Molina Healthcare, Inc. (MOH) Earnings Call Transcript & Summary

Great. Well, I started in this room, I think at 7:30 this morning. I can't believe it's already 5:00. But thank you for continuing with us on this first day of the conference. It's my pleasure to introduce Molina Healthcare. Molina provides managed health services under Medicaid and Medicare programs in the state insurance marketplaces. Over 3 million members, getting closer to 3.5 million members, will generate over $17 billion of revenue in 2019. And we have Joe Zubretsky, who's the Chief Executive Officer, to walk us through the story.

Thank you, Gary. Good afternoon, everybody. We selected a theme for this afternoon's discussion, the brief moments we have together, to convey to you perhaps a underappreciated part of the investment thesis of Molina. And that is how the management team plans to generate excess capital and our model for deploying it in very accretive ways. I'll start with the retrospective. 2 years ago, in this very room at this very forum, I couldn't answer a very legitimate question investors were asking, and that is, are you going to have to raise equity in order to solve some of the financial issues that were confronting the company? Well, the first thing we did was we unlocked the value of the business. We improved the financial performance so significantly that not only did we not have to raise capital, we generated a tremendous amount of excess capital. In fact, $1.7 billion, which was used to retire some very expensive convertible notes. High class problem to have as our performance improved and we drove the value of the equity up, the converts went into money, became expensive. But they had to be retired and we had to take them out, and we did that without raising $1 of capital. What it means is capital has now become a strength of the company. We have a significant amount of dry powder. Our capital generation is regenerative. If we are true to our model and the profitability profile of the business, we will continue to generate significant excess capital year in and year out. I'll repeat this countless numbers of times this afternoon. Our first priority is to grow the business organically. It is the most efficient use of capital, tremendous operating leverage, and there is a fair amount of organic business for the taking. Second, we will aggressively, vigorously pursue accretive M&A that fits with our strategic theme of providing managed health care services for government-sponsored programs and disadvantaged people. And third, if you run up ideas across dimensions 1 and 2, we will deploy that capital in a methodical and programmatic way and return it to shareholders. A retrospective on the capital story in a very short period of time from 2017 to 2019. Some very important facts. At the end of the third quarter, we had $800 million of cash at the parent. Doesn't sound like a large sum of money, but bear in mind, we're an $8.5 billion market cap company, $13 a share and excess cash. The capital requirements of this business are rather modest, even though we're in a regulatory structure, an insurance structure that requires risk-based capital. At 300% of RBC, only 10% of premium is required as capital. And therefore, the ROE characteristics of the business are significant if you can continue to produce 4% after-tax margins. Our equity base is very, very clean and very strong. We have not yet done many acquisitions, so the $2 billion of equity capital we have as a company is nearly 100% tangible. We have not converted and transformed tangible net equity into intangible net equity as a result of acquisitions, but have the dry powder to do so over a period of time. Our ratios are compelling. And while debt to capital at 40% kind of looks in the ZIP code of where you need to be, our debt to EBITDA is only 1.3x, and if you want to get into coverage ratios, we're covering our fixed charges with literally 3 weeks' worth of earnings. This is not a highly levered company. And the ROE generation characteristics are significant with -- even with excess capital generating levered ROEs of 35% and marginal returns on equity of 65% at target capital. These important facts will be repeated throughout this afternoon's presentation because they are the basis, the thesis on which our entire program is premised. Although we have, at point in time, a significant amount of excess capital -- you'll see in a moment, $1.7 billion -- the model is regenerative. If we can continue to produce margins 3.8% to 4.2% after tax, which is what our long-term outlook calls for, with a statutory requirement of capital at 10% of premium, the returns on that statutory capital of 40% bring that money to the parent, lever it up, you're at 65% marginal returns on equity and at any premium growth rate, the amount of excess capital that is not needed to support the business is significant. Organic growth, primary target, accretive, in scope, in-strategy acquisitions. Target #2 -- and as I said, if we run out of ideas across the first 2 dimensions, we would then programmatically and methodically return that capital to shareholders, all with the idea of a blended approach to capital allocation to create significant EPS growth and accretion for our shareholders. Excess cash, the parent $800 million at the end of the third quarter and growing, be higher by year-end, undrawn debt capacity $900 million for a total deployable capital of $1.7 billion. Interesting fact, but what does it mean? Well, if you convert your excess capital into purchasing power at our capital ratios, you could attract another $17 billion of organic growth, if you could find it. Now it's -- not that much organic growth out there. We're all competing for it. But the leverage effect of that much capital is significant. These businesses, our industry is not capital constrained from an organic growth perspective. And we'll show you in a moment the returns on organic growth are quite high. Secondly, on average, managed care properties trade at 50% of revenue, so $1.7 billion can buy $3.5 billion of acquisition premium. A company that's earning target margins could be valued at $3.5 billion. And if it's underperforming, it could be 1.5x to 2x that size, purchasing up to $5 billion of premium with $1.7 billion of excess capital. And as I said, if you run out of ideas across the first 2 dimensions, you'd return it to shareholders with, obviously, $1.7 billion of benefit being returned to our shareholders. But that's the model. Primary goal is to reinvest in organic growth; secondarily, we will look for accretive acquisitions that are in scope, in strategy and fit with our strategy; and third, return it to shareholders if we have excess capital after investing in organic and inorganic growth. The reason organic growth is our highest priority is the return -- it's the most efficient use of capital and the returns are quite high. Give me 100 more members in Central Ohio, and we're good. The operating leverage, the leverage of the fixed cost infrastructure, maybe you take them on at a slightly higher-than-average MLR, but that wears off really, really quickly. And organic growth is very attractive financially. And given our market share, as I'll show you in a minute, those organic growth opportunities do exist, whether it's growing market share, whether it's adjunct geographies in existing states or additional products penetrated into our Medicaid footprint. In the last 18 months, we built an expert team -- an expert acquisition team. It's small, but very, very focused. And given our size, we need