Molina Healthcare, Inc. Q3 FY2025 earnings call

• Third Quarter Performance: Adjusted earnings per share were $1.84 on $10.8 billion of premium revenue, with a 92.6% consolidated MCR. Approximately half of the underperformance was due to the Marketplace business, while Medicaid, despite some pressure, still had strong margins. Year-to-date, the consolidated MCR was 90.8% and the adjusted pretax margin was 2.7%.
• 2025 Guidance: Full year premium revenue is expected to be approximately $42.5 billion. The adjusted earnings per share guidance was revised to around $14 per share, which is $5 below the prior guidance. This revised guidance reflects a consolidated MCR of 91.3% and a pretax margin of 2.1%. For Medicaid, the full year MCR is 91.5% with a pretax margin of 3.2%. Medicare has a full year MCR of 91.3% with a breakeven pretax margin. Marketplace has a full year MCR of 89.7% with a negative pretax margin.
• 2026 Outlook: While formal guidance for 2026 is not available yet, the 2026 premium revenue outlook anticipates growth in the current footprint, new Medicaid contracts in Georgia and Texas, and growth in Medicare duals. The Marketplace pricing strategy is expected to be a revenue headwind but earnings accretive. Medicaid's performance in the second half of 2025 provides a base for 2026. Potential upsides include improvement in Medicaid rates, better performance in Medicare and Marketplace, and harvesting embedded earnings.
• Growth Initiatives: Continues to fuel growth engines. Won RFPs such as the renewal of the Wisconsin My Choice contract. Has an active pipeline of $54 billion of new opportunities. The acquisition pipeline has actionable opportunities and remains opportunistic in deploying capital to accretive acquisitions.

Medicaid constitutes 75% of total premium revenue. In Q3, it reported an MCR of 92% and an adjusted pretax margin of 2.6%. For the full year 2025, the guidance assumes an MCR of 91.5% with a pretax margin of 3.2%. Medical cost trend was higher than expected, driven by utilization of behavioral health, pharmacy, LTSS, and inpatient care. Average rates were expected to be 5.5% but the medical cost trend for the year is now projected at 7%. Medicare reported a Q3 MCR of 93.6%. The full year 2025 guidance includes an MCR of 91.3% with a breakeven pretax margin. It experienced higher utilization in the high acuity population, particularly related to LTSS and high-cost drugs. Marketplace had a Q3 MCR of 95.6%, which was significantly higher than expected. The full year 2025 guidance for Marketplace has an MCR of 89.7% with a negative pretax margin. Higher utilization is expected to persist with little to no offset from risk adjustment revenue, and Marketplace represents nearly 10% of total revenue.

Full year 2025 premium revenue is projected to be approximately $42.5 billion. The adjusted earnings per share guidance has been revised to around $14 per share, which is $5 lower than the prior guidance. For Medicaid in 2025, the full year guidance includes an MCR of 91.5% and a pretax margin of 3.2%, with the fourth quarter expected to have an MCR of 92.5%. Medicare's full year 2025 guidance has an MCR of 91.3% with a breakeven pretax margin, and the fourth quarter is expected to have an MCR of 93.6%. Marketplace's full year 2025 guidance has an MCR of 89.7% with a negative pretax margin, and the fourth quarter is expected to have an MCR of 96.2%.

Medical cost trends could differ from expectations, impacting margins. Uncertainty exists regarding Medicaid, Medicare, and Marketplace program changes. Fluctuations in risk adjustment revenue are a concern. Regulatory changes can affect pricing and eligibility, and for Marketplace, there is uncertainty related to subsidies and risk pool stability.

Q: Can you elaborate on the drivers of ACA MLR pressure in the quarter?

A: The pressure in the quarter was due to increased medical cost trend across all categories, including special enrollment volumes, program integrity issues, and IBNR roll forward development. Next year, exposure will be reduced significantly with rate increases and a smaller footprint.

Q: Just a couple of clarifications on how you're thinking about Medicaid going into next year. In terms of the rates that you're discussing, are you then expecting rates to be in the excess of this 7% cost trend that you're seeing right now. And then when you speak to enrollment trends, on one hand, it sounded like you talked to some level of normal enrollment growth, but then also talking about some expected pressure on enrollment. I guess could you just clarify whether you're expecting on a same contract basis in Medicaid for next year, whether enrollment is going to be up, down or stable?

A: In the last 3 quarters, Medicaid has seen a 1% membership decline due to disciplined enrollment activities. Rates are expected to at least keep pace with the trend and likely be slightly in excess of it because of past state rate updates, the baseline including cost inflection, discrete rating components, and an early glimpse at 1/1/26.

Q: I was hoping I could get you to share where you think exchange revenue would be for next year, given all those moving parts you talked about versus kind of the $4.5 billion run rate this year. And then maybe you talked about SG&A be a little pressured year-over-year given bonuses returning. Can you -- anything you could share with us in terms of where you think that SG&A ratio will shake out year-over-year?

A: Exchange revenue could come down from $4 billion to $2 billion or even less. The SG&A ratio is expected to be roughly around 6.8 for next year starting.