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Edited Transcript of MOH earnings conference call or presentation 31-Jul-19 12:00pm GMT

Q2 2019 Molina Healthcare Inc Earnings Call

LONG BEACH Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Molina Healthcare Inc earnings conference call or presentation Wednesday, July 31, 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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* Charles Rhyee

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - 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

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research 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 day, ladies and gentlemen, and welcome to the Molina Healthcare Second 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. 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 Second 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 second quarter earnings was distributed yesterday after the market closed, and the release is now posted for viewing on our company website. A replay of this call will be available shortly after the conclusion of the call for 30 days. The numbers to access the replay are in your earnings release. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein as of today, Wednesday July 31, 2019, have not been updated subsequent to the initial earnings call. In this call, we will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2019 press release that we issued last night.

During our call, we will be making forward-looking statements, including statements relating to our growth prospects, our 2019 guidance, our pending taxes, our fee and our long-term outlook. Listeners are cautioned that all of the forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for 2018 filed with SEC as well as risk factors listed in our other reports and filings with the SEC. After the completion of our prepared remarks, we will open the call up and take your questions. Finally, as you may have noticed from our earnings release issued last night, we have enhanced our disclosures of information eliminating the need for our quarterly supplements.

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. Last night, we reported earnings per diluted share for the second quarter of $3.06, pre-tax earnings of $257 million and after-tax earnings of $196 million, resulting in pre-tax and after-tax margins of 6.1% and 4.7% respectively on a reported basis. We are very pleased with our second quarter and first half performance, in which we are demonstrating that we can sustain our attractive margin profile, while pivoting to top-line growth. The business continues to generate significant excess cash flow, and our revenue growth initiatives are well underway. We are raising our full year earnings per diluted share guidance by $0.60 at the midpoint of the prior range, with a new range of $11.20 to $11.50 for the full year.

Now some highlights for the first half of the year. Premium revenue was $8 billion and in line with expectations, as our membership flows have stabilized, our rates remain sound, and our retention of at-risk premium continues to improve. We've managed to a medical care ratio of 85.5% in the first half as we continue to demonstrate our ability to manage medical costs, execute strong rate adequacy efforts and continue to improve our claim payment practices. The year-to-date G&A ratio was 7.6%, also in line with our expectations, as we efficiently managed our resources to provide excellent service to our members and providers, all while continuing to invest in revenue growth initiatives. We continue to harvest dividends from our operating subsidiaries and have used the cash to pay down debt, lower interest expense and provide ample dry powder at the parent company to reinvest in growth. We have a very strong balance sheet and a simplified and efficient capital structure. Now some comments on performance by line of business. In the Medicaid business, we achieved an 88.3% medical care ratio and an after-tax margin of 3% for the first half of the year, squarely in the range of the target margins we have forecasted for this business.

Some specific points on Medicaid, TANF and ABD generally performed in line with our expectations, and Medicaid Expansion outperformed. Medical cost trends remained well-managed across all medical cost categories as the result of our continued improvement in utilization management and payment integrity. And we continue to improve on our retention of quality and incentive revenue. Our Medicaid business is performing well, producing top-tier margins and well positioned to grow. Our Medicare business, comprising our D-SNP and MMP products, continue to perform well as we managed to a medical care ratio of 85% for the first half of the year and produced an after-tax margin of approximately 7.4%, outperforming our expectations. More specifically on Medicare, we continue to demonstrate excellence in managing high-acuity members by providing access to high-quality healthcare 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 results of our quality and risk adjustment efforts as, our Medicare risk course are becoming more commensurate with the acuity of this population and risk adjustment revenues increased. And our attractive Medicare margin profile gives us plenty of flexibility to reinvest in additional benefits, which then help us maintain our product competitiveness, as we position this business to grow in 2020 and beyond. Finally, our Marketplace business continues to perform well. We managed to a medical care ratio of 64.7% and an after-tax margin of 13.6% for the first half of the year. Specifically, the risk pool has seasoned, and our medical cost trend is stable and being well-managed. We are capturing more accurate and complete risk course and as a result, we are paying less into the risk pool, and our membership is lapsing at the expected monthly level of less than 2%. These results and metrics were in line with our expectations and our prior guidance. The margin profile of the Marketplace business also gives us ample flexibility to ease up on rates, improve the value-added benefits and pay competitive commissions, so we can grow membership in 2020, albeit, at a lower, more sustainable, but still attractive margin.

