U.S. Markets closed

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

Q1 2019 Molina Healthcare Inc Earnings Call

LONG BEACH May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Molina Healthcare Inc earnings conference call or presentation Tuesday, April 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joseph Michael Zubretsky

Molina Healthcare, Inc. - President, CEO & Director

* Ryan Kubota

Molina Healthcare, Inc. - Former Director of IR

* Thomas Lacy Tran

Molina Healthcare, Inc. - CFO & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Anagha A. Gupte

SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst

* Charles Rhyee

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

* David Anthony Styblo

Jefferies LLC, Research Division - Equity Analyst

* Joshua Richard Raskin

Nephron Research LLC - Research 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

* Shehryar Amir

Wolfe Research, LLC - Research Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Molina Healthcare First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. At this time, I would like to turn the conference over to Ryan Kubota, Director of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Ryan Kubota, Molina Healthcare, Inc. - Former Director of IR [2]

--------------------------------------------------------------------------------

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2019. The company issued its earnings release reporting first quarter of 2019 results last night after the market closed, and this release is now posted for viewing on our company website. On the call with me today are Joe Zubretsky, our President and Chief Executive Officer; and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. (Operator Instructions) Our comments today will contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual result to differ materially. A description of such risk factors can be found in our earnings release and our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under our Investor Relations tab of our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of April 30, 2019, and we disclaim any obligation to update such statements except as required by the securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at the company's website, molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Ryan, and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the first quarter of $2.99, pretax earnings of $260 million and after-tax earnings of $198 million, resulting in pretax and after-tax margins of 6.3% and 4.8%, respectively, on a reported basis. These results demonstrate, we can sustain the attractive margin position we built in 2018. While certainly not conclusive, our first quarter results validate our position that durable financial and operational infrastructure improvement can and should allow us to sustain these margins all while we began to grow the top line again. Our first quarter results represent a strong start to the year and a significant improvement over the $1.64 earnings per diluted share we reported in the first quarter of 2018. As you will recall, this time last year, we were just beginning to execute on our profit-improvement plan, which had yet to manifest itself in earnings. While the year-over-year improvement in the first quarter is significant, for the remainder of our prepared remarks, we will largely compare our quarterly performance to our own expectations. Our strong first quarter operational performance and the trajectory of our profit improvement initiatives have allowed us to raise full year guidance to a range of $10.50 to $11 of earnings per diluted share on a GAAP basis an increase of $1.25 from the midpoint of our guidance issued in February. Highlighting our results for the quarter on a consolidated basis. Premium revenue of nearly $4 billion was better than expected due to better Marketplace membership retention, coupled with slower membership attrition during the quarter. As expected, premium revenue has decreased sequentially due to lower Medicaid membership as we transitioned out of New Mexico as of December 31 and exited out of all but 2 regions in Florida as previously announced. Our medical care ratio of 85.3% was favorable to our expectations as the result of favorable prior year reserve development, but more importantly, improvement in our claims payment integrity process, frontline utilization management, quality and risk adjustment effort and the repricing benefit of our newly recontracted pharmacy agreement. Our first quarter 2019 performance was positively impacted by our continued focus on medical cost management and a stable trend environment. Taken together, these factors produced favorable prior year development of nearly $55 million or approximately $0.65 per diluted share, which we did not forecast in our initial 2019 guidance. These trends have continued in 2019 and, as such, our 2019 medical cost baseline and a trend off of that baseline so far have proven to be conservatively stated. We managed to a G&A ratio of 7.3%, which was better than our expectations. We continued to effectively manage our expenses in the quarter despite the headwinds associated with lower premium revenue. As a reminder, we typically see higher G&A expenses in the latter part of the year due to costs associated with our profit improvement initiative as well as sales and marketing expense for the Medicare and Marketplace open enrollment. Combined, the favorable medical care ratio and G&A ratio enabled us to deliver an after-tax margin of 4.8%. Now I will comment on our first quarter trends by line of business. The Medicaid business achieved an 88.5% medical care ratio and an after-tax margin of 2.8% in the quarter, squarely in the range of the target margins we have forecasted for this business. Let me provide some additional insight into the favorable performance of the Medicaid business. TANF and ABD performed better than expected while expansion slightly underperformed our expectations in the quarter due to some planned specific dynamics, which we will comment on later. Medical cost trends in general remained well managed. Specialty and pharmacy cost trends ran lower sequentially, and we retained more quality incentive in other revenue withholds. 