Molina Healthcare, Inc. (NYSE:MOH) Q1 2024 Earnings Call Transcript

Molina Healthcare, Inc. (NYSE:MOH) Q1 2024 Earnings Call Transcript April 25, 2024

Molina Healthcare, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Molina Healthcare First Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference to your host today, Jeff Geyer. Please go ahead.

Jeff Geyer: 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 made are 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 our 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 re-determinations, our recent RFP awards and related revenue growth, our recent acquisition and M&A activity, our long-term growth strategy, our embedded earnings power and future earnings realizations 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?

Joe Zubretsky : 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 pre-tax 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 half a 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 expectation. 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 this acuity shift with risk corridors capturing any temporary shortfall. Medicaid rates remain actuarily 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% of 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 we 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 gives 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 provide 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 re-procurement win in Michigan but were not awarded contracts in two other existing states, Virginia and Florida.

All these impacts combined cause 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 SHIP programs. This contract is expected to begin in September 2025 and last for six years with the option to extend 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 result 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 in 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 seven for nine in reprocurement and eight 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 low income will benefit from further integration of Medicare and Medicaid benefits. CMS 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 targets. With all of the successful growth activity in M&A in 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?

Mark Keim: 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 changed 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 experienced 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 expectation 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 move 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.

Dazing 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, 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 two-thirds 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 one-third 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 a dollar 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 receive their Medicaid and Medicare benefits from two different MCOs. CMS announced rules that will move these unaligned dual members to the DSNP plan, run by their Medicaid MCO. As such, incumbent Medicaid players will see increased growth opportunities in DSNP while the new rule will phase in over time, it’s clear that our substantial Medicaid footprint positions us well to grow our DSNP product to serve dual-eligible members. This shift, along with demand from state partners to service these complex populations gives us confidence 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’re now ready to take questions.

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Q&A Session

Operator: [Operator Instructions] And today’s first question comes from Cal Sternick with JP Morgan.

Cal Sternick : I guess, first, I wanted to start in the guidance here is, you talked about the strength in the core business and the MCR sort of being in line with your expectations. So I guess is the right way to think that the strength is really coming from G&A. And then when we think about the back half, I guess, the outperformance in the current business enough to allow you to maintain guidance? Or, if you think about the those potential contracts going away, are there additional SG&A savings you’d need to target in the back half to be able to offset those losses? Just any color to help us frame that would be great.

Joe Zubretsky : 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. It’s no one thing, it’s just general performance of all the portfolios. The loss ratios in our Medicaid and Medicare business get better as the year progress for variety of reasons. Obviously, the market place is higher in the back half due to the normal sensitivity of that business. But, 90 basis points of improvement is projected in Medicaid MCRs in the past 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.

Cal Sternick : Got it. And then I wanted to ask about the DSNP 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 you’ve gotten 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?

Joe Zubretsky : It doesn’t really change our M&A strategy. I mean, we look for opportunities across all of our product lines. A year before, most of our M&A activity has been in Medicaid, but the Bright acquisition represents our 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 DSNP opportunity is just one more way to monetize your significant Medicaid footprint, and the fact that we have a very robust and very operationally excellent DSNP business, those two platforms combined will allow us to participate in the dually eligible population growth rate that’s 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 auctioning the dual eligible population. The next question comes from Josh Raskin with Nephron Research.

Josh Raskin: Thanks. 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?

Joe Zubretsky : I’ll kick it to Mark for the question on the Florida and Virginia earnings. Go ahead?

Mark Keim : Josh, good morning. 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.

Joe Zubretsky: Josh, 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. — operationally breakeven in year one with slight earnings drag related to the carrying costs, breakeven in your operationally breakeven in year two. And full $1 accretion in year three and we get there by — we inherited a 95% MCR in the business. We’ve managed it to 87%. We inherited a 13% G&A ratio in the business. We 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 2 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.

Operator: And the next question comes from Stephen Baxter with Wells Fargo.

Stephen Baxter : Thanks. 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 months to 12 months.

Joe Zubretsky: 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 [indiscernible] or our Iowa — second half of our 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.