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Edited Transcript of MOH earnings conference call or presentation 30-Oct-19 12:00pm GMT

Q3 2019 Molina Healthcare Inc Earnings Call

LONG BEACH Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Molina Healthcare Inc earnings conference call or presentation Wednesday, October 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph Michael Zubretsky

Molina Healthcare, Inc. - President, CEO & Director

* Julie Loftus Trudell

Molina Healthcare, Inc. - Senior VP of IR

* Thomas Lacy Tran

Molina Healthcare, Inc. - CFO & Treasurer

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Conference Call Participants

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* Calvin Alexander Sternick

Cowen and Company, LLC, Research Division - Associate

* David Anthony Styblo

Jefferies LLC, Research Division - Equity Analyst

* Joshua Richard Raskin

Nephron Research LLC - Research Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Matthew Richard Borsch

BMO Capital Markets Equity Research - Research Analyst

* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Scott J. Fidel

Stephens Inc., Research Division - MD & Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Molina Healthcare's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Julie Trudell, Senior Vice President, Investor Relations. Please go ahead.

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Julie Loftus Trudell, Molina Healthcare, Inc. - Senior VP of IR [2]

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Good morning, and thank you for joining Molina Healthcare's Third Quarter 2019 Earnings Call. With me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Tom Tran. The press release announcing our third quarter earnings was distributed yesterday after the market close, and the release is now posted for viewing on our Investor Relations website.

A replay of this call will be available shortly after the conclusion of the call through November 6. The numbers to access this replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Wednesday, October 30, 2019, and we -- have not been updated subsequent to the initial earnings call. In 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 third quarter press release.

During our call, we will be making forward-looking statements, including statements about our growth prospects, our 2019 guidance and our long-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to view our risk factors discussed in our Form 10-K annual report for 2018 filed with the SEC, as well as the risk factors listed in our other reports and filings with the SEC. After the completed prepared remarks today, we will open up the call to take your questions.

I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [3]

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Thank you, Julie, and thank you all for joining us this morning. Late yesterday afternoon, after we issued our press release for the quarter, we learned the outcome of the Texas STAR+ RFP award.

Before we discuss our quarterly results, we will first provide you with the information we have at this time. We were awarded contracts in 2 regions: our existing Hidalgo region; and one new region, the Northeast region. Given the real-time nature of this information, a full analysis of the membership and revenue impact that is likely to occur in late 2020 is currently underway and will be completed shortly.

We are naturally very disappointed in this initial outcome and are currently seeking more information from HHSC with respect to the awards. We will then decide on the course of action and exploring all of our options relating to the decision.

Now let's turn the discussion to our third quarter results. Last night, we reported earnings per diluted share for the third quarter of $2.75. We reported pretax earnings of $233 million and after-tax earnings of $175 million, resulting in pretax and after-tax margins of 5.5% and 4.1%, respectively. Based on our third quarter and year-to-date performance, we are raising our full year earnings per diluted share guidance to a new range of $11.30 to $11.55 for the full year.

I will now provide some detail on our performance through the first 9 months of the year. Premium revenue was $12.1 billion and in line with expectations as our membership remains relatively stable, our rates remain sound and our retention of at-risk premium continues to improve. Our medical care ratio was 85.7%. Despite some cost pressures in select markets, this MCR level demonstrates our continued ability to manage medical costs effectively, improve our claim payment practices and execute other profit improvement initiatives.

The G&A ratio was 7.6%, also in line with expectations, as we efficiently managed our resources to provide excellent service to our members and providers. We continue to harvest dividends from our operating subsidiaries, resulting in nearly $800 million of excess capital at the parent company after paying down debt. We have a very strong balance sheet and a simplified and efficient capital structure.

We have attained a fairly attractive earnings profile. Our medical care ratio for the first 9 months of the year remains on track at 85.7% as the portfolio performed slightly better than expected. Total company after-tax margins of 4.5% are supported by 3% in Medicaid, 7% in Medicare and 12% in Marketplace. We have produced average quarterly earnings per share of over $2.90, with minor seasonal fluctuations. We have approximately $800 million of free cash, which, when combined with undrawn debt, creates a $1.7 billion investment capacity. And for the full year, we are on track to report EBITDA of approximately $1.2 billion or a 7% EBITDA margin.