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, also started the year strong. Managing to a medical care ratio of 84.7%, we produced an after-tax margin of approximately 7.5%, outperforming our expectations. More specifically on Medicare, both product lines, D-SNP and MMP, produced favorable results. 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 LTSS benefits, which are embedded in our MMP products. We are beginning to see the results 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. This excellent start to the year gives us even more confidence in our 2020 bidding strategy and the competitive pricing and enhanced benefits we need as we expand this business by 150 new counties in 2020. Finally, our Marketplace business continues to perform well. Recall that for the 2019 underwriting year, we took a conservative-rating posture to maintain our attractive margin position. We now have a scaled and profitable business that we plan to grow in 2020 and beyond. First quarter Marketplace performance had the following highlights: we ended the quarter with approximately 330,000 members, which was better than our original expectations; we are generating and continue to generate more accurate risk scores, and as a result, we will likely pay less into the risk pool than expected; our medical care ratio was 62.2%, which compares favorably year-over-year and sequentially; Texas continues to be our stronghold while California and Washington have both improved significantly over both periods; and we again forecast a seasonality to this business and its profitability is front-loaded due to benefit in product design. In sum, and most notably, our current Marketplace performance trajectory and margin profile give us flexibility to pursue profitable 2020 growth. Now I will comment on the first quarter through the lens of our locally operated health plans. Our health plan portfolio has started the year strong. As for the quarter, 13 of the 15 plans are meeting or exceeding their target margins. Our operating model continues to pay dividends as we empower local health plans to drive frontline decision making with strong support from centralized services and disciplined corporate oversight. A few comments on our health plan's performance. California, Illinois, Michigan and Texas, 4 of our largest plans, had very solid quarters. Florida was a significant outperformer in the quarter as it effectively managed the transition of its lost regions. In Ohio, our Medicaid MCR increased by 300 basis points from the fourth quarter, primarily due to a shift in the Medicaid Expansion risk pool and a newly carved in behavioral health benefit, both of which were not adequately rated. We expect both phenomena to soon be reflected in our rates. Washington experienced higher medical costs in the Medicaid line of business compared to the fourth quarter 2018 as a direct result of the new members we gained in our successful reprocurement and the [plan wide] carve-in of the behavioral benefit. This cost pressure will abate as the new members and new benefit mature. Turning now to our balance sheet and capital structure. We delivered approximately $290 million of dividends to the parent company in the first quarter. We expect to obtain approximately $500 million of additional parent company dividends for the balance of the year, including the excess statutory surplus from Florida and New Mexico. We have continued to improve the balance sheet, retiring additional debt. Approximately $78 million of face value of 2020 convertible notes remain outstanding as we continued to reduce our exposure to these expensive in-the-money converts that negatively impact our share count. In summary, we are very pleased with our first quarter 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 are increasing our earnings per share guidance to a range of $10.50 to $11 with the midpoint of $10.75. This midpoint increase of $1.25 or more than 13% represents a solid $0.80 outperformance for the quarter and a $0.45 raise for the remainder of the year. The $0.80 earnings per share first quarter outperformance comprises: $0.65 of favorable prior year reserve development, which we do not forecast as a matter of practice; and $0.15 of first quarter performance above our original first quarter forecast. The $0.45 raise for the balance of the year is backed by the momentum we have in all of our product lines as we project to exceed all of our previous guidance after-tax margin targets. I will now provide a quick update on the initiatives we are executing in 2019 for 2020 top line growth. As a side note, we will spend more time on this topic at our upcoming Investor Day on May 30. We have filed to expand our D-SNP footprint in approximately 150 new counties for 2020. We are currently executing our 2020 Marketplace pricing strategy and remain committed. The measured growth ensuring that overall profit dollars grow even if that means lower overall Marketplace margins. We are actively preparing for the Kentucky Medicaid RFP with resources deployed locally. We have our certificate of authority and are building a network. We continue to expect incremental membership growth in our Illinois and Mississippi health plans in 2020. And we continue to have confidence in successful Texas STAR+ and Starchip awards in the coming months. Our successful margin recovery efforts have enabled us to focus additional effort on growth opportunities. We continued to evaluate new opportunities through state procurements, acquisitions of small health plans, benefit carve-ins and adjacent product expansion in our existing geographies. Let me briefly highlight, what we've planned to present 4 weeks from now. We will provide you with a granular and detailed view of our top line growth strategy along with details of what we will sell, to whom and where in each of our product lines. We will provide you with our outlook for long-term revenue, after-tax margins and earnings per share. And you will hear from our Executive leadership team about our ability to sustain our attractive margin position; our tactical approach to top line growth initiatives; our robust capital allocation model; and other topics that support our continual drive to create shareholder value. In conclusion, we are very pleased with our first quarter results and our strong start to the year. Margin sustainability, the second part of our 3-part plan, is off to a good start. We have already launched the Phase 3, the top line revenue growth phase, and we are excited for what awaits us for the remainder of 2019 and beyond. I look forward to sharing more about our future growth plans and longer-term strategy at our upcoming Investor Day on May 30 in New York City. With that, I will turn the call over to Tom Tran for more detail on the financials. Tom?