to go find those acquisition opportunities. They don't always come to your front door. We've been very successful, at least initially, small but very meaningful acquisitions, the YourCare acquisition and the NextLevel acquisition in Chicago that we'll talk about in a moment. And hopefully, the amount of capital we allocate will get bigger per deal. Out of the gate, small, but meaningful, accretive, but we really would like to see some upsizing take place there. Expert team, very robust pipeline, has to fit with strategy and has to be actionable. And there's lots of 501c3s, provider-owned plans and underperforming plans out there that we were able to access. And as I said, if you run out of allocation across dimensions 1 and 2, you return it to shareholders. And as you saw, we recently put a share repurchase program on the shelf. And the reason we did that is more of a capital maintenance program. After buying back $1.7 billion of converts, we needed a program on the shelf in case we wanted to opportunistically go into the market and buy back shares. At a 65% return on target capital, organic growth should be your highest priority. Bearing in mind, it's hard to get. We're competing with lots of great competitors out there, but given our market share and given our market position, it's there to get. And we'll show you in a minute, the operational and strategic initiatives we've already funded and are executing on in order to harvest the organic growth. We have a very disciplined model on inorganic growth. It has to be accretive to share repurchase. If we could buy our own shares and take no risk, but we're not creating the operating leverage, and we're not expanding the revenue base. So the next priority is to invest in inorganic growth. And as I said, we're very active in that space and will continue to be. And lastly, if we believe we need to return it to -- return capital to shareholders, we will. And we will buy back our shares in a very programmatic and methodical way with the share repurchase program we put on the shelf. I believe it was a 2-year program at $500 million, which in the grand scheme of things, is fairly modest. How do you grow organically in this business? Lots of competitors, very saturated. Well, it is and it isn't. As you know, 2/3 of the lives in Medicaid are in managed care, but less than half the money is. There's still long-term services and supports, ABD opportunities that are still in fee-for-service, hopefully going into managed care. Our Medicaid market share, pretty decent in many of our geographies, but still not where the #1 and #2 competitors are. And if you actually look at our in-service area market share and then look at our market share in the states, in that state, it's very low compared to our in-service market share, which means while we might be very dense in Columbus and in Akron, in Dayton, we're not dense in Toledo and Cleveland, for instance, in Ohio. And it's a statewide contract. If we can light up the provider network, allocate marketing and community involvement money, we can expand in state because our in-service share is higher than our statewide share in many of our geographies. Add adjacent Medicaid geographies and pursue these benefit carve-ins, as I said, over half the money in LTSS and ABD is still in fee-for-service, and it's going to managed at some point in time in the near future. Medicare and Marketplace is really the same story. We are going to leverage our Medicaid footprint and leverage our Medicaid network. In Medicare, we have a great duals business, over $2 billion in revenue, both in the MMP demonstrations and the DSNP product. We launched the product in 150 new counties in 2020 and will provide growth in 2020 over 2019. And in Marketplace, we operate in the highly subsidized end of the market. This is the working poor. These are folks who will use the same network as a Medicaid network. We get great pricing off our Medicaid network. We're leveraging it to strategic advantage, and these members are paying very little out-of-pocket as they are highly subsidized. Except for the fact that it's in a different regulatory wrapper, this is Medicaid and completely in line with strategy. It makes for a fantastic continuum of products across the spectrum, no matter what your personal circumstances are. You get a job, you get laid off, you age into Medicare, we have a product that could fit your circumstances right across those 3 dimensions. The organic growth model is there, and it's very robust and will pay dividends in the future. There was a lot of skepticism, if you will, about our ability to win new business. And I think the skepticism really arose from the fact that we spent 2 years really harvesting the financial value out of the business, which was job one. And I guess we were unproven. In a couple of the early contract losses that were inherent to the legacy management team, probably shook people's confidence, but in the meantime, Washington Reprocurement, Puerto Rico and Mississippi CHIP, 3 really, really nice awards for us, written by the same proposal team that's writing -- that did write Kentucky and continues to write Kentucky. Highly competitive state, great incumbents. We wrote a winning proposal. We'll talk in a minute about how it's been reversed, and we're going after it again, but a very successful proposal showcasing the national, deep capabilities that Molina has. Texas, a mixed result. They say never blame the rest for a loss, but there's a lot to talk about there. The difference in the top proposal and the bottom proposal were a matter of fractions of a decimal place. And so let's see what happens, and we'll talk about the protest in a minute, but the proposal we wrote was good enough to be in the pack. And we'll, in a minute, talk about how that process might unfold. It was recently announced that we may go back into New Mexico and develop and launch a Medicaid program for the Navajo Nation. This is a great example of our government affairs organization and our business development organization combining forces and us having the sense as we left the state losing a Medicaid contract, develop a relationship with the new administration and work our way back into the state by bringing them a solution, not something that solves the problem for me, but something that solves the problem for them. If this gets launched, there are 75,000 to 80,000 members of the Navajo Nation that need Medicaid services. These are high acuity members with significant health care problems. It's got some more regulatory hurdles to go through. But I thought I would mention it as a example of special situation, something we're very, very focused on. And since it was publicized in the press at their insistence, I thought I would mention it. And then, of course, the 2 reprocurements, Ohio and California, where our businesses are doing great. And we have every confidence that we'd be able to sustain our business there and future procurement opportunities. We sized this at our Investor Day and $60 billion pipeline, Medicaid only. You can see the states across the bottom. We run them through a very, very disciplined set of screens, reasonable rate environment, the friendliness of the regulatory environment, strength of the incumbency, et cetera, et cetera. And from time to time, we'll make an announcement as to what we're going after and maybe what we're not. There are inorganic growth opportunities out there. You have to find them, and they don't have to be brand names or household names. In fact, I would tell you that the more underperforming it is, the