I would like to provide some comments with respect to our 2020 outlook. At our Investor Day, we forecasted an organic premium revenue growth rate of 7% to 9% for 2020, which now may change with the news on Texas. However, many of the elements related to that growth rate are still intact.

Medicaid growth in 2020 will reflect the annualized impact of the RFP awards that we implemented this year, along with some expected Medicaid Expansion. In Medicare, we expect growth in our DSNP product from the expansion of our existing footprint and entering into 2 new states: South Carolina and Ohio. In Marketplace, our analysis suggests that both our rates and broker compensation structure are highly competitive. Taken together, these factors give us confidence in our ability to grow membership.

Inorganic growth prospects will continue to be an important dimension of our long-term growth strategy because of the positive operating leverage resulting from membership growth and the synergies derived from our proven turnaround skills. Two weeks ago, we announced that we signed a definitive agreement to acquire YourCare Health Plan, a not-for-profit plan in Upstate New York. YourCare services 46,000 Medicaid members in 7 counties in Western New York contiguous to our Syracuse-based Upstate plan. This transaction, which we expect to close in early 2020, is indicative of the type of bolt-on tuck-in acquisitions that we discussed at Investor Day.

Turning now to our updated full year 2019 earnings guidance. Our year-to-date performance gives us confidence in raising full year earnings per share guidance to a range of $11.30 to $11.55. This earnings per share guidance implies an after-tax margin of 4.3% to 4.4% supported by after-tax margins of approximately 3% for Medicaid, 7% for Medicare and 11% for Marketplace.

Before turning the call over to Tom, I would like to say another word about the Texas news. If in fact this development does create a future revenue shortfall, bear in mind that this team has demonstrated the ability to overcome many challenges. The team has grown margins to industry-leading levels even in the face of a significant revenue decline in 2019. We are committed to meeting the challenge again, and we'll continue to pursue the revenue opportunities that lie ahead.

Now I will turn the call over to Tom Tran for more detail on the financials. Tom?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [4]

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Thank you, Joe, and good morning. We report third quarter's earnings per diluted share of $2.75 supported by net income of $175 million and an after-tax margin of 4.1%, with premium revenue of $4.1 billion.

Let me provide some additional detail on the quarter. My commentary will be focused on a sequential comparison. The consolidated MCR for the third quarter of 2019 was 86.3% compared to 85.6% in the second quarter of 2019, primarily due to the seasonality of the Marketplace MCR. Prior periods reserve development in the quarter was negligible. The G&A ratio for the third quarter of 2019 improved by 20 basis points to 7.6% compared to 7.8% in the second quarter of 2019. The improvement in the G&A ratio was mainly due to the sequential increase in revenue. Interest expense was flat at $22 million compared to the second quarter of 2019.

Let me provide some additional commentary on our performance in the third quarter by line of business. In the Medicaid business, our MCR for the quarter was sequentially flat at approximately 88%, producing an after-tax margin of 3.4%. These results were in line with our expectations. We continue to produce our targeted margins in Medicaid, while experiencing isolated medical cost pressures in certain markets, primarily due to acuity mix shift, benefit carve-ins and some large claim activity. We fully expect that these cost pressures will continue to be managed and will ultimately end up in our premium rates.

Our Medicare business, comprising of our DSNP and MMP products, for the quarter continued to perform well and was in line with our expectation. The MCR for the quarter of 85.6% was fairly stable compared to 85.2% in the second quarter of 2019, producing an after-tax margin of 6.4%. More specifically on Medicare, we continue to demonstrate excellence in managing high acuity members by providing access to high-quality health care at a reasonable cost. This includes our market-leading management of long-term services and supports benefits, which are embedded in our MMP product. We continue to see the result of our quality and risk adjustment efforts as our Medicare risk scores are becoming more commensurate with the acuity of this population and risk-adjustment revenue has increased. And our attractive Medicare margin profile allow us to reinvest in additional benefits, which should help us maintain our product competitiveness as we position this business to growth in 2020 and beyond.