Now I will comment on the first 6 months of the year through the lens of our locally operated health plans. Our health plan portfolio has continued to perform well. Our operating model continues to pay dividends, as we empower local health plans to drive front-line decision-making with strong support from centralized services in disciplined corporate oversight. California continues to perform well with its very diversified book of business, and in one of the more complex network environment in the country. With 590,000 members, our effective medical cost management and low-cost networks are producing MCRs in the mid-80s. As such, our California plan is poised to grow, particularly in returning to meaningful, Marketplace market share. In Ohio, with 297,000 members, we are generating solid margins with a total-book MCR of 88.2% for the first half of the year. The spike in Medicaid medical costs due to the introduction of the behavioral benefit and the higher acuity mix that came from redetermination efforts has been ameliorated by our effective rate efficacy in the state. We believe we are well positioned for the upcoming re-procurement. In Washington with 811,000 members and a diversified portfolio of products, our margin position is returning to its historical level, even with the confluence of significant membership growth due to our successful re-procurement and the introduction of the new integrated behavioral benefit. The higher medical cost trends experienced earlier this year due to this significant growth have abated as a result of the increased focus on inpatient stays and care management. In Texas, with 360,000 members, we await the announcement of the STAR+, STAR Chip awards at the end of August. The continued excellent performance in our ABD business contributes to our confidence in the pending procurement. In summary, we are pleased with our second quarter and first half performance across all of our operating metrics, product lines and health plans and with respect to capital management.

Now I will address our updated and increased 2019 earnings guidance. We have had a strong start to the year and very good momentum as we head into the second half. Our margin sustainability efforts have clearly taken root. This gives us confidence in raising full year earnings per share guidance to a range of $11.20 to $11.50 with $11.35 at the midpoint and an after-tax margin of 4.3%. This earnings per share guidance implies achieving medical care ratios of approximately 88% for Medicaid, 85% for Medicare and 69% for Marketplace, resulting in after-tax margins of approximately 3%, 7%, and 11%, respectively. With these medical care ratios and after-tax margins, which are in the top decile, we are taking a cautious approach to forecasting any further margin improvement for the remainder of the year. Many times, the positive implications of favorable reserve development are overlooked. As we continue to improve the management of our medical costs, we continue to outperform the medical cost trend assumptions embedded in reserving. This means our medical cost baseline and our cost trends for current-year dates of service could be conservatively stated. Our attractive and sustainable margin position, that we have laid out in our full year 2019 guidance, provides a strong earnings baseline as we pivot to top line growth in 2020 and beyond. I will now provide an update on 2020 and the longer-term outlook. As I shared with you at our Investor Day, we expect 2020 premium revenue to grow by 7% to 9%, supported by growth in all 3 lines of business. This excludes any impact of the Texas RFP outcome, which has not yet been announced. Our top-line growth initiatives for 2020 are well underway. In Medicaid, growth in 2020 will benefit from the annualized impact of the RFP Awards that we implemented and launched this year, along with expected Medicaid Expansion growth in some markets. For instance, we have planned growth in Mississippi, Illinois, in Washington and the potential for Medicaid Expansion in Utah. In Medicare, there are more than 400 counties nationally, where we offer only Medicaid, and our Medicare footprint is under-penetrated in approximately 65 existing counties. We have filed D-SNP pricing in 150 new counties for 2020, which includes entering to new states, South Carolina and Ohio. In Marketplace, our 2020 Marketplace rate bids have all been submitted. All of our submissions have not yet been made public. So we will not be commenting on rates in specific markets. Our approach is to perform a very detailed market-by-market analysis to evaluate our competitive pricing position. We believe we have competitive products that will be priced well against the competition. We have maintained a very robust broker network and believe that our broker composition plans will now be more competitive. Inorganic growth prospects are also an important dimension of our long-term growth strategy. And while we will never comment on specific opportunities, let me offer some brief thoughts on our activity in this potential value-creating area.