better we like it. We can buy these things at a significant discount to fully distributed value. And we've already proven we've got the chops to run managed care. We know how to fix networks. We know how to install payment integrity routines to make sure we're paying providers correctly and only once. We've got excellent, excellent high acuity care management services and many of these underperforming properties, literally, are just stumbling on the fundamentals of managed care, a prowess that we have demonstrated we have as we fixed an entire company in less than 2 years. We will not pursue capability plays. We are a managed care company. We like membership. We like premium, we like capitated risk. That's what we do, that's who we are. We have a very disciplined financial model. I won't bore you with all types of metrics, but I was -- sometimes get a charge out of a deal that's announced that's not accretive, but it's strategic, which means it's not accretive. And we have a very, very disciplined set of metrics that we follow. And whether it's the payback period or whether it's cash-on-cash return. Is it accretive to cash, everything -- as you buy anything, it was just accretive to cash. Is it accretive to buying your own shares? Is there operating leverage? Do I get to leverage my fixed cost platform against the property that I'm buying? Membership. Membership at a discount, particularly if it's underperforming, very attractive, and we have a very, very disciplined approach to making sure we're accessing the right properties. You saw the metrics on both NextLevel and YourCare, less than 30% of premium in terms of a purchase price. One of them was a membership migration deal, which means we don't even have to take the infrastructure, we just take the membership onto our infrastructure. So these have very, very attractive characteristics. And as I said, we are hopeful, as I look at our pipeline, that the amount of capital we allocate per transaction will grow from $40 million and $50 million to something larger. In terms of our outlook and our guidance, we're going to report earnings here in 4 weeks. But at this stage, we are reaffirming our full year 2019 guidance, whether it's the revenue number, the medical care ratio and the G&A ratio, which are approximate, or whether it's the range of net income, EPS and after-tax margin, we are confident that we will fall in the zone of all of these metrics for 2019 and for 2020, obviously, you'll have to wait 4 weeks to hear the story around it. We gave you a long-term outlook for this business at our Investor Day; it still holds. This is not guidance, it is an outlook. This is what we think the business can achieve over time and whether you want to say it's long term, whether you want to say it's a compound annual growth rate or whether you want to say it's an average over time, it is not each and every year. It's not necessarily any 1 year, but this is where we believe the potential of the business lies, and we'll update this periodically. But at this time, this still is our long-term outlook for the financial potential of the businesses that we're in. In the few moments I have remaining, I thought I might update you on some topics. And again, having written this a few days ago, not exactly knowing whether there'd be any real-time news on these items, there really isn't. The Kentucky RFP. Look, we wrote a winning RFP, and we won it. We're really happy about that. We were not surprised at the new administration, Governor Beshear's administration saying that they wanted to do it on their watch under their rules, so we are not surprised by that. We're going to bid again, and we're confident that with the same strategy, with the same set of capabilities, with the same story we told the first time that we can be successful. The reproposal dropped last Friday and is due in early February. It'll take a few months to analyze. I believe the new contract will be awarded for 1/1/2021. Let's see how that unfolds. I won't regale you with how disappointed we were in the Texas scoring, whether it's theoretical and structural flaws, process glitches and errors, untrained raiders or just blatant errors. You saw our protest or maybe you hadn't, but you will, and you saw the others. We think the process was flawed and we're protesting and pursuing our administrative rights vigorously. And we have no time line, no time line was announced as to when either an award would be announced, upheld or overturned. So we and our competitors, who are pursuing our administrative rights, as I said, vigorously, but nothing new there. Marketplace. This is the time of the year when your next year membership becomes a little clearer. And I'll give you some sound bites. We had a good sales and retention season. We are going to end the year with 270,000 Marketplace members. We will likely begin the year with approximately 350,000 members. Many of those members of the 350,000, 80% of them who we retained from our book of business, which is really good for MLR projections, continuity of care and understanding the risk profile. So a very, very stable book. Retention will be better this year because the book is more mature. We've had 2% on average a month trading off the books; that should be lower this year. So the revenue will be up year-over-year. Now the companion statement that we made, and have always made, is that in doing so, the margins that we're producing were unsustainable. We were very clear on that. They're going to come down into the single digits. We put 4% price decrement into the market last year and really, really try to be competitive with our product set. So the margins will come down purposely. The revenue will be up, all in the context of that 7% to 9% total premium revenue growth outlook we gave you a few months ago. So more to come on where it lands and what the margins look like, but we thought we'd at least give you a volume update for the Marketplace. Nothing new to report on M&A execution. I think we've spoken about it. And the last thing I want to mention is how excited and thrilled we are with the additions we've recently made to the management team. At the end of the day, it's the team you put on the field and their drive to execution that makes all this work. There is no question in my mind, 6, 8 months ago that we are taking on a lot more. Looking at acquisitions is time-consuming. After you get them, integrating them is clearly time-consuming. We're building the portfolio. We're driving hard at growth. And my view was we would be at risk for stretching the management team too thin. So we're thrilled to have added Marc Russo and Dave Reynolds to the management team, promoting Jason Dees, who's an expert in the Marketplace business and promoting him to an Executive Vice President to really anchor the operating team that just focuses on managing this incredibly complex regulated business, producing the target margins that we've outlined and continue to grow it organically and make sure that works well, while the remainder of the management team focuses more on growth. So now that growth is in the mandate, now that we're actually showing some early success of growing, we needed to grow the management team and bring on more skills, deeper bench, broader set of experiences, and we're very excited about them joining. We're at our time. The capital generation and capital deployment strategy is a very important part of our investment thesis going forward. Thank you for your time this afternoon, and thank you for your interest in Molina. We'll see you in the breakout room.

