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

All right. Well, thank you, everybody, for day 2 at TD Healthcare Conference. I'm Ryan Langston, I'm the health care facilities and services analyst here. Very, very happy to have Mark Keim, Senior EVP and Chief Financial Officer for Molina. Thanks for being here.

Absolutely, Ryan, it's a pleasure. Good morning, everybody.

So at the top, I just have to point out, I think if my fact checkers have it right, I don't think you've been to a sell-side conference in 1,874 days. So we appreciate you choosing us for your first time in a couple of days. So thank you.

Listen, right at the top, you reiterated guidance last week, $5 per share for full year '26. It's been a little less than a month now since you reported. I guess, anything to update us on in terms of cost trends, utilization? I think everything -- something that's on people's minds right now is effectuation rates and exchange. Just anything you can highlight since you reported?

Yes. Well, obviously, anything material would be inappropriate to report at this time. And more to the point, I've only really seen January, which is in the very early stages. So both from a disclosure perspective and from what I'm actually seeing in my business perspective, it'd be way too soon to give any kind of an indication on performance. But we are highly confident in our guidance this year and where we are. You talk about effectuation on marketplace. That's one thing we can talk about. As you know, in the Marketplace, every year, there's new members coming in and there's renewing members. Renewing members is always a bit of a challenge because they have several months to make their payments or not. And the way it's set up is there's a grace period, which essentially gives them the effect of being covered for a couple of months even if they don't pay. So for the first couple of the months of the year, you don't really know where you are. Now if you're following Marketplace at all, everyone says there were 24 million members in Marketplace last year across the country. Everyone's saying, well, gee, it's not falling that much. Well, that's because we don't know effectuation across the country. Most people think that the 24 million that we had last year will fall to the mid- to high teens, call it, 15 million to 18 million this year. But we don't know, Ryan, for exactly the reasons you're talking about, who's paying the renewals and not. Now the good news is by the time all of the MCOs give their first quarter numbers, they'll have a very good handle on that because we'll be through effectuation. But that's been the big disconnect in the media about, gee, everyone said the Marketplace membership would fall, it's not. Well, it is. We just haven't seen it fully yet.

On the $5 guidance, so you had called out, I think, $1 of drag from Florida implementation, $1.50 from MAPD. I guess maybe on the other assumptions, maybe walk us through another of the key pieces that kind of drive that $5 guidance, maybe particularly the 5% sort of net cost assumption on Medicaid?

Yes, sure. So we're at $5 right now. In the third quarter, I suggested something more like $14. How do we get from $14 to $5 is effectively your question. About $650 million of it is a deteriorating Medicaid MLR. Now back in the third quarter, we were jumping off a 92% MLR for Medicaid in the second half. I thought rates would improve by about 50 basis points on MLR to get us down to a 91.5%. Where I really am at the moment for the full year is a 92.9%. Why is it so much higher than what I thought back in October? One, the Florida Kids contract was a win. We like that a lot, but it comes in initially at a high MLR. Two, the carryover effect from a couple of those California items that we announced in the fourth quarter, the $2 of drag that we recognized in the fourth quarter will have a run rate impact into 2026. And then lastly, I hope that the rate cycle would help us by about 50 basis points. It actually hurt us by about 50 basis points. Rates have still not responded to increased trend.

Another thing you had called out on the call was this California retro adjustment. I believe it was related to the undocumented population. I think you talked about L.A. in particular, there was some churn there. I guess why was Molina maybe sort of more exposed to this versus your competitors? Because we haven't heard a lot of other folks really talking about this issue?

So just to set the stage for everybody, in the fourth quarter, we missed by about $3 versus where we expect it to be. $2 of that were 2 large retro items in California. One was a risk adjustment update, specifically on the L.A. population. The other $1 was on a new corridor for the undocumented population. Now that deserves a little bit of commentary. Five years ago, CMS said corridors can no longer be put in place retrospectively. That is if you don't know you have one at the beginning of the fiscal year, they can't pull it on you later on, which is what they did in the pandemic. So in theory, there shouldn't be surprise retro corridors. Why was there one in California? Because the corridor was specific to the undocumented population. Remember, CMS, federal funds pays FMAP, a meaningful part of most Medicaid plans. It pays nothing for undocumented populations because CMS doesn't recognize those populations. As a result, since the state of California paid for that entirely out of their own budget, they make up their own rules. So that's why suddenly we had a retro corridor in California. Now folks say, can this happen everywhere? Well, in theory, yes, but almost no other states have an undocumented program in the way that California does. New York has a small one, Illinois has a small one. Washington has a small one, but they're rounding errors compared to the 1.5 million people covered on undocumented basis in California. Now the second part of the question is, why was that a bigger item for us and not some of our competitors? Well, a couple of things there. One, we give transparency at a level that none of my competitors do. I give you very clear MLRs on my segments, and I go pretty granular on the drivers of my business by segment, which you just don't see in other players. So it's going to come out for that reason. Two, what's material for me may not be material for 1 or 2 of my bigger competitors. But third, and I think this should be somewhat obvious in retrospect, Molina is a best-in-class player. We typically are 400 basis points better than the market on our MLR performance. If you're not a best-in-class performer, you don't have a corridor problem. It sounds tongue and cheek. But if you're not a very good performer, throw a corridor at me, I don't care because it doesn't affect me. So I think for those reasons, you're not maybe seeing some of the others talk about it. But again, when you're a best-in-class performer, these things will hit you.