We expect to have $1.8 billion of investment capacity over the course of 2019. This comprises $500 million of cash currently at the parent, $900 million of presently available unused debt capacity and $400 million of additional dividends we expect to harvest over the balance of the year. If available, we would prefer to invest in attractively priced blocks of membership in our core products rather than buying back our own shares, as the operating leverage of membership growth is attractive, and we would prefer to grow our capital base rather than to shrink it. With our prudent turnaround skills, we would also find value in acquiring health plans to harvest the performance improvement synergies for the benefit of our own shareholders. Our business development team is working the landscape hard to develop these types of opportunities. Nothing about our long term outlook has changed since Investor Day, except for another solid quarter of performance and increased confidence in our future. A recap of our long-term outlook. We are committed to delivering 10% to 12% revenue growth, which would be derived from a combination of end-market growth in premium yield, actions we take in our product growth strategy and from winning new territories. We will produce sustainable margins at a range of 3.8% to 4.2% with the midpoint of 4%, which is where we are today. We are committed to long-term net income growth of 9% to 11%, and we are committed to earnings per diluted share growth of 12% to 15%, after deploying the excess capital generated. We are and we will be a pure-play government-managed care business. We are going to stay close to the core. We believe that the government-managed care business has very attractive growth characteristics, with compelling free cash flow generation. We aspire to be the lowest cost, highest margin producer in this high-growth industry. In conclusion, we are very pleased with our second quarter and first half results and continue to progress this year. Margin sustainability, the second part of our three-part plan, is off to a very good start, and we have launched the third phase that is to generate double-digit top-line revenue growth. We are excited from what awaits us for the remainder of 2019 and beyond. Now I will turn the call over to Tom Tran for more details 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 second quarter earnings per diluted share of $3.06 on a GAAP basis and adjusted earnings per diluted share of $3.11, excluding the amortization of intangible asset. Our pure performance earnings for the quarter is $2.91, which excludes the positive impact from the net $0.15 gain on repayment of the convertible notes partially offset by restructuring costs. Let me provide some additional commentary on our performance for the second quarter. Premium revenue for the second quarter of 2019 decreased 10.3% to $4 billion compared to $4.5 billion in the second quarter of 2018, which was in line with our expectations. Premium revenue for the second quarter increased 2.5% sequentially. The consolidated MCR for the second quarter of 2019 was 85.6% compared to 85.3% in the second quarter of 2018. Our continued focus on medical management combined with our relatively stable trend environment result in favorable prior-period development of approximately $28 million pretax, or $0.33 per share. The MCR for the 6 months ended June 30, 2019, improved to 85.5% compared to 85.7% for the same period in 2018. Favorable prior-period development for the first 6 months of 2019 was in line with the same period in the prior year. The G&A ratio for the second quarter of 2019 was 7.8% compared to 6.9% in the prior year. For the 6 months ending June 30, 2019, the G&A ratio was 7.6% compared to 7.2% for the same period in 2018. For both periods, the increase in the G&A ratio was mainly due to the decrease in total revenue year-over-year and was generally in line with our expectations. G&A expense increased in the second quarter from the first quarter of 2019 and was impacted by the timing of expenditures. Interest expense was $22 million compared to $32 million in the second quarter of 2018. The decline was due to continued repayment of debt.

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. As we have stated in the past, at quarter end, we remain consistent with our reserving practice that resolved in favorable prior-period development in the second quarter. As of June 30, 2019, our health plans had aggregate statutory capital and surplus of approximately $2.2 billion, which is well in excess of 400% of risk-based capital, which is yet another indication of the strong near-term parent company dividend harvesting opportunity. We harvested $345 million of dividends in the second quarter or total of approximately $635 million year-to-date. We plan to harvest approximately $400 million of additional dividends for the balance of the year. Together, with unused debt capacity, we currently have over $1.4 billion of available capital for deployment and expect available capital to be $1.8 billion by year-end. We reduced the principal on convertible notes by $139 million during the quarter and $185 million since the beginning of the year. Capital deployment actions have resulted in lower interest expense, a gain on repayment on the convertible notes and a lower share count, which decreased the 64 million shares from 66.7 million shares in the same period of the prior year. As of June 30, 2019, our medical claims payable totaled $1.8 billion compared to $2 billion as of December 31, 2018, due to the decline in premium revenue and the reserve on lost contract have been paid down.

Days and claims payable represents 48 days of medical cost expense compared to 49 days in the second quarter of 2018 and 52 days in the first quarter of 2019. The sequential decrease in days in claims payable is primarily due to seasonal factors. Operating cash flows for the first 6 months ended June 30, of 2019, amounted to $156 million and is lower year-over-year due to the impact of timing of settlements with government agency and premium receipt from CMS.

Shifting to our outlook. We have raised full year 2019 earnings guidance to a range of $11.20 to $11.50 per diluted share, with the midpoint of $0.11 and $0.35 per diluted share or an increase of $0.60 per diluted share. This increase is comprised of the following: $0.15 per share net gain from the extinguishment of the convertible debt partially offset by restructuring cost, and $0.45 earnings per share out-performance, which comprise of; $0.33 per share of improved claim cost reflected in prior-period development, which we do not forecast; and $0.12 per share from general out-performance for the balance of the year. Finally, our 2019 guidance does not assume any additional impact from prior-period development, positive or negative for the rest of the year. While we do not normally provide quarterly guidance, a quick thought on the trajectory of earnings on the back half for the year. We expect that our third quarter earnings will represent slightly less than half of the earnings for the remainder of the year due to the ramping of our profit improvement opportunities. 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) Our first question is from David Windley of Jefferies.

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

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Dave, you ready?

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Operator [3]

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David, your line is open.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [4]

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Sorry, can you hear me now? How about that?