Okay. Great. Thank you, guys, for joining us. I know it's late in the day, so we'll try to make this relatively quick. So we have Molina Healthcare here with us for the breakout session: President and CEO, Joseph Zubretsky; and SVP of Investor Relations, Julie Trudell. So just to get this going, I'll ask the first 3 questions, and then I'll kick it off to the audience to see what you guys have. So first question, regarding the exchange marketplace, national margins have shown to be down about 400 bps in 2019 on 4% premium growth. So with 2020 seeing about 0% premium growth, why wouldn't the margin decline be worse? And second, do you have any minimum MLR growth for the HCCs?

We are not giving a margin -- specific margin outlook for the Marketplace business for 2020. But as we've said many, many times, we're overperforming this year. The price increases we've put into the Marketplace 2 years running significantly improved margins at the sacrifice of membership. There's no question about it. Mid-teens pretax margins is not what was supposed to happen. But when you're pricing this business a full year in advance of knowing what the result is and you have a philosophy of conservatism, that's what happens. So margins will come down. There is no question about it. We are not giving a forecast of what those margins will be. But very clearly, with, on average, 4% price decreases going into our Marketplace business this year, margins will come down. We have not yet given a forecast of the profitability of our individual businesses. We tend not to do that. But we are running into the minimum MLR in 2019 in New Mexico and perhaps marginally in one other state. And when we give our outlook for margins on our fourth quarter earnings call, we'll give a margin outlook for 2020, including any commentary on minimum MLR, if it's appropriate or relevant.