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Joe, and good morning. As described in our earnings release, we report first quarter earnings per diluted share of $2.99 and adjusted earnings per diluted share of $3.04, excluding the amortization of intangible assets. GAAP's earning per share of $1.64 in the first quarter of 2018 include favorable non-run-rate items of $0.38 per share, yielding pure performance earning per share of $1.26. First, I will note that the 2 nonrecurring items that occur in the quarter net to 0, resulting in first quarter pure performance earnings equal to reported earnings per diluted share of $2.99. Specifically, we recorded $3 million of restructuring expenses, primarily related to cost associated with our ongoing IT restructuring plan and a $3 million gain as part of the repurchase of the 2020 convertible notes and related embedded call option termination. Next, I would like to make some comments on our first quarter earnings performance. First, our continued focus on medical management combined with a stable trend environment result in favorable prior year reserve development in the first quarter of approximately $55 million pretax. Second, each line of business performed at or above our expectations. Third, administrative costs in the first quarter were lower than expected, primarily due to the timing of certain expenditures. We expect administrative cost for the balance of the year to increase with higher cost from investment in infrastructure and increased sales and marketing cost associated with open enrollment in Medicare and Marketplace. 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 remained consistent with our reserving approach and practice that result in favorable prior year reserve development in the first quarter. Days and claim payable was down 1 day sequentially to 52 days. Operating cash flow was strong in the first quarter and sequentially at approximately $250 million. As a reminder, cash flow from operations is impacted by change in working capital and the timing of large payments and government-related balances. We are projecting strong operating cash flow for the full year. Turning to capital actions. As of March 31, 2019, we had unrestricted cash and investments of approximately $440 million at the parent company. We harvest $290 million of dividends in the first quarter and plan to harvest approximately $500 million of additional dividends for the balance of the year, including the excess capital in New Mexico and Florida. In the first quarter, we repurchased $46 million of the convertible notes, leaving $206 million of face value outstanding. In April, we repurchased an additional $128 million of the convertible notes, leaving $78 million of outstanding face value and approximately $240 million of current market value that will be retiring by this time next year. As of March 31, 2019, our health plans had aggregated statutory capital and surplus of approximately $2.3 billion, which represent approximately 460% of risk-based capital, which is yet another indication of the strong near-term parent company dividend harvesting opportunity. Last week, Moody's upgrade our senior unsecured debt rating to B2 from B3 and improved the company outlook to positive from stable. This upgrade is a testament to our focus on operational excellence as well as the discipline and rigorous financial management processes we have instilled across the enterprise. We are pleased that Moody's have recognized the progress we have made in the last 1.5 years. We have continued to look for opportunities to delever the balance sheet. Our action in the quarter to retire certain convertible bonds reduced average diluted shares outstanding to 66.2 million at the end of the first quarter of 2019 from 66.6 million at the end of the fourth quarter of 2018. Shifting to 2019 revised guidance of $10.75 per diluted share at the midpoint of the provided range or an increase of $1.25 per diluted share. We outperformed our first quarter expectation by approximately $0.80. Approximately $0.65 was related to favorable prior year reserve development, which we did not forecast as a matter of practice. The remaining $0.15 was performance above our expectations for the quarter across all product lines. The remaining $0.45 is an increase to guidance for the remainder of 2019. Favorable medical cost trends, favorable first quarter result along with our growing profit improvement initiatives suggest that the momentum and trajectory of the business have improved. Our practice is not to provide quarterly guidance. However, some framing comments are in order due to the shifting mix of our business and a ramping effect of our profit improvement initiatives throughout the year. Our guidance suggest approximately $7.75 of earnings per diluted share for the remaining 3 quarters of 2019. The second quarter is forecast to be slightly lower than 1/3 of that 9-month total. Finally, our 2019 guidance does not assume any additional impact from prior year development, positive or negative, for the rest of the year. All things being equal, if we have favorable prior year development as we did in the first quarter, our forecast result would be higher. And conversely, if prior year development is unfavorable, our forecast result would be lower. This concludes our prepared remarks. Operator, we are now ready to take questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And the first questions will be from Justin Lake of Wolfe Research.

