Operator: Our next question will come from the line of Gary Taylor with TD Cowen.
Gary Taylor: Two quick things I just want to make sure I understand. Back on the first quarter call, we asked about TBC and you felt it wasn’t a constraint to margin recovery for ’25. And I think what’s changed is that might have been true with the 0% funding assumption, but at a negative you’re just more underwater, so to speak, from an underwriting perspective. And so now TBC is more relevant to ’25. So I just want to confirm that. And then secondly, that $6 to $10 bridge, in our view, the final notice, on paper, wipes out most of that bridge. But at our conference in March, you had suggested you had still expected to see some earnings growth for ’25. So I just wanted to see if you could affirm that expectation today?
Susan Diamond: Yes. Gary, and you are correct. With where the final rate notice came in, it will require larger benefit reductions to achieve stable margins and approach the TBC thresholds in some cases. And so that’s where, as we said all along, we will be evaluating plan and county exits where the TBC limits impede our ability to price products at a reasonable margin. And then also look for opportunities within the bids to optimize benefit changes, to support further margin improvement. Given the competitive bidding process, we’re going to avoid sharing any specific details today on what that might look like. But certainly, as Jim suggested, post bid, we’ll be able to share a little bit more detail on how we approach the strategy for ’25 plan designs.
We do recognize that in light of the final rate notice sort of net membership will be more impactful to what we can ultimately deliver for ’25 earnings than it might have been in the previous thinking. And so that’s where we just feel like we need to have more visibility into competitor reactions to the final rate notice before we can really evaluate that. The final thing I’ll say is, technically, as we sit here today, we do not have the TBC threshold for 2025. And so to the degree that moves even a couple of dollars positively or negatively, can impact ultimately what we think we can deliver for margin progression given where we are. So for all of those reasons, we’re just going to need some additional time. But as we said, as we know more, we will make sure to update you and provide you with information as we become more confident in the information that we have access to.
Operator: Our next question will come from the line of Justin Lake with Wolfe Research.
Justin Lake: Hello, can you hear me?
Susan Diamond: Yes.
Justin Lake: So one, I wanted to follow up on Kevin’s question and then I got one of my own. The 3% margin, the 3% plus target, my recollection is when I did the math for 2025, when you originally had the $37, I was getting to about a 3.5% individual MA margin within that $37. Is that the right ballpark that you’d previously assumed just so we can compare or contrast? And then can you confirm that this doesn’t include investment income, which I think makes them a little less comparable? And then my question is on 2025. At this point, rates are known and the key — I know TBC is still got to come. You’ve got to make some decisions. But the key swing factor appears to be Medicare Advantage membership. Get that there’s less visibility here, but maybe you can walk us through.
I know I get a lot of questions on the P&L impact from lost membership, right? I’m thinking specifically beyond the loss margin, deleveraging on SG&A, whether you can offset that with efficiencies. And then any kind of downstream impacts from CenterWell. So maybe you could give us a framework to think about like every 1% decline in membership, the negative impact through the P&L ex the loss margin might be ex something.
Susan Diamond: Okay. Yes. So I think that was 6 questions in 1, but I will do my best to hit them all. To your first comment about the $37, you are correct. And here in that initial modeling, you can think of it between 3% and 3.5% over that period. And we had always said that our belief was that any margin progression and improvement would largely come from productivity and efficiency, not MLR gains and then any sort of revenue and claim trend vendors would sort of support the product to remain competitive and continue to grow. . But, yes, you were correct in terms of where we would have been thinking in the previous guidance. And you are correct, the 3% plus that we referenced does not include investment income. And so that can sometimes vary in terms of how peers report their margin targets.
But for us, that would exclude investment income. In terms of ’25, as you said, TBC is going to be a huge factor, just given where we think we are in terms of expected benefit changes and the net membership growth, as you said. The other thing I’ll mention before coming back to membership is just trend. Depending on how the trend develops in, well, frankly, how ’23 ultimately restates, how ’24 develops, that could be impactful to ’25 as well. We are not pricing for any favorability to emerge in 2024. And so to the degree it does, that would be incrementally positive going into next year as well. When you think about the membership, I would say the absolute membership is certainly important. And in light of the final rate notice and the expected changes that we expect, we think our ultimate result will be more sensitive to the net membership than it might otherwise have been.
And then in addition to that, I would say, plan mix underneath. There are varying margin profiles across a deal versus non, certain geographies and other factors. And so that mix ultimately will be important and how our plans are ultimately positioned relative to others. I would say right now, as we’ve said all along, we are anticipating that membership declined for 2025, largely because we do intend to exit certain plans in counties whether that is incrementally larger or smaller based on the other plans will be very dependent on what we see across the competitive landscape. And as we know more, we’ll certainly keep you apprised of our thinking. Depending on the level of membership change, we certainly will be mindful of driving the appropriate admin cost adjustments in light of that.
