately amend these metrics. Our operating cash flow for the full year 2025 was an outflow of $535 million due to the settlement of Medicaid risk corridors, the timing of tax payments, and lower operating performance in the second half of the year. Turning to reserves. Days in claims payable at the end of the quarter was 47. We remain confident in the strength and consistency of our actuarial process and our reserve position. Even in this period of sustained high trend. Moving to guidance. We project 2026 premium revenue of approximately $42 billion, a 0.8% pretax margin and adjusted EPS of at least $5. Our guidance is lower than the $14 per share initial outlook we provided on the third quarter call due to a number of factors. First, in Medicaid, our full year 2026 MCR guidance is 92.9%. That's 140 basis points higher than previously expected, driving $6.50 of the shortfall. The higher MCR results from several items. The fourth quarter retro revenue items in California, which resulted in a $2 per share impact, will continue in 2026, yielding 40 basis points of margin pressure across the year. Our Florida CMS contract, incepting in the fourth quarter, will add 30 basis points of full-year pressure as that initial quarter will run significantly higher before reaching target margins as new stores typically do. And expected rates for 2026 are approximately 50 basis points lower than our initial outlook. We previously projected rates exceeding expected trend to improve MCR by 50 basis points off the second half of 2025. While our initial discussions with states were encouraging, particularly in the presence of demonstrated underfunding across most of our markets, the rates we finally received fell short, now matching expected trend off second half with no benefit to the MCR. Second, the items driving our lower EPS guidance, underlying performance in our Medicare business deterred by $1 per share, largely due to the MAPD product. And finally, G&A efficiencies only partly offset a higher effective tax rate interest expense and lower volumes, resulting in a headwind of $1.50 per share. As Joe mentioned, upside components to this guidance include moderation in Medicaid cost trends, off-cycle and late 2026 rate adjustments as we sell in 2025 and Medicare and Marketplace performance. Now some additional details on our 2026 guidance, beginning with membership. In Medicaid, we expect year-end membership of approximately 4.6 million members to be flat compared with 2025. We expect modest contraction in our current footprint as some states continue to review membership eligibility, to be offset by the implementation of the new Florida CMS contract, incepting in October of 2026. In Medicare, we expect to begin and end 2026 with approximately 230,000 members based on open enrollment and transition to our integrated tools products. In Marketplace, we expect approximately 280,000 members at the end of the first quarter, down more than 50% from the end of 2025. Recall that we sought to stabilize margins in 2026 and reduce our exposure to the shifting risk pool caused by the expiration of enhanced subsidies and new program integrity initiatives. Our average pricing increased 30% and ranged from 15% to 45% across our footprint. Renewing members now represent 70% of our current book, and retention through the grace periods is less certain than in prior years. We expect to end the year with 220,000 members. Our 2026 premium revenue guidance is approximately $42 billion. The small decline versus 2025 is driven by several items. Medicaid is up $1.1 billion due to the new Florida CMS contract and the modest rate cycle, partially offset by the Virginia contract loss in 2025 and slight market contraction in our current footprint. Medicare is up $300 million due to the product mix shift in our Medicare portfolio as members transition to new integrated products, which have a higher average PMPM. This is partly offset by a decline in our MAPD product. Finally, Marketplace premium declined by $2.3 billion pursuant to the plan to reduce exposure to that segment. Our 2026 premium guidance does not include the Georgia Medicaid and Texas STAR CHIP contracts, which are now expected to go live in 2027. Turning to earnings guidance within our segments. In Medicaid, we expect a pretax margin of 1.2% on $33.4 billion of premium. The MCR of 92.9% includes a 30 basis point headwind due to the new Florida CMS contract. I'll remind you that our Medicaid MCR guidance assumes year-over-year rates of approximately 4% and trend of 5%. In Medicare, we expect $6.6 billion of premium revenue with the MCR at 94% and a pretax margin of negative 1.7%. Excluding the MAPD product, which we will exit for 2027, the pretax margin is closer to breakeven. Within the segment, margin improvements in the legacy products in the new rate cycle are offset by MMP members transitioning to new integrated products. These integrated products are expected to achieve lower margins in their first year before reaching their full margin potential in years 2 and 3. In Marketplace, we project a 1.7% pretax margin on $2.2 billion of premium revenue. The MCR of 85.5% reflects continued conservatism given market volatility and risk pool acuity shifts resulting from the expiration of enhanced subsidies. We expect the adjusted G&A ratio at 6.4%. This is slightly lower than 2025 as the tailwind from duals contract implementation costs, cost management discipline, and mix within our business is partly offset by the Florida CMS contract implementation costs and the return of management incentive compensation. Rounding out the other guidance metrics, we expect the effective tax rate at 30% and a weighted average share count of 51.1 million shares. Our earnings seasonality is expected to be much more front-end loaded this year with two-thirds of earnings in the first half of the year, reflecting the Medicaid rate cycle and the implementation of Florida CMS in the second half. Our Medicare and Marketplace segments are expected to follow normal seasonal patterns. Turning to embedded earnings. At the end of 2025, we reported $8.65 of new store embedded earnings. Our 2026 guidance harvests $0.60 for Medicare tools implementation costs net of the Virginia contract loss. Updates include the addition of the new Florida CMS contract of $4.50 and a reduction for the MAPD exit. Embedded earnings now exceed $11 per share and form a compelling view of long-term future earnings power on top of our legacy business rate recovery. We will outline the components and expected realization timeline at our May Investor Day. This concludes our prepared remarks. Operator, we are now ready to take questions.

