MOLINA HEALTHCARE, INC. Q3 FY2024 earnings call

• Third quarter adjusted earnings per share were $6.01 with $9.7 billion in premium revenue. - Reaffirmed full-year premium revenue guidance of $38 billion and EPS guidance of at least $23.50. - Growth initiatives include retaining presence in Florida, awaiting Georgia contract awards, winning contracts in Michigan and Massachusetts for dual-eligible products, and planning to acquire ConnectiCare. - Operational highlights include effective G&A discipline with a 6.4% adjusted G&A ratio in the third quarter.

In Medicaid, the third quarter MCR was 90.5%, above the long-term target range. Excluding a retroactive premium rate reduction in California, the third quarter Medicaid MCR was 90%. Year-to-date, consolidated MCR is 88.8%. In Medicare, the third quarter MCR was 89.6%, above the long-term target range. Marketplace had a third quarter MCR of 73%. Revenue contribution: Premium revenue for the quarter was $9.7 billion, with Medicaid, Medicare, and Marketplace segments contributing to this total.

• Reaffirmed full-year premium revenue of approximately $38 billion and EPS guidance of at least $23.50. - Fourth quarter Medicaid MCR expected to be 89%, Medicare 90%, Marketplace 78.1%. - Full-year 2024 MCR expected at 88.7% and G&A ratio at 6.8%. - Embedded earnings raised to $5.75 per share, with expectation of less than half to emerge in 2025.

• Medical cost trend differing from expectations, with higher than expected costs in Medicaid and Medicare segments. - Uncertainties in Medicaid rate adjustments and the progression of rates and cost trend. - Market dynamics affecting MCR, including the impact of redeterminations and utilization trends in services like LTSS, pharmacy, and behavioral health.

Q: Hi, thanks. I'd like to ask my second question first. So the strength in marketplace, does that change your view on the impact of potential rebate positions in 2025, just based on what you've seen in the last two years here? And could you just remind us your views? I think you mentioned sort of that mid-single-digit margin, just sort of how you're titrating additional growth in 2025 versus offsetting rebates versus sort of maintaining that mid-single-digit margin?

A: Sure, Josh, this will be the second straight year of outperformance in marketplace and in '24 into '25, we did invest that excess margin in our bids and expect to grow the business. And yet here we are again with another year of outperformance and we'll continue to do the same. So yes, we're targeting mid-single-digit pre-tax margins, but the business is positioned to grow really well next year and the year after. Now, with respect to the rebate question, recall it's a three-year test and also recall that an 80% minimum is equivalent mark to what? About a 75% GAAP equivalent, correct?

Q: Hi everybody, I think it's AJ but anyway. If your trend is running at about 6% that would imply the rate updates you need to normalize are probably in that range maybe a little bit higher over the next year. That's quite a bit different as you may know from what at least one of your large peers is saying they need, they're talking about a low-to-mid double digit rate increases. And they've also raised the question about whether state budgets can afford to update in one year what's necessary or whether we might need multiple cycles. I guess I don't know if you can comment on why there might be a difference between what you're seeing and what they're seeing, but I'll throw that out and see if I can get you to confirm the order of magnitude of the rate update you need to normalize and whether you think that's achievable over the next year.

A: Let me first, AJ, comment on the model of how we've been describing this since redetermination started. We knew there would be an acuity shift without question. It takes time for a state actuary to observe the acuity shift and allow rates to rate for it. There's a gap there. Being 200 basis points deep into the risk corridors would act as a buffer until rates caught up and that's exactly what's happening here. Obviously we're a bit short, but we're operating comfortably at 90% no matter how you cut it, we're operating comfortably at 90%. Now with respect to rates, what gives us encouragement and great comfort are the rate updates we saw in the second half of the year, $345 million of pre-tax benefit to the second half, 230 basis points in the MCR. Some of those rate updates were off cycle, meaning that states truly have recognized that components of their program were underfunded. The on cycle rate adjustments in the third quarter averaged 4.5%. The on cycle rate adjustments in the fourth quarter averaged nearly 9%. Now we've only seen a handful of draft rates for 1-1 when 55% of our revenue renews but we've been encouraged by what we've seen at this early stage. So how it all maps out depends on what cost trend emerges in the fourth quarter as to whether the strength of those 1-1 rates will truly get us back to our target MCR.