Finally, our Marketplace business continues to perform well and is generally in line with our seasonal expectation, as we report an MCR for the quarter of 71.2% compared to 67.2% in the second quarter of 2019. As a reminder, the margin profile of the Marketplace business allow us to ease up on rates filed for 2020, increase value-added benefits and offer more competitive commissions, so we can grow membership next year at a lower, more sustainable, but still attractive margin.

Turning to our balance sheet, cash flow and cash position for the quarter. Our reserve approach is consistent with prior quarters, and our reserve position remains strong. Days in claims payable represent 50 days of medical cost expense compared to 48 days in the second quarter of 2019 and 53 days in the third quarter of 2018. The sequential increase in days in claim payable is primarily due to seasonal factors. As of September 30, 2019, our health plans had total statutory capital and surplus of approximately $1.8 billion, which equates to approximately 335% of risk-based capital. We reduced the outstanding balance of the convertible notes by $55 million during the quarter and $240 million since the beginning of the year, and only $12 million of the convertible notes remain outstanding and will be redeemed in early 2020.

Capital deployment actions have result in lower interest expense, a gain on repayment of the convertible notes and a lower share count on a fully diluted basis in the quarter, which decreased by 6% to 63.6 million shares when compared to the same period in 2018. Operating cash flow for the 9 months ended September 30, 2019 amount to $398 million and is higher year-over-year, primarily due to the timing of government payments.

Shifting to our outlook. We raised our full year 2019 earnings guidance to a range of $11.30 to $11.55 per share from a range of $11.20 to $11.50. This implies the fourth quarter range of $2.50 to $2.75.

This concludes our prepared remarks. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Scott Fidel of Stephens.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [2]

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First question, just if you can maybe expand a little bit on the commentary on seeing some cost pressures in certain markets and in the Medicaid book. Maybe just sort of discuss how many markets' and geographies' products you're seeing that? And then sort of what type of rate traction you're seeing around some of those issues right now?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [3]

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Sure, Scott. I would say the cost pressures that we're experiencing in various markets come across 3 dimensions: one, we did see in the quarter some aberrant and anomalous large case activity, which will abate; second, we have seen an acuity mix shift due to some redetermination efforts, particularly in the state of Ohio. And those are primarily the reasons for the cost pressures. We believe that ultimately acuity mix shift ends up in rates, and in fact, the state of Ohio has been very reasonable and rational in rate discussions. And we believe that normal operating protocol, such as utilization control, care management and looking at our network contracts harder will arrest some of the large claim activity. So there were pressures in various markets, some of the behavioral carve-ins actually caused some rate pressure. You're never sure you're getting the right capitated rate when a benefit gets carved in. So we certainly saw some behavioral cost pressure in Washington. That will end up in rates. So acuity mix shift, benefit carve-ins and some large claim activity, but all very manageable as evidenced by a very flat sequential Medicaid managed care ratio of 88%.

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Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [4]

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Got it. And a follow-up question. Just I guess sort of related, maybe not, just around the trends on the reserve development side. And I know you mentioned you sort of had negligible reserve development in the quarter. I know you guys have had some pretty hefty development sort of trending over the last, let's call it, 4 to 6 quarters. So maybe sort of just update us on sort of the reserves and how you feel the adequacy is at this point? Did the reserve development get impacted by some of these issues in Medicaid or are there other factors to consider as well, just around reserve development trends?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [5]

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Take it to Tom in a moment, but I -- the reserve practices that we undertake have remained consistent. I would say in the third and fourth quarter, your prior year reserve development should abate. Last year I thought was an exception. We had some reserve development in the fourth quarter off the prior year. I think that was an unusual phenomenon. So the fact that reserve development is over $100 million for the year on a pretax basis and has abated here in the third and fourth quarter is not unusual. Tom, anything to add?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [6]

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No, nothing more to add to that, Joe. Our reserve practice remain very consistent. We feel that our reserve balance is very strong. You can see DCP has gone up 2 days. And none of these issue on the cost pressure you see there emanate into any particular issue for our reserve balance at all.