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Operator [5]

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Yes. We can hear you.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [6]

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Can you hear me? Yes, Sorry. Multipart question on rates. Joe, you've talked about the Medicaid environment being, kind of better-than-average, curious if you still view it that way? Second, on your comments on risk adjustment and at-risk revenue retention. Where do you think you stand there in terms of your recapture on at-risk premium? And third, in the exchange market environment, you talk about kind of easing your pricing in that environment to resume enrollment growth. Can you talk about the dynamic with such a high percentage of the enrollment subsidized? To what extent does do changes in pricing have an impact on consumer decisions in that highly subsidized market?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [7]

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Great, Dave. I'll take those in order. We believe the Medicaid rate environment is very stable, rational and actuarially sound. We have been experiencing a medical cost trend in the very low single digits in our Medicaid business, and rates have generally kept pace with the rate of medical cost inflation. With respect to risk adjustment and at-risk revenue, across all of our lines of business, marketplace, Medicare and Medicaid, we continue to improve our performance in retaining at-risk revenue and that is emerging in the results in a very obvious way. So we continue to get better at whether its quality withholds in Medicaid, whether it's risk adjustment in Marketplace, whether it's STAR ratings in Medicare across the board, we are just getting better and better at retaining at-risk revenue. And as I said, it's showing up in our medical care ratios. And lastly, yes. With the performance of our Marketplace business, when the year is over, we'll have 275,000 members, a $1.5 billion in revenue and 11% after-tax margins. There is ample flexibility to improve the value-added benefits we inject into the products to ease up on rates. We have seen some of the rate filings in certain states, and we believe our pricing for 2020 is well positioned us to grow versus the competition. So our prospects for growing the marketplace business in 2020 seem to be moving along a good execution path. But we'll know more when we see some of the competitor rates, particularly, in the larger states like Texas and Florida. Hope that answers your question.

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Operator [8]

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Next question is from Peter Costa of Wells Fargo Securities.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [9]

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I wanted to ask about the TANF and CHIP business medical loss ratio, seems like it deteriorated a little bit year-over-year. Others have talked about pressure in Medicaid loss ratios. What you think the issue there is? Is it really just that the mix is no longer improving with tightened eligibility, and then no longer getting [use for] the incremental people found from signing up for healthcare reform? Meaning that you need a higher rate from states going forward? Or what's happening in there that's causing the rates not to keep up with trend?

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

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Well, thanks, Peter. For the most part, our TANF and CHIP business is performing as expected. And you're right, in many states and for us in particular, in places like Ohio and Michigan, where eligibility redetermination efforts have been ongoing. It is fair to say that there is an acuity mix shift that occurs. Generally speaking, healthier people are the ones returning to work and the unhealthy population will stay on the Medicaid roles. So you do get an acuity mix shift, not only in traditional TANF and CHIP, but in Medicaid Expansion, where the incomes are a little higher. So there is a phenomenon there, but I will tell you that for the most part of the states have been very reasonable in recognizing the acuity mix shift, and our rate adequacy efforts have allowed us to actually get rate relief on some of these acuity mix shifts. So I would call it a sort of a mild trend that's putting a little bit of pressure, but not really a phenomenon that has to be dealt with in a dramatic way.

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

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Peter. Last year, we didn't have any Mississippi startup at a time. So that also adds a little bit to the startup business in Mississippi throughout -- if you compare Q1 this -- Q2 this year versus Q2 last year, so that's another data point for you.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [12]

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Yes, great. That brings me to my second question, which is you have very high targeted margins in your businesses, but you don't have as much growth as some others have. And where you have had growth, like in Mississippi or Washington and places like that, here you have seen pressure on your margins. Would you be willing to trade your high-margin targets for more growth going forward? And then, can you talk about sort of the trade-off between growth and margin, at least in the first year or two?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [13]

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Well, I would say, on -- with Washington, in particular, when you grow 30,000 members due to an incredibly successful re-procurement, and there is a major carve-in of the integrated behavioral benefit, there will always be some level of uncertainty as to whether the rate deal obtained was reasonable and enough to capture the trend that you're going to experience. So I consider some of these pressures that we've been experiencing more benefit-related than trend-related, and they will essentially and effectively end up in rates. As they did in Ohio with the integrated behavioral benefit and the higher-acuity mix shift that happened in the expansion population. So in answer to your broader question about would we be willing to invest margins in growth? Yes. I mean we do believe we can sustain these margins in perpetuity and start growing the top line at double-digit rates. We believe our cost structure is very, very effective, and we aim to be the lowest-cost, highest-margin producer in high-growth industry. So we will invest some of our Marketplace margins in product features and pricing next year to grow, but we really do believe we can maintain a single-digit Medicare margin and a 3% Medicaid margin in perpetuity.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [14]

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Congrats on the quarter.

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [15]

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Thank you.