Sort of a two-parter on the Medicaid side. Is there a large variance that remains across your states with regard to Medicaid margins? And are you at the point in any state where you're contemplating a potential exit? And sort of part B would be, what were the drivers of the negative retro adjustments in California that seems incongruous with what you were seeing in terms of rate increases and margins? Is California just a market that happened to be running higher than average margins?

Josh, regarding the first part of your question, no. Rates across our portfolio are generally underfunded, and there isn’t a state where the regulatory environment is so hostile to managed care that we consider exiting. As we've mentioned in our prepared remarks, we believe these rates will return to equilibrium over time for various reasons, which I will discuss shortly. As for your second question, the two issues in California were quite specific. They were event-driven. For the undocumented population we serve, which includes about 180,000 members, services were not utilized during the year we priced. Consequently, the state decided to adjust, and I would say, recover funds due to a retroactive corridor being introduced. In L.A. County, there was also a noticeable change in membership churn during the year, leading to an imbalance in the risk profile among different carriers. At the year's end, they conducted a risk adjustment update, redistributed funds, and we needed to reimburse them. Mark, do you have anything to add regarding these two points?

No, Joe, I think that's well summarized. Josh, it's about $135 million between those two items. That's the $2 per share. And they're both pretty unusual in nature. On the corridor from the undocumented immigration status normally, CMS has a rule that they can't put retro corridors in place. That rule went back in place during the pandemic. However, since this undocumented program in California is state funded, the CMS restriction doesn't apply. So they were able to put that restriction in place on the corridor on that population. So I don't know of another state where that could happen. On the risk adjustment, risk adjustment data refreshes are common. We have them all the time. Normally, they're de minimis up or down. In this case, there was enough change in the population in LA, as Joe mentioned, that it was material to us.

And one final point, Josh, you didn't ask, but inherent in the movement from our $14 per share outlook and $5 per share guidance, we pulled through that California effect into 2026 because we believe those same situations will apply to the 2026 operation. So we pulled it through a lot of conservatism.

Can you elaborate on what you're experiencing in the Medicaid sector? We've heard from other companies about states collaborating with them to adjust benefit designs, in addition to just anticipating a better rate update. Are you observing any of this happening? You mentioned that Medicaid will reach its lowest point in 2026 and then recover. With some new regulations coming into effect in 2027, are you confident that you can manage that and still achieve margin improvement in 2027 and beyond?

A.J., let me answer the second question first, and I'll come back to benefit design. But the context is even in what we consider to be a trough environment in Medicaid, we are operating at low single-digit margins, 2% in the fourth quarter, 1.6% adjusted for Florida Kids in 2026. By analysis of the regulatory filings and other public company reports, the market appears to be 300 to 400 basis points underfunded. If we get even partially way there, we're back flirting with our target margins in Medicaid, number one. Number two, don't forget that last year, we got 150 basis points of mid-cycle updates. Now it wasn't enough to offset a 300 basis point increase in trend during the year, but states are recognizing that aspects of this program are underfunded. Next point on rates. Generally speaking, the states are using a 2024 cost baseline. That baseline does not include the full impact of what we're calling the great inflection here over the last two years. When the 2025 cost baseline fully developed begins to be used as the baseline off of which the trend rates will become stronger. Next point, discrete rating factors. LTSS benefits, pharmacy benefits and behavioral, all trending up, and those are very discrete rating components, very transparent. Actuaries can debate and have clinical and actuarial debates over how those costs are being burned into rates in a very transparent way. And lastly, in 2025, we are experiencing the tail end of the redetermination acuity shift, 250 basis points to our estimation that will not recur in 2026. But to your point, in '27, '28 and '29, we will begin to see the emergence of perhaps a small acuity shift related to OB3. Mark, do you want to take that part?