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Operator [7]

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The next question comes from Peter Costa of Wells Fargo.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [8]

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Question about Texas. Your loss ratio in Texas is higher than some of your other loss ratios when I look at the government programs loss ratio. But it's hard to tell given the mix of higher acuity business that you might have in Texas, whether that's more profitable or less profitable than average. I guess one of the questions is, is the contract that you stand to lose more profitable or less profitable than your average profitability? And then the second question, just what was it that gave you the confidence at the Investor Day that the 7% to 9% organic growth rate would be there, if you sort of weren't sure about the Texas result at that point in time?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [9]

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Let me...

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [10]

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Let me answer the second question first. To be clear, at Investor Day, we said that the 7% to 9% revenue forecast for 2020 assumed status quo in Texas. So it didn't assume any increment or decrement due to a gain or loss. We were very, very clear on that point. So now, as I said in our prepared remarks, as we redo our forecast for 2020, if this award sticks and it incepts in -- on September 1, we would, therefore, adjust the 7% to 9% to allow for that 4-month revenue shortfall in Texas. Tom, you want to answer the question about profitability?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [11]

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Sure. We obviously do not partition our profitability by specific market and even down by line of business of market, but I will provide the following general comments. The acuity of the population in Texas is generally higher because of the significant portion of ABD and MMP population in the state. So almost by nature, it's a much higher revenue PMPM, if you will. So with that generally, we run the text that you saw, we disclosed that at a 91% MCR in the press release. However, the business is profitable. Overall, our Medicaid business, as you know, hovering around 3% plus or minus on an after-tax. So in some states, it may be less, some states maybe more than that midpoint, so -- but the business there is profitable, albeit the fact that it may be slightly less than the midpoint because of the high acuity of the nature of the population.

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Operator [12]

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The next question comes from Josh Raskin of Nephron Research.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [13]

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Just want to follow up on a comment that you made, Joe, with the first question around Texas. I think you said that you'll explore all your options. And I want to make sure, is that just with regarding protests and Texas specifically? Or is that a broader Molina Healthcare commentary around as you kind of rethink about the long term?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [14]

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That was meant to refer to exploring our options in Texas. There is a -- there's 10 business days to file a protest. That's usually routine in these types of matters. But I was referring to exploring all of our options to review the scoring on the Texas awards. And then to the rights that we have to pursue an additional award, we would pursue vigorously.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [15]

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Okay, which I guess leads to my second question which is, you talked last quarter around long-term targets of 10% to 12% revenue growth still being consistent with your views long term, understanding that 2020 won't be in that range and EPS target to 12% to 15%. Does -- and I know you don't have the scoring, so you don't know exactly what happened in Texas, specifically. But is there anything that's occurred sort of with that Texas, where you guys will have to take a step back, rethink long-term targets, rethink Molina's long-term strategy or anything else in terms of just overall views for the company?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [16]

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Our managed Medicaid duals high acuity. We do this really well. We're disappointed in the Texas award, and we'll look at the scoring. And as I said, we'll pursue our rights. But nothing changes in our long-term outlook for the attractiveness of the business we're in or the target margins that we've outlined for you. There's an inherent growth rate in this business. That is very attractive as well. It produces significant excess cash flow. And although we're disappointed in this award, we'll reset our 2020 numbers and we'll grow off of those, and profitably.

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Operator [17]

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The next question comes from Justin Lake of Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [18]

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Just one follow-up with a couple of questions on Texas. First, in terms of the -- you've got a pretty big exchange footprint there, Joe. I would assume the good news is it looks like your STAR footprint is pretty similar to your STAR+ footprint. So is it fair to say that even if you were to lose the regions that -- in the announcement in STAR+, you would still have enough scale to run a successful exchange strategy there so that you wouldn't need to exit the exchanges in Texas in any material way?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [19]

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Okay. We have -- a lot of our exchange membership is in Dallas and Houston. We've proven in New Mexico that you can run a really profitable exchange business without being in Medicaid. And as you suggested, we still have the STAR CHIP contract, and we think we have enough network girth and scale to participate in the Marketplace business going forward. And the Texas Marketplace business has been profitable and an attractive growth opportunity for us.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [20]