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Operator [16]

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The next question is from Josh Raskin of Nephron Research.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [17]

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For -- I -- just 2 questions. The first is just as you think about the 3 segments into 2020 and maybe even beyond, are there specific sort of margin resets? I know you've talked about the pricing on the exchanges or in the Marketplace for you guys. But in Medicaid or Medicare, are there minimum MLR reset? Are there state arrangements on profits -- sharing things like that or other sort of like technical requirements where you would expect the margins to normalize just based on sort of being above target margins? And then the second question, just on the M&A commentary, certainly appreciate you guys looking for books of business and understand that rationale, is that a commentary around the potential divestitures from Centene WellCare? Or is that a broader commentary around provider on plans and other plans in the marketplace?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [18]

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Well, Josh, on your first question about margin resets in our 3 segments. The margins we're achieving today are subject to all the caps and corridors that exist in various markets. Various markets have, as you know, G&A caps, they have profit caps, there's quality with holders, all types of features to sort of regulate the amount of profit you can earn and the 3% margin we are earning in Medicaid is subject to all those puts and takes. So I don't see a margin reset coming in the Medicaid business at all. In Medicare and our MMP product, they have introduced various levels of minimal MLRs that probably will change over time to put maybe a little bit pressure on the MMP product, but that's the only phenomenon I can actually think of that represents anything close to profit pressure due to profit caps, corridors and the like. On your last comment on M&A., that was the very general comment, recognizing the significant financial capacity we've created in a short period of time and returning to positive operating leverage. As a reminder, we had negative operating leverage last year when we lost the Florida and the Mexico contracts, and we want to start creating positive operating leverage, and there is significant operating leverage to create if we can attract books of business, so is in recognition of positive -- returning to positive operating leverage and the significant financial capacity we have created. We would never comment on any specific situation with respect to M&A.

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Operator [19]

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The next question is from Justin Lake of Wolfe Research.

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

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Let me just follow up a little bit on the -- Josh asked about margins. Just broadly, on 2020, can you -- I'm thinking about the run rate of earnings in 2019 into next year. I know, for instance, you guys typically exclude the incremental PYD that you've kind of called out so far year-to-date as a headwind to next year. Is there any other headwinds that you would want us to kind of consider? And anything else you -- we should keep in mind as we kind of looked to 2020 and that versus that 12% to 15% growth rate target that you have out there in EPS?

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

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Justin, no, really. The good news about this year is when we print the final numbers, if everything goes as planned, it would be a very, very clean year. The revenue base, the MCRs, the SG&A ratio, the margins we are producing, are all very reflective of the earnings power of the business. So we finally have a clean stable year, where we'd step back, look at it and say, this is the baseline off of which we will grow. So there really are no significant headwinds or tailwinds as we emerge into 2020. As we said, with 7% to 9% premium growth projected for next year, we should return to positive operating leverage and the margins on that business should hold. So we are feeling -- without giving a forecast for 2020, which we are not, we are feeling pretty good about the trajectory we are on for the second half of '19 into '20.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [22]

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Got it. And then just following up, and I apologize if I missed this before. You talked about the 7% to 9% premium growth. Were you able to give a breakdown to kind of where you see that coming from specifically, and especially exchanges versus Medicaid?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [23]

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We haven't done it specifically but generally, what we have said is, we filed in 150 new counties in our D-SNP product, roaming at 65 today, and we actually expect to grow market share in the 65 we are in, because we're mostly under-penetrated in now 65 counties. So we have a good growth prospects for Medicare. In Marketplace, as you suggested, we will ease up on rates, as you probably saw in some of the rate filings, where our margins today are outsized, we can reinvest in the product. We are going to do a better job pricing Bronze. We are seeing a lot of people select Bronze over Silver because of the lower monthly premium. So we'll do a better job there. So very confident in our ability to grow the top line in Marketplace. With respect to Medicaid, it's mostly going to come from end-market extensions of run rate we're creating this year, Mississippi run rating at the next year. We have had a good year in Illinois and South Carolina, building our revenue base there due to better positioning in the auto-assignment algorithm. Washington, the growth that they've experienced this year will extend into next year. So most of the growth in Medicaid next year will come from things that already exist today. So it's merely a -- an extrapolation of the benefits that we are enjoying this year due to some end-market growth.

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Operator [24]

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The next question is from Sarah James of Piper Jaffray.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [25]

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So you guys are the second company to flag this redetermination, and I'm wondering if this is something that's always been going on to this degree, or if states are kind of approaching it with a new vigor, and that's why it's coming up? And then, you talked about being able to resolve any shift that causes in mix through rate adequacy is. Hoping you could give us an idea of what the turnaround time line on that is? Is this something that you typically will resolve in the first quarter? Or does it take a couple of quarters of adequacy to get the payments where you need them to be?