And then building from the $5 sort of into the future, I think you had talked about an $11 per share sort of embedded opportunity. Obviously, there's margin recovery potential sort of across the book. Maybe walk us through on that $11, what's in that? And maybe even further, what are some of the building blocks to kind of get you back to where you want to get to?

So what you're referring to $11 is what we call embedded earnings. And for Molina, the concept of embedded earnings is not just get your act together and get your margin back to where it belongs. For us, $11 embedded earnings. The concept of embedded earnings has always been new things that we've done, that aren't in the P&L yet. So if you have an acquisition, if you won a big new state RFP, those are things that are in future earnings, embedded earnings, but not in today's earnings, not underperformance on margin. So just embedded earnings on that new store concept I just talked about is $11. What's in there, things like the Georgia win, not in our P&L yet, things like Florida CMS, not in our run rate yet. Texas, so many items that are yet to come that you can stack on top of 2026 performance. So there's $11 embedded earnings, new things on the come. Now some of my competitors have talked about embedded earnings of, gee, margins are lower than where they should be, let's just bring them up. Well, that's not embedded earnings to us, but let's go through the math. So this year, my guidance is about 1.5% pretax margin. It's the lowest it's ever been since I've been in the seat. Why? Because some of the bigger things we'll talk about with rates versus trend. That has to normalize. And again, Molina is a best-in-class performer. We're 400 basis points better than the market. The market needs those rates more than I do, but man, I need them too. Every 100 basis points on the MLR line or the pretax line, your choice is $5 a share. If the market is underfunded by 400 basis points, do the math, what's your assumption on where we get back to? Is it 100 basis points, 200 basis points, 300 basis points are the full thing, multiplied by 5. So is it $5, $10, $15 that you're adding on to where we are already. Now all in Medicare and Marketplace, same math, they're smaller business, every 100 basis points is $1. But you add those things up and you're approaching $30 a share, maybe the better question is, how much of the rate do we get back by when? And without a crystal ball, I can't tell you, but I think things are moving in the right direction.

You also announced at the fourth quarter, you were exiting the MAPD market in 2027. I guess maybe remind us the reasoning behind that. I have gotten some questions from folks. Is this just a simple exit? Is there a monetary value to that book? Maybe just kind of give us where you think that goes over the next year?

Yes. So let's talk a little bit about what we're talking about in particular. What we call MAPD is what some people call general issue or just Main Street Medicare Advantage. It is not the duals. I currently have $6 billion of revenue in what I call Medicare. This affects $1 billion of it. The other $5 billion is duals, which are very core to our strategy. Now on MAPD, it's never been particularly strategic. If you follow the company, you know a year ago, we exited 12 states that were very subscale in MAPD. The $1 billion we're now talking about are the assets that we picked up through 2 acquisitions, one in Bright in California and one in ConnectiCare. Those were picked up as part of larger acquisitions. Bright was done largely for the dual footprint. MAPD was option value. ConnectiCare was done for the marketplace footprint, MAPD was option value. So as we look at this MAPD, we look at the CMS environment going forward for MA. We're a subscale player. We're better served focusing on the duals, which are so strategically aligned with our Medicaid business. So that's exactly where we are. Now the second part of your question is how will we exit. You can imagine since we announced that just a month ago, the phone has been ringing off the hook with all kinds of people maybe looking to make offers, do something. Ultimately, what we do, I'm not ready to tell you yet, but it could be a runoff, it could be a sale.

Got it. You mentioned the Florida Medicaid contract win. You talked about it on the fourth quarter, a large competitor, I think you took that from kind of said it was a very low single-digit margin business. I think in the fourth quarter, you just said it's sort of high 90s MLR. So what's attractive about that particular business? And again, crystal ball, but where do we think that goes moving forward?

