Joe Zubretsky: David, I’ll take the Marketplace question first. We were running really well in the middle of the 2023. Our experience was quite positive. So we consciously, consciously bid to grow the business modestly and moderately, as we suggested we would. And so we priced somewhat below the observed trend, not usually below the observed trend, but slightly below the observed trend, to essentially invest some of the excess margin. We earned nearly 10% pre-tax in that business in 2023. So in a sense, we invested some of the excess margin in growth, hence the 31% membership growth and 17% revenue growth. Mark, on the phasing — quarterly phasing?
Mark Keim: Yeah, absolutely. Nathan, and good morning. Yeah, you got it right. We’re normally 55-45 on the front half versus the second half of the year. I’d almost flip that around this year because the dynamics are a little bit different. One, we put on a lot of new business this year. As you can see in our revenue bridge, we got $5.7 billion of new revenue coming into the company, which always comes in just a little bit warmer in the first year, but in the first quarters in particular. So I’m expecting to get some momentum on MLRs in Medicaid and Medicare as we kind of grow into our new footprint there. So that’ll change the dynamic a little bit. The other thing is, and I think Joe touched on this, very often, Marketplace has attrition throughout the year such that Marketplace declines during the year.
This year is a little bit different. With all the members rolling off on redet and us expecting to pick up our fair share of them in Marketplace as they convert, we’ll see a growing book in Marketplace. And as you know, we’ve got some confidence on the margins given that we really prioritize margin over volume in Marketplace. So for those two reasons, you’re going to see a little bit more of a back-end loaded EPS trajectory this year. I think that should address your question.
Nathan Rich: Great. Thank you.
Operator: The next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.
Sarah James: Thank you. Can you clarify for us what you guys contemplated in for two midnights and V28 into your 2024 plan design and also for Bright? And when you mentioned the pressures that you were seeing on Medicare, you guys didn’t flag outpatient or some of the inpatient trends that the rest of the group is seeing. So I wanted to clarify if you are seeing this?
Joe Zubretsky: Hi, Sarah. I’ll kick it to Mark for we have very detailed analysis of the changes in the risk adjustment rules and what it meant for our book. In answer to your second question, one of the reasons I articulated earlier the configuration of our book of business being somewhat different than what I call mainstream Medicare Advantage is that we have a low income, high acuity population. Our members are using services from the first day of the year to the last day of the year. They’re chronic. They have comorbidities and are polychronic. And so the notion of discretionary utilization means far less to our business based on its mix than it might be to a mainstream population where discretionary or the pedic procedures are being done, screenings are taking place, perhaps, and up demand from the pandemic.
In our book of highly chronic patients, high acuity members, that’s less of a dynamic. And so the three cost categories that I articulated previously, LTSS hours, high cost drugs, GLP-1s, and the supplemental benefits were really the drivers in our book. Mark, do you want to take the risk adjustment question?
Mark Keim: Sure. And I think, Sarah, it’s important, as Joe mentioned, when we talk about Medicare, it’s in fact three things. Your probably question is most aimed at the DSNP, or high acuity component of our Medicare, which is a third of the book. Obviously, it’s less relevant to MMP. On the two things you mentioned, on the two midnight rule, I’ve seen a little bit of buzz about that lately, and we’re a little bit surprised because it’s certainly not new. And many of us have factored this in for quite some time. And what I always remind folks is even though there’s a two midnight rule, providers still have to prove medical necessity, so there’s really not a big window there for a change in trend or a change in risk adjustment issues as we can see it.
On V28, it’s got some interesting dynamics. It is certainly a drag in many places for folks, but there’s an interesting dynamic around V28 and high acuity. On single-chronic, people use the example of diabetes, where there’s diabetes, but there’s some other conditions that kind of correlate or are highly associated with diabetes. V28 will be a reduction on risk adjustment for those kind of situations. But when there’s polychronics where there’s different comorbidities that are in fact quite different than each other, V28 is actually helpful. And in our high acuity chronic book, we actually have many of those polychronics. So we don’t quite see the same dynamic that maybe some of the other folks do out there.
Sarah James: That’s helpful. And one more clarification if I could, just on your comment with the exchanges, I know you guys are guiding to a really favorable MLR for this year, but is there still a step-up in earnings as you mature this new book? I guess in other words, your year one is still slightly below target range, right, on new members? And then there would be an implied earnings lift as that book moves into the second year of operations?