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

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Well, Sarah, on redetermination, I think there are couple of factors at work here. One is, I think it's fair to say that certain states have an increased focus on redetermination, which makes perfect sense, they're spending taxpayer's money, and they want to make sure that people on the rolls are actually eligible for Medicaid. So there was an increased focus. It seems to have abated a bit. But secondly, we are dealing with a very good economy, and people are returning to work. And as they return to work, the healthier people will return to work and the sicker people who can't work will stay on the rolls, which therefore, creates the acuity mix shift that you observe. We can do, as a company, we can do a better job keeping people that are going to the redetermination process. We believe that some of the softness in our membership rolls over the past couple of years have been -- are because we've being relaxed in working with our members to keep them on the rolls should they continue to be eligible and they leak out of our -- out of Molina into the system and wind up in other companies, and we are going to do a better job keeping them on the Medicaid rolls, if in fact they're eligible. On the rate adequacy efforts, states are very aware that healthier people go back to work and the less healthy people stay on the rolls. Recent example in Ohio, where there was a rate adequacy effort to look at the redetermination effort that took place there to look at the acuity mix that stayed on the Medicaid rolls and the market, in general, including Molina have been very successful in making sure that rates have stayed commensurate with the acuity of the population. So there is usually a lag time, but states have been very reasonable to observe that phenomenon, and they have been agreeable to make sure the rates are adequate.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [27]

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Got it. That's very helpful. And one clarification. In the release, you guys mentioned a decrease in Marketplace risk adjustment compared to '18. Can you quantify how much that was?

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

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I'm sorry, your question to -- answer -- risk adjustment on '18?

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [29]

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Yes. The Marketplace risk adjustment that you guys experienced this quarter that relates to 2018, can you quantify how much that was?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [30]

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All right. We haven't quantified that. We -- if you recall last year, I understand your question, last year, we disclosed an amount that was very significant, I mean at the time, they represented almost 25% of our earnings forecast for the year, so we disclosed it. We thought it was relevant. This year, the number was immaterial to the quarter, to the 6 months and certainly to the full year forecast. So we have not spiked that out and probably will not.

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Operator [31]

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The next question is from Stephen Tanal of Goldman Sachs.

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

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You guys have covered a lot of ground, so maybe just a couple of numbers question here. Just on the prior-period development. So you guys framed the $28 million pretax in the quarter. I just want to confirm, whether that's net of offsetting reserved builds? And what the comparable number was last year? Just to understand sort of the year-on-your swing in MCR, if any?

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

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Yes, Stephen, the -- Tom. The $28 million is primarily prior-year development there for the quarter. And if you look at the 6 months this year, as Joe commented in his prepared remarks, it is pretty consistent with prior year in the same ballpark number essentially. And for the year-to-date numbers, it's approximately in the zone of about $90 million in total pretax.

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

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Okay. Got it. And that sort of the way that you guys are defining that as net of reserve builds, correct? Is that the right way to think about that?

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

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Yes. We are consistent in our approach to reserve and that's a very, very, very fair comment.

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

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Perfect. And maybe just one more follow-up. Just sort of on the Medicaid redetermination story. It sounds like the states are actually playing ball, which is great to hear. But just wanted to clarify, are you guys actually seeing sort of off-cycle rate increases, whether the issues are playing out? Or you typically having to wait for the next renewal cycle?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [37]

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Typically, you're waiting for the next renewal cycle in agreeing to a prospective adjustment. Every once in a while, you might be able to argue for some retrospective rate relief. But generally speaking, it will wait for -- if there's a midyear true-up, it will wait for that process, and if you have to wait for the following year, usually that's the way it happens. But every once in a while, you can approach a customer for a midyear correction, if in fact there is a dramatic shift in acuity or benefits.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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Got it. That's very helpful. Maybe just last one from me. Just the MA sort of SNP's business look particularly strong in MCR. Wondering if you could give us any specific commentary on what's working particularly well in that business, and then I'll (inaudible).

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [39]

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It's really just the fundamentals. We continue to manage high-acuity populations really, really well. The membership is very stable, and we continue to get a lot better at risk adjustment in making sure that our -- the scores that we are achieving are commensurate with the acuity population, and that continues to give us some lift. So we're just really operating really well on the fundamentals of the business and with our renewed interest in growth in filing in 150 new counties next year and increasing our penetration in the 65 existing counties, we're really bullish on our prospects in the D-SNP line of business.

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Operator [40]

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Our next question is from Matt Borsch of BMO Capital Markets.

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Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [41]

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Yes. I know you've touched on this. I was just hoping you could talk on the drop -- sequential drop in day's claims payable relative to the favorable reserve development that you saw. And then, just to put it in context, I recognized the track record that you've developed for conservative and favorable reserved development speaks to the integrity of your reserving process. But I just want to get a little bit more comfort on this stat, the reserves were replenished going forward given the drop in day's claims payable?

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

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Sure, Matt. I'll give that question to Tom.

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

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Yes. Matt, you're right. We are very consistent in terms of about preserving that methodology. So regarding the quarter end, June '19, you see a drop of 4 days, and you look back last year, June 2018, if you compare that to March of 2019, it's a similar kind of drop of roughly about 4 days. June is typically low realization months and usually step your reserve based on that and most of your reserve balance at the end of the quarter consist of the current month. So that's really the phenomenal of seasonality that I mentioned.