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Great. And then in terms of the losses, I mean, I know you're still going through the numbers. I've come up with something estimating close to just under $1 billion of revenue that this low premium business looks like. Again, no need to comment on that. But just, I know you've talked about Texas in terms of the potential for deleveraging on the SG&A side if this were to go against you. And I just wanted to kind of follow up on that in terms of, if that number is in the right ballpark or you do lose $1 billion of revenue, do you think you could offset that SG&A and still hit your targets? Or do you think that would also be a reset above and beyond just the margin contribution, that, that's a risk here?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [21]

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Various scenarios on what this might mean for revenue, but I would say the number that you articulated is certainly in the neighborhood of what could happen if we kept everything we have in Hidalgo and the Northeast gets split, let's say, evenly between 2 players. Those numbers are in the right neighborhood. Look, stranded overhead is certainly a phenomenon in this business, so just the fixed cost nature of the business, but we don't tolerate stranded overhead here and we've proven that in 2019. If you recall, in 2018, with the Florida and New Mexico losses, we said we had stranded overhead that we had to get at. And I think when you look at north of 4% margins across the board in this business, we've proven that we don't allow stranded overhead. We'll get at the fixed costs when we -- when the revenue disappears, and we'll restore ourselves to our target margins.

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Operator [22]

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The next question comes from Kevin Fischbeck of Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [23]

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I wanted to ask about the exchanges. You've had a couple of competitors talk about their bid strategy and their expectation for margins for next year kind of coming down. And at least one of them specifically saying that their view about the minimum MLR really was a main reason why they were doing that, but they're operating at much lower margins than you're operating at. I just wanted to just kind of recheck with you and see what your thoughts were about whether that at all is a barrier to growth in either next year or in the next couple of years in certain markets? Just trying to understand why you're operating at a higher margin and yet you're not seeing the same potential cap to growth?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [24]

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Well, first thing I would say, Kevin, is, it's obvious that '18 and '19 have been very profitable years for us in the Marketplace and '17 was quite the opposite. So when '17 rolls off the 3-year average in '20, that will certainly put certain markets up against the minimum MLR. The other thing I would say is, it depends on how your portfolio performs. Averages can be misleading. It really depends on how your individual properties are performing. We have some that are performing really well and others less well, and so we will bump into the minimum MLR probably in a few markets, but we certainly considered that when we filed our prices for 2020. We certainly considered that when we were loading in additional value-added benefits to put value into the product then paying rebates. And we took all that into consideration as we filed our rates for 2020. And our preliminary analysis, now that everybody's rates are public, is that we have very competitive positions, #1 and #2 in about 75% of our key markets, in our flagship silver product and our bronze product, which is the products that we want to be competitive. So we're still feeling really good about our growth prospects in Marketplace for 2020. As a reminder, we said we were going to grow the business, albeit at a lower, sustainable and still attractive margin.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [25]

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And you said a couple of times on the call today that your broker compensation is also, I guess, strong. Is that a change this year, that -- did you do something differently? Or are you paying more now in 2020 -- or for 2020 than you have in the past? Or is this just a comment that you've consistently been doing this?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [26]

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We are paying market now. We are paying more, but we're paying market. We weren't competitive on our broker commissions in a few markets last year and we've corrected that. So although we're paying more, we're not paying above market. We are now paying market.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [27]

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And is there anything that you can kind of draw or share with us about that dynamic, like in those markets where you're paying below, any view about what that means to go from below market to being in market?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [28]

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Well, I mean -- as you know, about 50% of the business comes through .gov and the other 50% comes through brokers, and brokers want to be paid market commissions. So we believe we'll have good broker loyalty. We have a strong network. And now that we're paying market commissions, it should enhance the growth rate.