I think that's well covered. Across the next three years, we see any place between 2% and 4% annual impact on One Big Beautiful Bill. But that's also before any influx of new members, as you typically had in the past, or even a recessionary impact as jobs are lost to AI and who knows what else. So the outlook, I think, if there's membership decline over the next three years is rather small. And as Joe always says, the small changes in membership or cohorts don't really get you because they sort of even out with everything else going on and rates do adequately reflect them. It's the big jumps in population that are problematic like the 20% decline we had in the pandemic with redetermination. So I don't really see a meaningful impact on membership here going forward, either in magnitude or impact on acuity.

A.J., part of your question was about benefit design. We're observing some changes. During the pandemic, states relaxed the utilization control requirements for aspects like behavioral health. They required us to cover GLP-1s for weight loss even without a diabetes diagnosis. These regulations are starting to tighten up again. States are reintroducing stricter utilization controls for behavioral health, and now 12 out of 15 states have a requirement for a diabetes diagnosis to access GLP-1s. However, I wouldn’t characterize this as a complete shift in benefit design; rather, it’s a gradual and inconsistent change depending on the location.

I wanted to ask Joe about your attrition assumption in 2026. Looks like you're assuming down about 2% membership attrition, and that's offset by, I think, 100,000 members in Florida coming on. Let me know if I'm wrong on that. But 2% versus what it appears some of your peers are talking about mid- to high single digits, it looks like you had some pretty significant attrition just in the last quarter. Why are you assuming that attrition is going to be so modest next year relative to what you're seeing just in the last quarter or two and what some of your peers are talking about? And then maybe you could talk about if you do see attrition higher, would we assume that, that would impact risk pool and cost trend?

Sure. Looking back at the historical clinical data, Molina has seen a 20% organic membership decline over the past few years, excluding new store growth. This was 13% in 2024, 4% in 2025, and we now project it to be 2%. We believe the effects of redetermination are mostly behind us, and we are at the tail end of that phase. Moving forward, our focus will be on program integrity, particularly in advance of the OB3 changes set to take effect from 2027 to 2028. We're discussing 2026 now. With stricter measures in place for the enrollment and redetermination processes, we expect the 4% attrition rate from 2025 to decrease to 2% next year. If our assessment does not hold and the rate ends up being slightly higher, I will let Mark elaborate on that shortly. We have thoroughly analyzed low users, and it varies based on the definition used over different time frames regarding lower-than-average loss ratios. Not everyone utilizes services at the same level in relation to their premium; some use much more while others use significantly less. So, your inquiry about whether a significant shift is imminent does not align with our expectations. Mark, would you like to add anything?

Joe summarized everything well. Justin, to address your framing question, we're at roughly 4.6 million, which is flat from the beginning to the end of the year. That's a 2% organic decline, which is offset by Florida. You've got that right. Additionally, the market has declined about 20% since redetermination began. We conducted thorough cohort analysis to identify who joined and who left, and interestingly, we estimate that about 5% fewer individuals in our population are low users or non-users since the startup of redetermination. If we examine any given quarter, the number of people who didn't use the service at all or used it very minimally, for example, around $200 PMPM, is now 5% smaller within our current population compared to two years ago. While the shifts in cohorts are significant, this particular trend stands out. Looking ahead, most of those individuals are no longer with us as a result. The low and non-users present during the suspension of redetermination are largely gone now. Therefore, we estimate a 2% organic attrition rate for the year, which is a relatively small figure. Even if it ends up being slightly higher, the main factor driving acuity shifts or trends remains those low users and non-users, who are mostly out of the system now.

I was hoping if you could update us on the size of your Medicaid expansion enrollment both, I guess, enrollment and premiums would be great. And as we think about dimensioning the attrition that you saw throughout the course of 2025, how much of that came from Medicaid expansion versus other sources, other program types?