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Operator [44]

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The next question is from Ricky Goldwasser of Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [45]

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Just couple of follow-up questions here. First of all, on Ohio, because you keep coming back to Ohio as an examples of states where rates have been readjusted. So second quarter margins for the state reflect kind of like the steady-state margins or should we see margin expansion into 2020 as a result of these rate adjustments, that's the first question. And then second question, I know Santino and [Derek Paul] talked about the ongoing process of divestiture and the discussions. So just any thoughts on that and any specific regions that you'd be interested in?

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

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With respect to the profitability of Ohio, I would say that the rate adjustment that we are getting is keeping pace with the new acuity and trend of the population. So we are not projecting any significant change in the margin picture that we're presenting today. That rate was necessary to keep pace with medical cost inflation. So no change in the trajectory of the state of Ohio profitability. The rate increase that we are able to get helps us keep pace with the rate of inflation. And on the last question, we just make it a practice never to comment on any specific M&A opportunity but to repeat what I've said in our prepared remarks, we have $1.8 billion of capacity, and the desire to return to significant positive operating leverage, we are very interested in books of business and membership in our core products. And I would leave it at that.

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Operator [47]

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Next question is from Kevin Fischbeck of Bank of America Merrill Lynch.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [48]

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Just a couple of things. One is you mentioned that, I guess, it sounds like the Medicare business is coming a little bit better than you guys expected so far. And that you are a little above your target margin there, did you guys realize that in time for the 2020 bids? Or is that potentially going to be a source of upside kind of going to next year as well?

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

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This profit picture was emerging as we were filing our bids for 2020. So it was taken fully into consideration, Kevin.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [50]

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Okay, because I think you said something on the lines of that you have favorable development that people might not quite appreciate how that may be set you up for additional upside kind of later in the year. It's maybe just provide a little more color as to kind of what you're trying to -- message there?

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

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Well really what I'm saying is that, I think, oftentimes, favorable or unfavorable development is just seen as sort of some actuarial phenomenon. But it really is performance related. The actuaries have to use a experience period where they are looking at your medical cost trend and, including those trends in reserving, and if you continue to outperform those assumptions by payment integrity routines, effective utilization management, the reserves are likely to run off redundantly, and your medical cost baseline and trend used for the current year date of service are likely conservatively stated. Stated another way when you're managing into declining trend, it can't help but be very positively from a financial point of view. And that's really what we're trying to message there that favorable development and if very attractive margin position that we have created for ourselves really is the product of very, very effective cost management across the board.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [52]

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Okay. Then last question. You guys have a lot of things going on from a cost perspective. You get the pharmacy agreement earlier, you talk about integrity, risk adjustments. Can you talk about what else is still kind of to come here over the next 12 months?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [53]

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It really is more or less extensions of all the things you've mentioned. We are not done implementing all of our payment integrity themes. We have full run rate of our pharmacy -- new pharmacy contract in our earnings. Our IT outsourcing is now in the expense run rate. So I would just say that more or less extensions of many of the initiatives we talked about before, and that we showed you -- continued to show you at Investor Day. But no big other initiatives other than the ones we've already mentioned, but more or less extensions of once that we've already begun to implement.

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Operator [54]

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The next question is from Charles Rhyee of Cowen.

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [55]

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Joe, you talked earlier about trying to make sure you're keeping members on the rolls if they are eligible. For members that are no longer eligible, are you able to focus on them to get them into sort of eligible exchange into the Marketplace? And how's it sort of been if that's -- if you're able to?

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

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There are subjects -- the state rules are all different across these lines in terms of whether you can approach members for other products, whether they can be more in transfers, et cetera, and we obviously comply with those state rules and do the best we can to keep minimal in the product, but it's hard to answer that generally, all the state rules are different in terms of what you can and can't do. I will tell you that when it comes to the member and it comes to the network, it's critically important, and that's why we love our products stream. Medicaid, Medicaid Expansion and Marketplace, as members move up and down the scale of their incomes relative to the federal poverty level, and they love their primary care position and they like their network and love the Molina brand and how they are cared for, when they have a choice, they will stay with the Molina product. So whether we can transfer them or not, many of these decisions are made by the provider and the member jointly and that they have a positive Molina experience, they will stay with the Molina product.

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [57]

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That's helpful, and then -- and you earlier also talked about redeterminations. I think, one of your peers talked about relative to the states that they are in, they are maybe halfway through or a little bit more upstates kind of going through this process. Can you talk about relative to your footprint where the states are in terms of going through the cycle of sort of redeterminations?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [58]

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I mean, they are always going through it but we've seen, I would say, in the last 12 to 18 months, most of the pressure we saw in our book of business occurred in both Michigan and Ohio, and I would say that is largely leveled out. And the fact that the redetermination leakage has leveled and then, the Washington, Mississippi and South Carolina and Illinois membership has grown, net-net, we are back into -- we are going to be back into positive territory on a sequential basis when it comes to Medicaid member months. So redetermination leveling, our growth initiatives have started to take hold, I think we will be back into solid positive territory from a volume perspective real soon.