Yes. So a couple of things, and I've gotten the same question, Ryan, from a couple of different perspectives. That competitor you mentioned, if you look at the stat filings, tends to run at a significantly different level than Molina does. So maybe that's the first premise for your question, why they maybe see it differently. But what we do really well is manage high acuity populations. And the Florida business we're talking about, it's called CMS, Children's Medical Services are high-acuity kits. And we're very good on these high acuity populations. We're very good on medical management in general. We believe we can make attractive margins in this business. Right out of the gate, as you may know, it's not performing at its ultimate run rate. That's typical for new contracts. Very often, we say that it takes between 1.5 years and 2 years to get to target margins. The first quarter always runs a little bit higher. But again, I believe Molina with a best-in-class MLR is probably best situated to make a margin on these kind of populations.

Maybe just sort of big picture now, right? Medicaid, in general, how are we viewing that? Or how do you view it, right? We're sort of now past redeterminations, but acuity trend are up a ton, rates aren't keeping up. We'll get to that in a minute. You have OBBB changes in '27 and then further changes in 2028. Where are we at right now with Medicaid in general, knowing those things coming over the next couple of years?

We believe 2026 is a trough year for margins. Look at how we got here. In the pandemic, there was no check for eligibility. So anybody just got coverage and kept coverage and didn't get kicked off. After redetermination starting in mid-2023, they started to check eligibility again. As a result, national membership went down by 20% across about a year or 15 months. Now what happened when so many people came off, many of them were low users and no users. We track low users and no users, and the percentage in our book dropped by 5%. So if you think about it, if close to no users or no users drops by 5%, that's immediately pressure on the remaining population. We call it an acuity shift. So you lose 20% of your members, they're disproportionately low users, no users. Over a 2-year period, you feel that an increased trend. It's not the kind of trend you normally think about where same-store people are utilizing more. There's some of that, but it's more about low users and no users falling out, driving over the average cost per member. That's a lot of the trend pressure we saw. So in '24 and '25, we estimate that about 2.5% of trend was attributable just to that mix of members coming out. We reported 6.5% trend in '24. We reported 7.5% trend in '25. In both years, about 2.5% was that acuity shift. Now I'm guiding to 5% trend in '26. Why do I feel good about that? Because last year, it was 7.5%, 2.5% was the acuity shift. I no longer have acuity shift. So let's go with the same number we had last year ,5%. So that's how we got here. Really high trend, rates didn't keep up. Now why do we feel good about this being a trough and next year turning around? So a lot of the acuity shift is behind us. And more to the point, I get the question all the time on actuarial soundness, well, shouldn't actuarial soundness prevent this. Concept of actuarial soundness is a longer-term concept. The protection next year, it doesn't protect it tomorrow. So what it says is that eventually, rates and trends must converge. But whenever there's a spike or a lull in trend, actuarial soundness doesn't necessarily offset that. Why do I feel good about 2027? Here's a little insight into how the actuarial process works. The way the actuarial process works is they go back a couple of years to get what they call a solid baseline. Why do they want to do that? Because medical trends take sometimes a year to 1.5 years to fully what we call develop. So for 2026, for example, we won't know '26 definitively until late '27 or early '28 just because it takes so long for certain claims to come in. So the actuaries will say, let's look back at a certain baseline. For '26, they use 2024. So that's a rock-solid indisputable number. Where does the human element come in? Okay, well, I have to put 2 years of trend on that to give you 2026 rates. Rock-solid baseline. What was trend in '25, don't know, I'll make it up. '26, don't know, I'll guess. So the actuarial process, rock solid on the baseline, a lot of latitude on the 2 years of trend. Okay. Jump to '27, they'll be jumping off '25. Remember, '25 was the second year of those artificially high trends because of the mix of acuity shift. Now I'm jumping off a rock-solid inflated number. And if I use anything close to a normal trend number, I'll get to an appropriate rate. So I feel really good about that. Now what you're also seeing is states just step forward when they don't have to and do the right thing. Here's a retro rate adjustment. Here's a midterm rate adjustment, recognizing the market is underfunded. Why did they do that? They're looking at the stat filings and saying, actuarially, I'm where I need to be, but half of my MCOs are losing money, particularly that big not-for-profit, that's the second biggest employer in my state capital. Oops, better get some rates in there. So not required actuarially, but they just look at the results, they know the market is underfunded. Lastly, when they fund, Ryan, they don't just fund one big black box. They're actually funding what we call rate cells. So if pharmacy is running like crazy, they have to discretely recognize that. If behavioral health is running crazy, which it is, they have to specifically recognize that. So for all those reasons, technically, I feel good about the recovery of rates versus trend in 2027. But the one I really hang my hat on is we know from the stat filings that the market is underfunded by 400 basis points. Even with that, I'm guiding to 1.5% pretax margin. My competitors are losing money. The big publicly traded companies have told you they're in the low 2s, high 2s pretax margin losses. Guess what, the not-for-profits are doing even worse. They're just not as efficient. That's not sustainable. States have to step up and do the right thing. If we get half of that 400 basis points of underfunded, I'm right back at target margin. My competitors are maybe breakeven again. So for all those reasons, we're feeling pretty good about '27. That's why we call it '26 a trough.