Just sizing Medicaid expansion, Mark will correct me, but I'll go from memory here. The Medicaid expansion population is about 1.3 million members and about $8 billion of the $32 billion of premium. Now when we're talking about OB3 work requirements, semiannual determination, etc., we still predict losing about 15% to 20% at the high end of that population, which is only 25% of the total Medicaid book. And as Mark said, when you're trying to calculate or estimate whether that causes a huge acuity shift, the fact that that cohort is operating closer to the mean of portfolio average is a meaningful statistic. Mark, do you want to talk about the attrition in that population?

Sure. We definitely see more people coming out of expansion due to the OBB, just because that's where the policies are aimed, but that's also where you have more volatility in the population. As Joe mentioned, if you lose 15% to 20% of the folks in expansion, one, it's a quarter of our overall Medicaid population; and two, if it happens over three years, it's even smaller as an impact on the overall book. So could be an impact there over time. But annually, I don't think it's meaningful. And again, if all folks are more gathered around the average MLR, the impact shouldn't be meaningful.

Great. I’m trying to clarify a few things. First, regarding your 2026 guidance, you mentioned several positive factors that could drive upside. Were there any negative aspects you're concerned about? It's been challenging to make predictions in recent years. Is there anything specific you’re keeping an eye on? Also, could you elaborate on the risk pool shifts? You mentioned that last year there was 250 basis points of pressure on 4% membership, and now you’re saying 2% membership has no impact. Can you explain that further?

Regarding the last point, we’ve addressed this before. The relationship isn't linear or proportional. The key factor is the number of low and no users in your population. If you assume that 4% caused a 250 basis point impact, it raises the question of why 2% would cause a 125 basis point impact. The low and no user population, as we define it, has decreased by 5%, meaning people are closer to the average rather than the skewed data. Concerning the 2026 guidance, it’s important to note that anything with potential upside also carries potential downside. However, we believe that rates being at 4% represent our floor, and last year we experienced a 150 basis point release midyear. We don't foresee any downside to rates, only potential upside. Medical costs have trended at 5% and increased by 20% over the past three years. For 2026, we expect the trend to be similar to 2025 without the acuity shift, maintaining that 5% trend. Is there a chance we could be mistaken? Yes, but we feel confident in our conservative trend assumption. The 4% rate serves as a floor, with all midyear and off-cycle rate increases representing upside potential. We anticipate there to be upside for Marketplace and Medicare since our pricing has been more conservative than our guidance suggests, targeting low single-digit margins. According to Mark, we expect a negative margin of 1.7% in Medicaid and a positive margin of 1.7% in Marketplace, with the possibility of these figures being higher, but they could also be lower. Mark, do you have anything to add?

And just to begin, the 1.7% was Medicare, not Medicaid.

Medicare, sorry. Medicare.

The impact of low and no user cohorts becomes apparent not when they exit, but in the following period. For instance, if they leave in 2024, the effects will be seen in 2025 due to year-over-year comparisons. Joe mentioned a 4% decline in membership for 2025, but a more significant 13% decline in 2024 will create pressure on 2025. With only 4% exiting in 2025, the expected rollover into 2026 is much lower. Additionally, many low and no users have already left the system, resulting in a diminishing impact.

I would like to ask about your trend assumptions. Clearly, the trend has been challenging, with a 7.5% increase this year. However, I am curious why you are projecting a more modest 5% increase moving forward. Is this a considerable figure? Do you anticipate any areas showing a decline? Is it largely due to utilization management? From my perspective, this industry has been able to support all businesses for the past three years. Therefore, when I see a 5% trend projected for the future, I find that insufficient. I would appreciate more detailed information regarding specific state actions, utilization management, or anything else that could clarify why you believe the trend will only grow by 5%.