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Operator [29]

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The next question comes from Stephen Tanal of Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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I appreciate all the color, especially this early on the Texas RFP. And I guess, just wanted to follow up on kind of the comments on stranded overhead. Joe, that was helpful. But I guess, is it sort of fair to expect the earnings impact will be closer to the direct loss of what you're getting today as opposed to something larger, then? Like the state makes available sort of financials for all the companies. And I guess, the direct impact's somewhere in the ballpark of like 5% of EPS, if we're looking at all that right, using margins from the last reported fiscal year. So is that what you'd manage to, kind of just losing that direct impact? Or should we actually think, well, even if you cut some stranded overhead, the impact could be greater for whatever reason?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [31]

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I think I understand your question, but as I stated previously, certainly, the margin -- the fully baked margin on the product -- on the revenue that's lost will disappear. And as I mentioned before, there will be fixed costs that will then become stranded, but we don't allow that to happen and we've demonstrated that in 2019. We gave you, at Investor Day, initial estimates of maybe $40 million to $50 million of stranded overhead due to the New Mexico and Florida losses. And if you just look at our G&A ratios today, look at our margins today, I mean, it all becomes fungible at some point, but we've managed our G&A ratios really, really well through this dynamic, and we would be disciplined enough to do that yet again, in late 2020 when this revenue phenomenon hits.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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Perfect. And then maybe one for Tom. Just in terms of the guidance revision, 2 questions on it. One, could you kind of confirm sort of the level of peer performance EPS that's implied there? And the other was more mechanical, just the guidance hike on investment and other income. Any reason to think that's not sort of a 100% flow-through to earnings?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [33]

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In terms of peer performance guidance, I think what you're referring to is, is there any sort of restructuring costs or any kind of gain/loss on convertible, if that's what you're referring to. And our EPS that we provided is all in. All of those items are in, okay? So in other words, we have roughly about a $0.12 of year-to-date net gain from the redemption of the convertible. So that's in the $11.30 to $11.55.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Okay. Great. And I'm sorry, and the investment and other income piece?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [35]

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Investment income, yes, I mean, certainly, we have provided guidance with high investment and other income, that's a combined 2 items there. And that's, we have seen a little bit higher investment income in the third quarter, so that's why we upped the guidance for the full year.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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And does that flow through 100%, that was sort of just what I really wanted to understand, or should we be assuming that maybe with the other income part of that, the flow-through to earnings is not 100%?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [37]

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The EPS is 100%.

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Operator [38]

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The next question comes from Charles Rhyee of Cowen.

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Calvin Alexander Sternick, Cowen and Company, LLC, Research Division - Associate [39]

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This is Cal Sternick on for Charles. Just recognizing that you guys are fresh off of the Texas announcement and still working through your strategy, how are you thinking about your appetite for M&A going forward, just in the context of the YourCare acquisition and maybe some of the additional capital you'll have from pulling out of the Texas subs? And then just more generally on M&A strategy, do we think of M&A activity as being biased? Or is it just a business like Medicaid or Medicare?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [40]

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Sure. First and foremost, the best use of our excess capital is to fund organic growth. We hold about 10% of premium as regulatory capital and the levered and unlevered returns on equity are superb. Second, we have a very, very capable M&A team. We are going to remain very disciplined. We will look for opportunities in our existing markets and in greenfield markets in our core products, particularly Medicaid, high acuity in duals and probably not traditional Medicare Advantage. So we're going to stay very disciplined to our core product line. We really do seek out underperforming businesses because of our proven turnaround skills. We can harvest those performance-based synergies for our earnings stream and that's a very, very attractive use of our human resource capital. So we're going to remain very disciplined. We still think there is opportunities out there. There's orphaned plans. There's provider-owned plans. There's 501(c)(3)s. And we are scouring the universe for attractive opportunities to deploy our capital to accrete earnings per share.

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Calvin Alexander Sternick, Cowen and Company, LLC, Research Division - Associate [41]

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Great. And I appreciate the commentary on the Marketplace growth rates. Recognizing that we're still early in the enrollment period for Medicare, I'm just wondering if you could talk about any visibility for growth there next year?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [42]

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On Medicare?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [43]

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If the question is on Medicare, as you know, our Medicare is primarily centered around the DSNP product, and we have expanded the footprint. We have spent -- entered into 2 new markets. So we expect to have membership growth in 2020. We do have some visibility against our competition now, and we feel that the product will grow from 2020.