On the flip side from rates and trend is really benefits. And this is something we've been sort of contemplating. It seems that states have not necessarily broadly been open to benefit cuts or allowing you to do more UM, et cetera. I guess what are the conversations like with the states that maybe the budgets just don't allow for these actuarially sound rates? Is there openness to, again, revisions to benefits, not necessarily cuts, but UM, anything on the benefit side that you're seeing maybe broadly with your -- especially your larger states?

There's such more receptivity now to it. Remember, we said that actuarial soundness was a delayed concept. Well, in the early stages, states can kind of ignore it. In the early stages, inevitably, they have to fund those rates at an appropriate level. Suddenly, they're a lot more interested in saying, well, what else can we do? If we have to put rates back to where they need to be, what else can we do to take the pressure off this? Now Ryan, we're back to what you just said. The other lever is for them to say, gosh, I have to fund appropriately, but where else can I reduce the expense? Can I reduce eligible members? Can I reduce the benefit load or can I allow MCOs to put more utilization management in place so that they save money so that we can fund less longer term? I think you're seeing all of those things. What are the good examples? Pharmacy is a huge one. We had a number of states that it was a free for all in GLP-1s. Literally, whatever the condition was, you get GLP-1s. Well, they don't fund that. And then eventually, the bills come in, they have to make rates right. And they say, well, gee, maybe GLP-1s should be restricted to what's medically appropriate. Well, now we're doing the right thing on utilization management. What's another one? BH. We had certain states that completely had an open door for BH, no utilization management for BH, which means you've got a lot of unchecked use but you also get a lot of fraudulent providers pop up. There's no utilization management, open your doors as anyone come in, we'll charge an arm and a leg. So states realize that these unchecked protocols result in much higher expenses. So doing the right thing on high-cost drugs, doing the right thing on BH, checking eligibility, making sure the benefit loads are appropriate and allowing MCOs to do utilization management so that things are clinically appropriate out there. We avoid the fraud waste and abuse. You're going to see a lot more of this going forward. It's the appropriate thing.

Maybe sort of a sensitive topic, but we have heard, I think, a little bit more chatter and maybe a little bit more openness from some of your competitors about exiting states if they just don't see sort of a glide path to some appropriate margin, whatever we can argue what that is. I guess what is your stance given your exposure to Medicaid on the willingness to potentially walk away from a state, small, large, whatever, but just given the political ramifications and just sort of the view from the market?

Ryan, it's a good question, and I've gotten that one from a bunch of people. And just anecdotally, I am seeing some of my big competitors with similar actions or at least suggested actions. What's really interesting about Molina, I mentioned that in Medicaid, I'm guiding to 1.5% pretax margin for the whole company this year. We're in 20 states Medicaid. It's amazing how tightly around that 1.5% mean they all gather. I don't have big performance SKUs. I don't have big outliers, which is really surprising. You'd go back and look at your portfolio and you'd say, well, surely, the Republican states are doing worse than the Democratic states, not true at all. Maybe the high FMAP states are doing better than the low FMAP states, not true. Oh, my favorite one, look at state budgets and rainy day funds. Clearly, that would show you who's doing better or for worse, no correlation, big states, little states. So I don't have performance SKUs. I might be thinking more like the competitors if I did. If I had one massive negative outlier, would I be thinking differently? I don't know. We've never been in that situation. But what's unique maybe about Molina is we're best-in-class on margin, but it's also highly consistent across the book, big, little, small, red, blue, et cetera.

On the MA side, obviously, that has had some pressure to it, too, over the past couple of years. Growth is slowing. Competitors are revising sort of long-term margins in some cases. But thinking about that as an analog to the Medicaid side, Medicaid struggling, of course. I know you say it's a trough year, but you said your competitors are doing worse than you are. Is it time for maybe the market to sort of reset the margin expectations broadly? I know you have your Investor Day coming up in the front row in Molina, but just thinking in general, does the market need to look at that and say, historic margins may be off the table at this point?