Well, thanks for the question. And of course, it is a key assumption in our outlook through 2026. Context, we had a 7.5% trend in '25 off of '24. With perfect hindsight, 2.5 percentage points of that was related to the redetermination related acuity shift as we've just been describing in a couple of questions that were asked. So core trend is 5%. Core trend includes every impact. It's a supply and demand economy. It includes the higher acuity of the American population that we serve. It includes any 'upcoding' or aggressive billing from providers. 5% is what we experienced in 2025. And again, it's off a cost base that's increased 20% over the past 3 years. It's 50% higher than historical averages. Medicaid trend over the last 10, 15 years has been 2% to 3%. We're seeing BH behavioral health services now nearly 20% prevalence of BH diagnosis is now 20% prevalent in our population, up from 17% to 18% three years ago. Why is that important? It's trending at 9%, and the BH services themselves are trending at 18%. Our pharmacy trend, 13%. Top 10 therapeutic classes trending at 36%. These are in the 5% number. LTSS hours, SNF admits, professional office visits up 16% and the number of services, the number of procedures per office is dramatically higher this year than it was in the last two. So we believe that the 2025 5% number includes a lot of the phenomenon that industry pundits and commentators talk about, and we believe that's a good number off of which to project. Are we seeing signs of, I call it, aggressive billing, but upcoding? Level 3 is becoming Level 4, Level 5 service intensity, psychiatric hours going from 30-minute visits to 60-minute visits sure. But that's in the 2025 trend. And that's why we think the 2026 number is fully loaded for all the supply and demand dynamics that are being experienced in the market.

I'll shift focus to the ACA. I wanted to ask how January open enrollment tracked relative to expectations and what's embedded in your membership assumption for non-effectuations and attrition this year? And if possible, it would be great to share how year-to-date effectuations are tracking now versus this time last year?

Sure. We're in real time. I'll give you a global answer and I'll give it to Mark because we're right in the middle of that process now. But as you recall, we ended the year with 650,000 members. We priced up 30% on average, ranging from 15% to 45%, consciously reduced our #1 and #2 position from 50% of our counties to 15% and reduced our footprint by 20%, a conscious effort as we will not allocate capital to an unstable risk pool. Our speculation or forecast at the time was we would come down into the 200,000 zone, 200,000 to 300,000 and reduce our revenue to $2.2 billion. As we're right in the middle of that story right now, I'll hand it to Mark to give you the latest tail and tape what we're forecasting and what's likely to happen with retention and effectuation. Mark?

Andrew, this year, predicting the number of marketplace members is proving to be more challenging than in previous years. To answer your question directly, I expect about 280,000 members at the end of the first quarter, which will decline to around 220,000 by the end. The reason for the increased difficulty this year is that while it's clear how many new members we have, the renewals are uncertain. There seems to be some misunderstanding in the media suggesting that marketplace membership numbers remain high when many assumed they would decline. This misunderstanding arises from the assumption that all renewals will stick. As partially or fully subsidized individuals review their new premiums in January and February, many that might have renewed passively will likely not do so. They may enter a grace period without making payments and eventually drop off. This scenario will occur more frequently this year due to the pricing dynamics in the market. Currently, I'm estimating 280,000 members in the first quarter. As Joe mentioned, we expect about 70% renewals and 30% new members. For new members, the effectuation rate appears to be around 60%, which is lower than the historical expectation of 70% to 80%. As for renewals, I anticipate a 30% attrition rate, whereas I would have previously expected around 60%. This is largely driven by those who are considering renewing after seeing their new premiums, many of whom are not fully subsidized. I expect many of them will not go through the grace period for payment and will eventually drop off in the first quarter, which is why my estimate is for March rather than the current timeframe.

Sticking on the ACA, MCR. Can you help clarify went on in the fourth quarter? Was there a pull forward of utilization or any category that was running high? And then how do you think about the slope of the MCR curve for 2026, given the attrition and effectuation that you're assuming? Should we think that the peak to trough swing widens maybe by a few hundred basis points on what you've experienced historically?

Mark?

Sarah, it's Mark. A couple of things there. What you're calling pull forward, we don't see it. And I've gotten that question a lot. And just for everyone's benefit, the concept of pull forward might be if subsidies are declining and people might drop or lose their coverage in January, would they increase utilization in the fourth quarter in anticipation of that. And we're just not seeing it. If you look at my MORs, I'm only slightly up Q4 versus Q3, part of which is normal seasonality and a little bit of which is we talked about the out-of-period provider settlements. So you're just not seeing it in the MCR and I'm not seeing it in the utilization. Now on next year's seasonality, we're going to have to see exactly what the membership content looks like when it all settles in March. But I would expect a fairly normal seasonality as we've seen in the past. The only thing that might be a little bit different there is metallic mixes are shifting. In past years, we were more 70% silver. This year, we're more 50% silver. So with deductibles, co-pays, things like that, you might see some changes based on metallic mix. But I wouldn't think you'll see something much different in seasonality than we normally have.