Okay. So about the duals opportunity, I was wondering if you could talk a little bit about the duals opportunity broadly without having a scaled MA platform.

The -- it's a different animal. And what most of the states are saying, although it's not regulation or legislation yet, most of the states are saying to themselves that in order to have a decent presence, they want you to have a Medicaid presence. And the reason is the whole object here is to have both financing mechanisms integrated into one product where the member doesn't have to navigate between 2 financing sources. I'm going to the doctor today. I'm getting this service. Is it Medicare or Medicaid? The member shouldn't worry about that. So CMS, the federal government and states are truly moving toward a fully integrated structure, and Medicaid is leading the dialogue. Many states say they prefer their D-SNP licenses to have a Medicaid presence. We think the natural extension of that maybe over time is states may begin to require it.

Okay. So one more before I turn it to the audience. With your G&A percentage already being well below peers', can you talk a little bit about your remaining and realized G&A improvement?

Our G&A ratio, as I said, our target for the year is 7.7%. You have to really watch out for the mix effects of this because the G&A ratios and the PMPMs for G&A are markedly different product to product. So you have to watch out for the mix effects. But putting that aside, we still have some G&A efficiencies to harvest. We haven't harvested them all yet, but we've harvested a fair number of them. We've done many of these major outsourcing contracts with our IT platform, with many of our commodity-type care management services, some payment integrity routines, et cetera. But there's a little more of that to harvest. The real juice here is in operating leverage. We have a discipline instilled in our operators that we don't hope fixed cost leverage occurs. We force it to occur with management routines. We don't allow operators to increase their fixed cost platform when they get rate or when they get organic membership. You shouldn't have to hire one more care manager, one more claims handler and certainly no more lawyers and accountants and HR people. So the fixed cost leverage, if we can grow this business organically, we even get the fixed cost leverage off of our acquisitions because we're clever enough to make sure that as we bring a business into the portfolio, we're resourcing it appropriately on their front lines to make sure the right number of care managers and field people are servicing the business, but we do not increase our fixed cost baseline. So to me, the real story in G&A here over time is marginally some continued outsourcing and co-sourcing, but it's -- if we can get the revenue growth to occur the way we've projected, the fixed cost leverage will be significant.