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Operator [44]

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The next question comes from Steven Valiquette of Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [45]

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So in Texas, I know you don't have the scoring yet, but breaking down the awards by region, if we look at the fact that you lost in Dallas, Harris, El Paso, Bexar, Jefferson, but then you actually won brand-new business in the larger MRSA Northeast region. I guess I'm just curious, is there any -- really anything high level that jumps out to you on what may have driven the new regional win, that was different mechanically than the factors that maybe in your mind may have drove the losses in the other regions? So -- and tied into that, is there any silver lining there worth pointing out with that one new win that might help you in the other protest process as well? I know it's kind of preliminary and high-level, you don't have the scoring, but just curious if anything jumps out to you?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [46]

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The answer is no, not at this stage, obviously the news is 12 hours old. And the scoring, as you suggested, has not been made available, but those are very legitimate questions and questions we will be asking, what did we learn about the scoring in the regions we lost and why were we successful in a brand new region for us. So no, we don't have any information at this time, but we will be seeking the answers to those questions and then pursuing our rights that we have under our contract.

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Operator [47]

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The next question comes from Matthew Borsch of BMO Capital.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [48]

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Yes. I'm just curious about the episodes of MCR pressure in the Medicaid business. Is that something that -- and I think you'd made some allusions to rate lag in the last call, but it wasn't particularly a factor. What's been the timing of this emerging and relative to how the impact has played out? Is that something that was sort of accelerating into the back part of the third quarter? Or how would you characterize it?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [49]

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I would characterize it as somewhat accelerating throughout the year, and want to be very clear. When benefits get carved into a program, you do your best to understand the capitated rate you're getting for that benefit. Sometimes it's right and sometimes it's not sufficient. So we've seen that in Washington with respect to the behavioral carve-in. We've seen it in Ohio with respect to the carve-in of the behavioral benefit that took place over a year ago and the acuity mix shift that has occurred in their redetermination efforts. So rates always do lag trend, but the good news is that our customers have been very rational and reasonable in understanding these cost pressures. And they have been included in recent rate discussions. And in fact, we had a mid-year rate increase in Ohio to offset some of this pressure. So whether it's large claim activity which is aberrant, whether it's the acuity mix shift and whether it's a carved-in benefit, this is just managed care dynamics and can be dealt with through operating protocols, utilization controls, network management and the like or in rate advocacy efforts, and the fact that we're still producing high 80s MLRs in the Medicaid business, 88% flat sequentially second to third quarter, I think, is testimony to the fact that there's a lot going right in the portfolio even though we're seeing pressure in some isolated places.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [50]

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Joe, if I could just, if we back up and look at the broader landscape of plans in Medicaid, seeing pressure in multiple markets. Is there any -- I realize the eligibility redeterminations is certainly a common factor, but it sort of feels a little bit like the rate development has sort of turned a little bit stingy coming into this year. And now we're going through what's likely to be some bout of corrections, and certainly, it's extremely helpful that you have reasonable business partners in most cases. But is that a mischaracterization?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [51]

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It's a legitimate question. But I think it's maybe slightly mischaracterized. The rate discussions have been reasonable, rational. Rates appear to be actuarially sound. And anytime you go through, as I said, the phenomenon of a benefit carve-in or a significant shift in acuity, you get these little rate shocks, which then quickly correct. I think the good news on redetermination is something we ought to really focus on. In this business, there's been a lot of discussion over many years is, how does the managed Medicaid business respond in economic cycles. We don't have to model it anymore, we know. And the fact that the Ohio economy is very strong, the fact that expansion members who actually do work and make some money are making more money now and going back to work, that puts pressure on membership roles. It makes an acuity mix shift happen on your existing population, but then it's correctable in rates. That's actually a very positive phenomenon. The fact that the good economy is creating pressure in one state, but then it's correctable through rates quickly, is a very positive phenomenon. We no longer have to conjecture and guess how these businesses perform through economic cycles, we know.