Joe Zubretsky: I’m not quite sure I’ve captured the essence of your question, but we are forecasting a 78% MCR for the year, which is at the low end of our long-term target range, which means we’ll be operating high single-digit margins, certainly not the 10% pre-tax we achieved in 2023. But look, if you grow the book more aggressively, more of your members are going to be new to the book. And so you have to — in our view, you have to strike a balance about how fast you’re going to grow it and how many new members you want. Every new member that comes in, you need to find risk adjustment. If they come in during SEP, if they’re chronic, you better find risk adjustment quickly or they won’t get the profitability in the near term.
So there’s a — very much a balance between what you get in annual enrollment, what you pick up in SEP, and how one thinks about how fast do I grow the book to achieve mid-single-digit margins when the maturity of the membership and the duration of the membership is pretty important to the stability of the risk pool. You have to balance those two factors.
Sarah James: Thank you.
Operator: The next question comes from George Hill with Deutsche Bank. Please go ahead.
George Hill: Yeah, good morning guys. And I think Nate and Sarah kind of covered everything I wanted to hit on the exchange, but I’ll try to bring up one more topic, which is I guess, can you talk about underlying utilization trends and kind of cost growth trends there because it sounds like you guys priced the book for growth in 2024 but the utilization is going to kind of continue to remain low. So I guess I’m trying to parse the spread between utilization trends and price growth for the margin expansion. Kind of any color on that would be helpful?
Mark Keim: And, George, your question is focused on Marketplace?
George Hill: Yeah, Marketplace.
Mark Keim: Yeah, look, as Joe has been very clear, we’re prioritizing margin over volume in this business, and the way we do that is we keep it silver, which we believe is the best product for both the member and the payor. But we keep it stable, which means we continue to have really good renewals. As we look at our pricing objectives here, we’re putting price into the market to make sure that we can defend reasonable margins here. We did concede a little bit of margin in our pricing for 2024 just because we were well below our target range. Remember our target range is 78% to 80% and we printed something a little bit south of that in ‘23. So there’s no reason to leave volume on the table if we can put a little bit of price back, drive some volume and still hit our margin targets. Hope that helps.
George Hill: It does. And maybe if I can just sneak in a quick follow-up. I know it’s a tiny piece of the business. Could you talk about kind of the expected disruption in PDP in 2025 given the changes from IRA?
Joe Zubretsky: I’m sorry, we had trouble hearing the last part of your question, George. PDP?
George Hill: Yeah, but like I said, I know it’s a tiny part of the business, but we’re expecting kind of PDP to be pretty disruptive or disrupted in 2025 because of the IRA changes. I know it’s a tiny part of the book, but if you guys have any commentary on what you’re saying would be helpful.
Mark Keim: Yeah. So on PDP, as you know, we don’t price a PDP product and the IRA or the Inflation Reduction Act, as you’re pointing out, is certainly a headwind for that sector, but that’s not too relevant to our business, George.
George Hill: Thank you.
Operator: The last question today will come from Scott Fidel with Stephens. Please go ahead.
Scott Fidel: Thanks. Right before the bell here. I just was interested if you could walk us through your preliminary analysis on the 2025 MA advance notice and whether you’re able to parse that down between the legacy business impact and then what you’re projecting will be the preliminary impact on the Bright book? Thanks.
Joe Zubretsky: Sure, Scott. I mean, on balance, our view is the same view that you’ve heard from others, is that the advance notice does not appear to be adequate to compensate for trends that we’re all observing. I think in our book, if you take the CMS advance notice and project it to our book, I think we’re projecting about a 50 basis point, 0.5 point of rate increase, which we believe is, along with others, is insufficient, and we’ll see where the final notice comes out. It usually comes out, as you know, better than that. But our view is not any different from anybody else’s.
Mark Keim: Yeah, just to build on that, and a lot of this data is in the public domain at this point. On the effective benchmark rates in the advance notice and then risk or normalization, most folks are seeing across the entire market, the net of those at about zero, right? As Joe mentioned, we see a net of about a positive 50 bps. So we’re a little bit better on the benchmark rate, and we’re a little bit not so bad on the risk score normalization for some reasons I alluded to earlier. So we’re seeing about a 50 BP benefit there, and obviously the rest of STARS impact and what ultimately everyone does with risk scores has yet to play out. But that’s our initial point on the legacy book.