--------------------------------------------------------------------------------

Shehryar Amir, Wolfe Research, LLC - Research Analyst [2]

--------------------------------------------------------------------------------

Shehryar Amir on for Justin. So Washington recently approved a public option plan for the Washington exchanges where Molina participates. Could you give us your preliminary thoughts on this? How this new system will impact Molina? And how the economics will work? And whether the government plan will be completely outsourced?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

This is Joe Zubretsky. Obviously, there are various proposals at the state and Federal level for public options, single payer, Medicare for all type arrangements. Right now, we're considering most of these positions to be political rhetoric. And after discussion phase, I would call them more conceptual statements and philosophies rather than plans. And until such time, the plans become more substantive with real facts and real analysis to assess what the implementation would be, we're just continuing with the business as usual. And as more facts come out, we respond accordingly.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question will be from Ana Gupte of SVB Leerink.

--------------------------------------------------------------------------------

Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [5]

--------------------------------------------------------------------------------

So I appreciate all the -- fantastic quarter. I appreciate all the comments on margin sustainability. I mean you're just crushing it, if you will. But, I mean, prior to you taking this on, Joe, it was like very low single-digit net margins. Now you're almost 5%. You're guiding to 4.1% to 4.3%. What is the sustainability, number one, on the prior development? And should we include that in our baseline as we go into 2020? Then secondly, your points around payment integrity. You had this announcement on Evercore's specialty, your PBM margins and all of that. Is this all sustainable? Or will you trade some of this off as you go for, I mean, a more growthy top line into the 2020 plan year?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [6]

--------------------------------------------------------------------------------

Thanks, Ana, and let me first comment on the prior year development. Every month, every quarter, we become more effective at managing our medical costs. And as you're manning -- managing your medical cost trend downward, reserves are likely to restate favorably. This trend has continued into 2019, which means the medical cost baseline and the trend off that baseline, that we used to forecast our 2019 results, have also proven to be conservatively stated. So the prior year development is real, and it's a real testament to the fact that we are becoming better and better at managing our medical cost through increased focus on frontline-utilization management and reengineered and revamped payment integrity routines. To that second point on payment integrity, the team has done a great job, updating and making more modern, the stacks of technology we have to perform our claim edits, and it's creating real value without creating provider abrasion. The third part of your question was on specialty UM with Evercore. We have a new arrangement with Evercore. It's part of our co-sourcing and rent-to-own model of making sure we have access to best-in-class resources. They are going to manage about $600 million to $800 million of medical cost spend across a variety of specialty categories. And we're certain that over time, that'll create a real value for us. The last part of your -- actually, the first part of your question, but I'll address it last where with the sustainability of margins. We continue to generate profit improvement through the inventory of initiatives we've shared with you in the past. We are in a reasonable and stable rate environment. And our management team continues to execute with a great deal of discipline and rigor. And I would attribute the margin position that we have achieved, and we believe can sustain to those -- to the confluence of those 3 factors.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question will be from Matt Borsch of BMO Capital Markets.

--------------------------------------------------------------------------------

Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [8]

--------------------------------------------------------------------------------

Yes, Joe and Tom, if I could just ask in terms of the competitive landscape. Are you viewing any new competitors getting into your markets given not only your success in profitability, but some of the other peer companies? And given the backdrop that a lot of competitors were driven out by the initial exchange implementation?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

Thanks, Matt. Are you referring to the Marketplace or broadly referring...