The only other point I would make is in 2026, we're projecting a much lower special enrollment period addition for the three quarters. And as you know, special enrollment is an invitation to buy insurance when you need it. They usually come in with very high MLRs until they settle down, and the SEP enrollment during the 2026 is forecasted to be much lower than it was in 2025 and prior.

I’m curious about your perspective on the approach to underwriting for new business development. This includes both new contracts and potential mergers and acquisitions. Considering the current downturn and pressures, I would like to hear your thoughts on pursuing a contract in Florida, as well as how the mergers and acquisitions you've accumulated over the past few years have performed within the overall enterprise compared to ongoing operations.

Scott, first on the new business, we are still actively pursuing new contracts. Our win rate is 80%. $20 billion of run rate revenue over the past number of years, including the Florida Kids contract, which we believe is a very valuable contract. We have proven over time that we expertly handle high acuity, low-income lines, and these are very high-acuity situations for young adult, young children in the state of Florida. We've worked hard for this contract. We believe it's accretive. We wouldn't have put $3 of ultimate run rate into our embedded earnings if that wasn't the case. And I want to clarify the start-up here. The fact that there is a $1.50 drag on 2026. The reason is you have to spend money before any revenue ever shows up. You have to hire people, number one. Number two, new programs, whether it's Nebraska, Iowa, or Florida Kids, a new program or a new entrant always runs higher as people get used to systems and business processes, etc. And third, as Mark would like to talk about, there is a financial implication of building reserves in the early years. So that $1.50 drag is not symptomatic or emblematic of the power, the earnings power of that business. We added a $3 run rate to our embedded earnings for the ultimate attainment of target margin. Mark, anything to add on Florida?

Joe, you've highlighted some important differences. First, the Margin Operating Ratio tends to be elevated for new properties. Typically, we expect a two-year period to reach target margins. With only one quarter of performance in Florida, the margins we're applying on top of our usual selections, which are one-time items, really inflate the results for the first quarter. So, Florida will exhibit a high Margin Loss Ratio initially, primarily because it's a new property establishing its processes, along with the margins we've set from day one, following our standard actuarial guidelines. Additionally, the $1.50 figure doesn't just reflect activity from the fourth quarter; we've spent two to three quarters preparing by hiring staff ahead of revenue and incurring expenses, which obviously doesn't factor into our ongoing run rate. Thus, the $1.50 is not supposed to serve as a long-term projection but rather as an anomaly resulting from one quarter of new business and significant general and administrative preparation.

Yes, $6 billion of revenue, which to us is, you're adding 15% of revenue with one contract. And we never measure our acquisitions or contracts on contribution margin. But in this case, it's entirely appropriate. The contribution margin of this contract is going to be significant. To your question on M&A. This is the perfect environment to be exploring M&A, and we have. Our pipeline is as actionable opportunities in it. Many of them are what I'll call challenging situations for single state, single geography payers who are in the same rate environment that everybody else is in and they're eroding capital. Without naming names or states, we've tried to action 2 or 3 of these in the past 6 months. And they were so troubled, they had to seek other alternatives rather than to be acquired. But this is a great time to acquire revenue. At the heyday of margin attainment, we are still acquiring things at just over 20% of revenue, which means very little goodwill value; you're mostly exchanging cash for regulatory capital. Now in this environment, Mark and I say, give me a property at book value, and I'm good to go, and we'll get it to target margins in our 2- to 3-year period. So this is the perfect time. We believe long term in the veracity of this business and its margin potential, and this is the perfect time to responsibly purchase long-dated revenue streams with stable membership in states where we want to do business, either states that we're already in and are underrepresented in market share or states that we're not in and want to create a foothold.

Maybe within the cost trend assumption of 5%, maybe give us a little sense on some of the components within that assumption, maybe cost categories you assumed higher, lower and maybe any sort of swing factors with the widest range is positive or negative?