Well, let me go through a little framework, which is the way we think about it. When the actuaries set rates, they target a 1.5% pretax margin. So they target a certain MLR, they acknowledge a certain G&A load and they get to a 1.5% target margin. Right now, the market is under by 2.5%. On average, the stat filings say the market is losing 2.5%. That's why we say the market is underfunded 400%. Now unless someone's going to suggest that the 1.5% target margin is no longer the target margin, states have to get back to that number. Now if Molina is always 300 to 400 basis points better than the market, the market is targeting 1.5% as they did historically and achieved 1.5% historically. If we're 300 to 400 basis points better, doesn't our target margin stay the same? It's a matter of actuaries bringing rates back to where they need to be. I think this is a really powerful part of the discussion, though, Ryan. Actuaries have to target 1.5%. Remember, those little not-for-profits need to be making some return on their capital to even stay solvent and have continuity. If they're getting back to the 1.5% and Molina keeps its benefit to the market, we're well within our target margin of 4% to 5% just because we perform that much better than the market. But I think that's the fundamental model on how to think about it.

So you think the market can eventually get to a target margin?

Oh, it has to. Actuarially, it has to.

As we sort of think about the exit of MAPD, and obviously, you talked about sort of your duals membership and your line membership. Are you going to sort of approach that market more from the Medicaid side at this point, maybe going forward as opposed to sort of the traditional MA broker type channel?

Yes. So what Ryan is talking about is the integrated duals market. We left the MAPD market. Remember, that was a little part of my Medicare business. The duals, though, is a very different proposition, and it's highly attractive for us. What is a dual? It's a member that has Medicaid benefits and Medicare benefits. States are increasingly saying, I don't want those 2 benefits from different MCOs. The member experience and the clinical outcome and the economic outcome are so much better when both sides of the equation are managed by the same MCO. That makes sense, right? Two membership cards, 2 call centers, 2 networks, it doesn't make sense for somebody with both benefits to have 2 different insurance plans. So put them together, that's what we call exclusive alignment. It's truly integrated. This is highly strategic for us, unlike mainstream MAPD because these are Medicaid folks. They're Medicaid folks that just turned Medicare eligible, which means the Molina name resonates with them, our value prop, our network resonates with them. We know these members. Now going forward, states want this exclusive enrollment. Any incumbent Medicaid player is tremendously advantaged in this environment. Why? If you have to be on both sides, it's very easy to become a Medicare player. You just go out and get an H contract. It's very hard to become a Medicaid player. There's only 3 or 4 at any given time and RFPs only come up 6, 7, 8 years. So if you want to be on both sides, easy to become a Medicare player, not so easy to become a Medicaid player. So incumbent Medicaid players tremendously advantaged. If you don't have an H contract for Medicare, you just grab one -- player doesn't have the same option. They can't just grab a Medicaid contract. So we like this a lot, both because it's continuity for our current Medicaid members, but also there's a real strategic advantage to our current footprint, which we like a lot.

And maybe to that point in the last minute or so here, we've written on the benefits, I think, to this duals alignment of this fully aligned model. There are some provisions coming in '27 and 2030 as well. In your public comments, you've been very supportive of those, obviously, given your sort of overlay the vast majority of your members in your states. How are you thinking about stepping into '27 and the opportunities given those change in provisions?

Well, so a lot of this has already happened. You may know that in 2025, what's called the MMP demonstration program came to an end. We were one of the biggest players in the MMP demonstration program, if not the biggest player in the MMP demonstration program. January 1 of this year, MMP transitioned into what's called FIDE/HIDE, fully integrated or highly integrated dual eligible program. So essentially D-SNPs with integration. So as of January 1, we already converted this big MMP book to a large HIDE/FIDE footprint. To do that, we had to win a number of RFPs, Ohio, Michigan, Illinois, so many places like that. So we're suddenly in a really good spot on these FIDE/HIDEs. Now going forward, you mentioned brokerage distribution. We need to do all that. That's business as usual. But again, we have that strong Medicaid footprint that very few others do that we're able to go chase this FIDE/HIDE program. And remember, these are high acuity folks where we do really well. And by high acuity, you might also think financially high PMPM, per member per month revenue. Typical Medicaid member is about $400 per member per month. These high acuities are $3,000, $4,000 a month. So think about the opportunity to manage medical costs when the base is that much bigger. This is what we do really well. These duals will grow 10% to 15% a year as a market going forward. We think we're pretty well positioned.

Great. Well, I think that's all the time we have. We'll leave it there. Mark, thank you so much for joining us, and thanks, everybody. Enjoy the rest of the day too.

Thanks for your interest in Molina.