Okay. Any questions?

Look, there's a question that the Texas award stands the way it is right now, what are you doing to offset the negative impact? Or what could you do overall to mitigate the situation?

Sure. I mean the question is, if the Texas awards are upheld and we have a contract clause as of September 1, what are we doing? We're growing the business. In fact, I would tell you, and I actually made -- meant to make the point in the room, thanks for reminding me, if we close on YourCare and NextLevel when we project to close, it probably will offset the revenue loss from Texas inside of 2020. Now that doesn't mean it's perfectly going to offset the negative operating leverage perfectly, but those businesses are $500 million, $550 million on full annual run rate. We expect to close on them at the end of the first quarter, maybe early second. So that could actually fill the hole left by Texas just inside of 2020. The answer to your question is we got to grow the revenue base. And if we can do that, then we'll try to replace every dollar of revenue loss in Texas. Kentucky would be another opportunity and many of the opportunities that I spoke about organically in the main room. Yes, sir.

Does your net loss ratio of 86% reflect the full global capitated net risk? Or do you subcapitate to providers?

For the most part, our contracts are DRG fee-for-service, and we do not subcapitate. Now health California is a whole different world. We're under delegated capitated arrangements in California. But if you put California aside, our arrangements are essentially fee-for-service DRG hospital contracts.

[indiscernible]?

Yes. And -- however, with a value-based component, meaning that around a fixed budget, gain share or loss share, bonus payments, there's an element of value-based contract that fits on what is essentially a fee-for-service DRG chassis.

Upside only? Or upside and downside?

They run the gamut. We have a spectrum of like Tier 1, 2, 3 and 4. And if you move up the spectrum to Tier 3 and 4, upside and downside.

[indiscernible]?

Yes.

Excellent ratio.

Thank you. Yes, [ Ken ]?

Understanding that margins and the market have both come down [indiscernible] on [indiscernible] margins about 4%, what gives you the visibility that you can [indiscernible] and still stay in that 4% range? What visibility do you have in that?

We...

[indiscernible].

Oh, sorry, what gives us the ability to have confidence that we can stay in the 4% after-tax range consolidated? And I think the context of the question was particularly because the Marketplace margins are planned to come down. Well, bear in mind the Marketplace is the smaller of our businesses, right? So the margins come down. It's -- on a consolidated basis, you have that effect of just a blending. It's really a question of Medicare and Medicaid. We are very confident in our Medicaid platform. We still have room to improve. We're great at high-acuity care management, but you can't be -- there's nothing -- you can't be good enough at that. We still have more payment integrity routines to implement. We're finding things all the time. So chipping away at the portfolio of profit improvement optimization initiatives is an ongoing aspect of our business. That's one. Two is at least up to now, and I always say that because nothing is assured in the future, that we're in a very rational and reasonable rate environment. So what does that mean? That means that as our actuaries face off to a stage actuaries, is the conversation a reasonable conversation? There's always arguments over 20 bps here and 30 bps here, or the pharmacy should be priced here or priced there. But at the end of the day, it's a very, very reasonable and rational conversation. And we believe our state customers are taking very seriously the principle of actuarial soundness. Ohio is a classic case of that. Ohio has a roaring economy. A lot of Medicaid expansion people went back to work. What happens when Medicaid expansion people go back to work? They're the healthier ones. The people remaining on the rolls are higher acuity. Well, there's a mix shift that happens. We've talked about it for the last 3 quarters. State of Ohio stepped up, actuarially recognized that and put the rates into the market to fund it. Might be a little bit of a lag, which causes a little anxiety here and there. But at the end of the day, the current rate environment is reasonable and rational. That, combined with continued profit improvement, gives us confidence, at least for now, that we can sustain the margin picture that we've constructed for you. Thank you for the question. [ Vince ]?