Sure. Sure, Ryan. I covered a few of these before. Behavioral health services are the cohort of Medicaid patients with a behavioral condition trending at 9%. We did not reduce that at all, and the behavioral services themselves are trending at 18%, not only due to the prevalence of behavioral conditions, but let's face it, providers are using their judgment on diagnosis and treatment protocols. The pharmacy trend globally is 13%; the top 10 therapeutic classes are trending at 35% antiretrovirals, antipsoriatics, GLP-1s, all the things you read about. The cancer diagnosis are prevalent. We did not soften any of the current trends that we're experiencing in 2025. As I said, now that the baseline, the cost baseline, is 20% higher today than it was 3 years ago. It's 50% higher than historical averages. Medicaid trend over the last 10, 15 years has been 2% to 3%. We're seeing BH behavioral health services now nearly 20% prevalence of BH diagnosis is now 20% prevalent in our population, up from 17% to 18% three years ago. Why is that important? It's trending at 9%, and the BH services themselves are trending at 18%. Our pharmacy trend, 13%. Top 10 therapeutic classes trending at 36%. These are in the 5% number. LTSS hours, SNF admits, professional office visits up 16%, and the number of services, the number of procedures per office is dramatically higher this year than it was in the last two. So we believe that the 2025 5% number includes a lot of the phenomenon that industry pundits and commentators talk about, and we believe that's a good number off of which to project. Are we seeing signs of, I call it, aggressive billing, but upcoding? Level 3 is becoming Level 4, Level 5 service intensity, psychiatric hours going from 30-minute visits to 60-minute visits sure. But that's in the 2025 trend. And that's why we think the 2026 number is fully loaded for all the supply and demand dynamics that are being experienced in the market.

I appreciate your detailed commentary on the cohort analysis. However, what assumption are you currently incorporating into your 2026 guidance regarding hospital risk, given that more states are facing increasing budget pressures and stricter eligibility requirements? If this leads to a rise in procedure disenrollment rates, is there a range of outcomes reflected in your guidance? We are tracking states where we are observing concerning procedural disenrollment rates, some reaching as high as 90%. Many of these trends have begun to spike in recent months, and their impact will typically be felt the following year, which raises our concerns. While these individuals may not be complete non-utilizers, they generally tend to be healthier overall. In light of this, I recognize your confidence in the lower prevalence of overall utilizers in your projections. However, I would like to ask again how we should consider the achievability of your guidance if more states decide to tighten eligibility.

We have confidence in it. I want to emphasize that while we do approach things from a top-down perspective using global assumptions to test theories, our current analysis is entirely bottoms up. This involves our actuaries and local teams engaging directly with our state customers to understand their situations and plans. It is in the best interest of each state customer to share with us what to expect, allowing us to allocate resources appropriately. Our forecasts indicate that some states may retreat more than others, but this is all grounded in the information provided by the states regarding their intended actions, such as implementing stricter enrollment and eligibility requirements. This is especially relevant before the impacts of work requirements begin in 2027, which will necessitate semiannual redeterminations. We feel confident in our 2% forecast. If we are incorrect, we believe that many low and no users have exited the portfolio during the redetermination process. Therefore, if we do outperform by a percentage, it will likely be closer to the portfolio average, resulting in a volume impact but not affecting margin shifts. This is an important point to note.

Great. So I understand it's early, but what are some of those items that we should be thinking about in terms of the earnings growth profile into 2027? Do you get back to growth algo? Do you add back some of those burdens? I think you were talking about that earlier in terms of what's an anomaly, what's not or what's recurring in nature. And then is that the right way to think about it? And the $11 in earnings, embedded earnings power, the trajectory to get there, I guess, we'll hear more about it at Investor Day, but just higher-level conceptually how we should be thinking about that as well in terms of the time frame from here?

Sure. Regarding the embedded earnings, we will provide a more detailed overview at an Investor Day. This will include not only the accounting aspects but also what is included and whether it may be slightly higher or lower. We will give updates on how this rolls out into 2027, 2028, and 2029, which will be crucial. For the time being, we are not making predictions about the rates versus trends over the next three years. It's a relevant question, but I don't have an answer right now. However, 100 basis points of improvement in the Medicaid MCR translates to $5 per share. Consider a scenario where the overall platform across various regions sees an improvement of 50, 75, or 100 basis points annually for the next two to three years. Many believe we are at a low point, with some suggesting 2027 as that point, while we think it’s 2026. We are currently earning a 1.6% pretax margin, unlike many competitors who report losses between 1.5% to 2%. If the market can recover to 300 to 400 basis points, we would return to our target margins. While I can't provide specific projections at this moment, we will share more at Investor Day. Just think of an environment where trend rates improve positively by 50, 75, or 100 basis points annually for a few years, considering the significant leverage effect of $32 billion in revenue, where 100 basis points in Medicaid MCR for us equals $5 per share.