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Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [59]

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That's great. And lastly from me. I think, you've mentioned a little bit about Texas at the very start here. In terms of just timing, if I'm not mistaken, right? Texas has kind of delayed decisions before that. They had to rebid again once. Any kind of additional color you can give like as to what's going on maybe in Texas in general, why things are taking so long here?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [60]

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No. I really can't. We are just subject to whatever the decision-making process that they have decided to take. The last we heard, it's going to be the end of August. We also believe that they likely announce the STAR+ and STAR CHIP awards concurrently, but we're in wait-and-see mode. We remain confident, but we know nothing more than you know based on what you've read or heard.

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Operator [61]

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The next question is from Steven Valiquette of Barclays Bank.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [62]

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Joe and Tom, so two questions just on the Marketplace quickly. One, just to follow-up on the Marketplace risk adjustment true-up in 2Q '19. While you not disclosing the number, are you able to clarify whether the true-up was contemplated in the guidance for 2019? And then number two, you know the Marketplace MLR of 64.7% in the quarter, while was up versus roughly 54% in 2Q last year. Still a pretty phenomenal number in the grand scheme of things, especially if it did not include any material benefit from any sort of risk adjustment true-up. You've mentioned it could trend higher from here, which makes sense but I guess, the question I'm just looking for a little more color how does 2Q Marketplace MLR stacked up versus your own expectations, just for the quarter specifically?

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

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I'll let Tom add some more color to this. But I think two perspective, Steven, are important. One is that we true-up our accruals and a risk adjustment every quarter. So I think you can assume that not all of this was actually adjusted in the second quarter, some of it was adjusted in the first. It wasn't material to the quarter and I think, the phenomenon you are looking year-over-year in terms of loss ratios, obviously, last year was benefited hugely by that number. On a going-forward basis, you have got it capture it correctly at 67.4% year-to-date, 69% projected. We are right where we want to be. It's a very profitable book of business. It will produce over $220 million of pretax profits for the year and gives a very solid baseline off of which to grow. But we are just getting better and better risk adjustment, and we keep outperforming the assumptions that the accountants and actuaries used to account for the risk adjustment, and that bodes well for the continued profitability of the business.

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [64]

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Yes, I would add a little bit more color to the question you asked about last year. Marketplace MCR at 57% and last year, quarter's benefit tremendously by the Marketplace's risk adjustment, and if you kind of normalize for that, then the MCR would have been around 67%. And we're very comfortable with what you see this year.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [65]

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That's helpful. I quoted the 6 month's numbers, not the quarterly, so thanks for correcting that too.

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Operator [66]

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Ladies and gentlemen, our final question is from Gary Taylor of JP Morgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [67]

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Just a couple of quick ones. I appreciate all the comments today. Just trying to understand, and I have certainly heard the comments about the redeterminations and so forth but as I just look at and understand this portfolio business, that's part of the answer, but when we look at TANF in the first quarter, MLR was down 500, this quarter up 120 and then, expansion, the complete opposite, first quarter MLR was up about 420, and then, down 350. So in both quarters, the [transferable] buckets sort of offset each other. So when we look at just how that's progressed year-to-date, are we to think that there has been more rate adjustment in the expansion population? Or is that just much better operational performance in that population?

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Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [68]

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Yes. If you were to look at past and -- the different components of the Medicaid business, I would look at the 6 months versus 6 months, this year versus last year. We look at that on TANF and CHIP over year-over-year comparisons for the 6 months this year, last year is actually improved by almost 100 -- almost 200 bps. So in our Medicaid Expansion, it's fairly stable so we have had some rate advocacy in Ohio that came through in the quarter so really helped -- really bring the overall loss ratio for the expansion business back to a more normal zone, if you will. So on balance, the portfolio is really doing well.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [69]

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Okay, year to date I totally get it just a little more quarterly fluctuation, and I guess, maybe anticipated so just trying to think about that better. My last one would just be -- maybe I missed this earlier, you were talking about one state I missed it. But just Illinois, so it was a good quarter. So I'm going to pick on one where it looked like the MLR was up, to just try to understand anything specific around Illinois for 2Q?

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Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [70]

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No. Illinois is doing really well. It will be a $1 billion business shortly. And the margin recovery, last 2 years have been significant. In the quarter, if memory serves me correctly, there was a provider settlement that hit the quarter. One-off effect, Illinois is doing great. It's got mid-single-digit margins. It will have the $1 billion of revenue soon. And the prospects for growth there are very, very strong.

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Operator [71]

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Ladies and gentlemen, that then concludes today's conference. Thank you for attending the presentation. And you may now disconnect your lines.