California LTSS extension, I believe the state was -- is intending -- again, is it too early? Or can you somewhat size the scope and magnitude of that expansion for you?

It is too early. We're trying to size it. It's -- right now, I'm going to try to remember the numbers, about 1/3 of it already is in managed, since the other 2/3 is going managed. So it matters where we play and where we don't. And we'll update the market on that in due course. The interesting thing about California, when everybody talks about government entitled programs are being chipped away at, state partnership, not in certain states. California continues to throw more money into Medicaid and continues to put people on the rolls. California just introduced LTSS for 2021 to another 2/3 of its counties. Just said we need to cover illegal immigrants up to age 26. And third, said these subsidies in the marketplace is up to 400% FPL. Might be good for the Feds, but we want it up to 600%. So another 185,000 people are going to go into the California marketplace with some subsidy up to 600% of Federal Poverty Level. So depending on what state you're in, sort of the liberal bastions in Washington and California, et cetera, managed care is alive and well, and the membership rolls and the spending is expanding, not shrinking. So I don't have a number for you on LTSS, but that would be a very, very robust program and, as you know, a very high monthly premium. Yes?

Any interest in an expanding Kansas since Kansas is planning to expand?

I'm sorry.

State of Kansas.

State of Kansas?

Yes. They're expanding the Medicaid.

We don't, right now, have any plans on the drawing board to expand in Kansas. If I can remember the map we've put up there now, and I spent a lot of time on this, but West Virginia, Tennessee, Iowa, Indiana, Georgia. Am I missing one? But we have 6 or 7 states in our near-term focus, and Kansas is not one of them.

So just turning to the flu. It's been one of the strongest flu seasons in the past few years, especially with December looking strong. However, today, we've heard from an MA payer who said very minimal impact to them, not so much for the Medicare lives, but they see this impacting Medicaid in commercial-specific pediatrics. Curious, what impact are you guys seeing?

Well, again, not giving interim updates on our financials, so I can't say. But at the end of the third quarter, we hadn't seen any impact. And you can just follow the CDC maps and the states we're in. There's going to be some flu we're going to have to deal with, obviously, this year, particularly in [indiscernible]. But we'll update everybody on that in terms of what we're seeing and what it means for our 2020 outlook on our earnings call.

Okay. Any questions?

Yes, sir.

Yes. With respect to like catastrophic cases, how do you manage the risk on that? Do you have contracts directly with like, say, the academic houses that sort of transplants at [indiscernible] fixed cost rate per case or something?

Sure. Broaden -- the question was about catastrophic cases and what are we -- ranging from transplants, which we have a transplant unit that manage them and farms them out externally. NICU, for us, is big, right, being in the Medicaid business. NICU is probably the best example. And we have an institutional platform on NICU management that's quite robust, making sure that these infants are getting the right care in the right setting. But to avoid the typical pitfalls, there's a ton of upcoding that goes on in NICU, as you know. It's an incredible revenue center for hospitals. It just is. And you just have to make sure that the taxpayers of your particular state are paying for the right things. So we have many, many examples, whether it's intense behavioral conditions, OUD, substance abuse. Whether it's NICU, whether it's transplants, we have a whole panoply of capabilities where these cases get channeled to a handful of people that are expert in doing them, consulting with the right clinical people internally. And again, first and foremost, making sure the patient is getting the right care in the right setting at the right cost and then watching the budget. But in this business, you have to be good at that. NICU is probably the best example.

Are the premiums adjusted for risk adjusters?

Sometimes.

Okay. But the NICU?

Some of you maybe have heard of kick payments that states have. There are sometimes these kickers that you get for certain cases. But the question you're asking, what you really have to watch out for is what we call outlier status. When a claim gets to a certain level, the DRG does the planning where it goes to bill charges, dollar one.

Sure. All right.