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Operator [52]

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The next question comes from Sarah James of Piper Jaffray.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [53]

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On Friday, Texas HHSC announced that Kay Molina took over as Head of Medicaid procurement, which is unusual to do just before an award. And in general there has been a good amount of churn on who is running this procurement for Texas. So just wondering if there's any color you can share on how churn in this department could have influenced the procurement environment? And if it means that there's actually going to be a different team evaluating the STAR RFP and scoring?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [54]

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Sarah, it's -- I hesitate to comment on what's going on in the inner workings of our customer. Certainly, the churn or the turnover phenomenon you suggested is real. Everybody knows it. We know it. But I can't speculate at this point on what impact that might have had on the scoring. When we get the scoring, we are going to do what we normally do. We're going to evaluate it very thoroughly. We will go through lessons learned and what we could have done better, but then we're going to pursue our rights that we have under our contract to -- if we think we were not scored accurately or favorably, we will pursue our rights. But I can't speculate on what might have happened inside the department that created the scoring that impacted us.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [55]

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Okay. Given where we're now on the top line for 2020, is there any additional flexibility that you have in the timing of investment spend or bringing forward any of the outsourcing opportunities, time-wise so you can influence the pacing of SG&A improvements to offset some of the top line headwinds?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [56]

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As we continue to [work] down the path of developing a 2020 plan, certainly SG&A management is certainly something that's on our radar screen. We're not done yet. We think there's more efficiency in our operation that can be gained. But most of the large-scale outsourcing that is going to take place here has already occurred. We did a very large-scale IT outsourcing last year, as you know. We outsourced some of our very specialized and esoteric utilization management capabilities. We outsourced our nurse advice line earlier this year. So most of the large-scale outsourcing has been done, but not all of that is in the current run rate and that mostly will -- that should be fully in the run rate in 2020, if that was your question.

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Operator [57]

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The next question comes from Dave Windley of Jefferies.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [58]

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It's Dave Styblo in for Windley. Joe, the team has done really a commendable job of extracting costs from the business, I think, to the tune of $350 million to $400 million by the end of this year. And you guys have talked about another $350 million to $400 million of savings opportunities in the future. I'm curious if any of those savings were earmarked for opportunities in Texas that might not now have an opportunity to be addressed because of the shrinking footprint for the RFP outcome?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [59]

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Dave, it's a fair comment. I mean, without parsing the $300 million to $400 million of opportunity, I guess you could just, fair to say that it's evenly spread across our book of business, across our products and across our geographies. So yes, if part of that was earmarked for, whether it's G&A savings, payment integrity savings, care management savings, that whatever would have happened on the revenue that we lost will not happen. So I think that's a fair comment. But we're not going to start allocating our profit improvement opportunities to individual states and products, but you make a fair comment. It's a fair comment.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [60]

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Sure. Okay. And then -- and stepping back, I know you guys have started to talk about the revenue growth opportunities and have done that for a couple of quarters now with -- across the different businesses. I'm curious, are there any RFPs that are larger in scale that can add chunks of revenue coming up in the next 12 to 24 months that are on your horizon that you guys have visibility on, that you're willing to disclose that you'd be interested in participating in from a bid perspective?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [61]

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We have a fair number of what I'll call special situations, which at this time are still confidential, that we're working on. As you know, we submitted a response to the Kentucky RFP. That's in process. And we're told that will be announced sometime in the month of November, so imminently, and the other states we showed you at Investor Day, while RFPs haven't really dropped, Tennessee, Georgia, West Virginia, even Iowa to some extent we're looking at. We have a ground game ongoing in various greenfield states. We're evaluating the opportunities. We've run every opportunity through a very disciplined set of screens. The regulatory environment, the ability to build a network, the strength of the incumbency and the competition and we'll pick our spots.

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David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [62]

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Okay. And then maybe just a last one, I know you commented about some of the turnover within Texas. I'm curious, the way that the 2 RFPs are evaluated for the STAR+ and the CHIP TANF. What are some of the key differences that you might see there that might not cause kind of a similar outcome to happen in the next RFP award announcement coming up in December?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [63]

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Real-time nature of this news. It's a very legitimate question, and one we're looking at. But I just don't have an answer, specifically, at this time for you, but obviously we'll be looking at the similarities and differences and the scoring dynamics for the 2 programs. And we'll take that into consideration as we build our confidence level on winning the second award.

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Operator [64]

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This concludes today's question-and-answer session and Molina Healthcare's Third Quarter 2019 Earnings Conference Call. Thank you for attending today's presentation. You may now disconnect.