That's when your antenna go up and you're paying attention. Yes?

Besides the NICU upcoding, what are the other payment integrity routines that you're...

Well, I didn't want to single that one, obviously, but payment integrity is a whole -- it's an unfortunate part of the business. It's an arms race. Providers find interesting ways to bill you, developing very complex pieces of software to do that. And then what we're supposed to do is invest in equally complex platforms to find it. And then after we find them, they'll develop more applications to find more stuff, and we'll do the same thing and just keep escalating. But you have to do it. Jim Woys, a very accomplished senior executive who joined us 2 years ago, built a great team to make sure we focused on managed care fundamentals. Our technology stack was dated. And it runs the gamut, postpaid, prepaid, chase and pay, coordination of benefits. Money is left on the table constantly for Medicaid, paying for things it doesn't need to pay for because there's primary coverage. So I don't want to bore you with the details, but if you just went down the litany of payment integrity routines, Molina was lagging in most of them. But we're not targeting any one thing, whether it's a short inpatient stay that should be an observation, whether it's a maintenance code at primary care physician's office that's being upcoded to a different risk level, it just goes on and on and on. We've gotten -- under his leadership, we've gotten tremendously better at that and are continuing to improve.

The MA enrollment numbers were out 4 1 1, and it showed sequential improvement. One thing you talked about at Investor Day and then today was just growing top line organically. It doesn't point to getting your MA book in the range where you want to grow organically. Maybe that's a misread of data, but how do you -- what needs to change or what can you do to get MA growing in that differently if you want to grow, especially since it seems to need to grow faster in the U.S.?

Yes. Bear in mind the demonstrations, I don't call them a closed box, but the demonstrations are more or less closed boxes. It's really the D-SNP business. And our D-SNP strategy is to expand the number of geographies that we're in to make sure we have, if regulatorily allowed, to have a D-SNP product everywhere we have our Medicaid footprint, number one. And two, after we've done that, we still believe we're underpenetrated. Now we're swinging with some of the big hitters, so we know it's not free of competition. But our market share in those counties isn't what it needs to be. The other avenue, and I meant to mention this earlier and I didn't, bear in mind that 10,000 people a day are aging into Medicare, meaning we have people on our Medicaid rolls today who tomorrow will be eligible for a dual-eligible product. And that's not the way the business is built. The business was never built administratively to make sure you can identify those members. But we're building capability to know that if we have a Medicaid member today and they're aging into Medicare and they're dual-eligible, that we get them into a duals product, which has better benefits, better premium and more integration. So it's a very comprehensive strategy, albeit off a small base, admittedly. With 45,000 D-SNP members, it's not huge, but it's growing. I think at Investor Day we showed you a 12% growth rate in D-SNP nationally. And the fact that we're underpenetrated -- add that under-penetration to the fact that the business itself is growing at 12%, there's a growth rate in there that can be quite attractive for us.

Okay. Just one more for me and then we'll see if there's any other questions. So 2 parts to this. You previously guided 7% to 9% organic revenue growth for 2020, and this is before the Texas STAR+ loss, about 5% of your revenue. I'm wondering, does this also include the contemplated Kentucky win, which I know is about 2% of your revenue?

Right. Just to restate what we meant at the time and what we said. The 7% to 9% revenue growth, premium revenue growth, was -- did not contemplate Kentucky, did not contemplate an acquisition, even though we knew we might do 1 or 2, and did not contemplate any gain or loss on Texas. So it was pure sort of organic. Now there's a lot of moving pieces there, Kentucky, Texas and the 2 acquisitions. And so when we update you on our fourth quarter earnings call, we'll give you the organic number and then we'll say but it's likely to come out better or worse depending on how events unfold on those 3 situations.

And do you include -- given where your market ended up, is that kind of the -- is that assumption still going?

Again, not giving updated guidance for 2020, but whatever we were doing in the marketplace, whatever we were going to end up was included in the 7% to 9%. It's all part of the same thing. That was not excluded. It was 7% to 9% premium revenue consolidated across the board.

Okay.

Okay.

Okay. I think we'll call it. Thank you, guys, for joining us.

Thank you, everybody. Thank you.