--------------------------------------------------------------------------------

Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [10]

--------------------------------------------------------------------------------

I am. I'm sorry. Yes, the Marketplace is what I meant.

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

Well, the term Marketplace can mean many things to many different companies. Our niche is to service the working poor. We operate in the demographic, where 25% of our membership are fully subsidized, and 95% has a very ample subsidy. It's pure leverage off of our Medicaid network, and it's pure leverage off of the Medicaid pricing in our network. So we consider our Marketplace business to be a mere extension and a very valuable extension of our Medicaid franchise. Others that might be chasing some of this business might be operating with the mass affluent. That self-employed architect or accountant who might be making $200,000 to $250,000 a year, that's not where we're playing. This is a pure extension of our Medicaid franchise. It is creating real value for us. And as people move in to Medicaid, Medicaid Expansion and Marketplace, and move up and down the spectrum based on their income, we have products that can capture that member and keep them in the Molina family.

--------------------------------------------------------------------------------

Matthew Richard Borsch, BMO Capital Markets Equity Research - Research Analyst [12]

--------------------------------------------------------------------------------

But maybe I could just ask an extension to that. Do you have any plans currently to go up in the income hierarchy in terms of your marketing approach going into 2020?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, not for the Marketplace. But let me put a point on that. We do not plan to go upmarket into higher affluence and a more affluent demographic, but we do plan to grow the business in 2020. If you recall, this time last year, before we had visibility into the profitability that we -- that emerged in 2018, we were sort of compelled to put conservative prices into the Marketplace, which actually proved to be very rich, and it cost us the membership. Next year, now that we have good visibility, 330,000 members. We know where the margins are. We're going rating region by rating region, analyzing our price point versus the competition. If we need network changes, we'll make them. And we're very comfortable that with these margins and our competitive position as exist today, we can put a price into the market that grows membership, eases up on the margin percentage, but grows the overall profit pool in 2020.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

The next question will be from Josh Raskin of Nephron Research.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

First one just on guidance. Just a couple of quick clarifications from last quarter. I think you mentioned some stranded overhead in New Mexico and Florida of $0.75 and sounds like Florida was outperforming. So just want to confirm if that $0.75 is still there that comes off next year? And I think you had mentioned sort of this negative spread between the Medicaid trend and the yield of almost $0.90. And again, sounds like things are running better. So curious where we are on those 2 to start?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure, Josh. On Florida and New Mexico, I would say that the stranded overhead was merely to help investor's bridge the progress from '18 to 2019. If you recall, when we gave guidance originally for 2019, we were projecting a 60 basis point increase to our G&A ratio, half of which was due to the stranded overhead for Florida and New Mexico. We're going to sort of stop referring to it as stranded overhead. It's in the baseline. It's in our SG&A. And we're going to continue to chip away at it and manage it very effectively. The overall performance in Florida was really managing the tail of the runoff claims more effectively than we have originally projected. In terms of the spread issue, I would say, first of all, the rate environment is very reasonable. We're generally able to obtain the trend and acuity factors that we need in rating when benefits are carved in and out, generally the right amount of premium is moving in and out of our portfolio. And yes, where we actually thought that rates were going to be challenged to maintain pace with trend. Due to our increased ability and efficiency in managing medical cost, I will say, for the most part, our medical cost trend appears to be coming in on top of rate.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So that's [spreads better]. And then my other -- -- my real question here is just with the pending Centene WellCare transaction, I'm just curious as you guys think about that in terms of opportunities for Molina. Do you think about divestiture opportunities should those arise? Any specific markets where their, consolidation would have a direct impact on the states that you guys are operating? I'm just curious as you think about 2020 what you guys are thinking in terms of the potential opportunities for you?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Well, in terms of sort of long term, one of the factors we look at -- if you take on average that -- a state has on average 4 major players on their Medicaid panel, and let's say, on average there are 6 major players chasing those 4 spots, it obviously makes the bidding math more likely for us to succeed as we try to plant new flags in new territories. So the bidding dynamics do change as one very capable competitor has now combined with another. That's the long-term view. The short-term view, look, everybody has written on the speculation of which assets in that combination might have to be divested. I would say this, if that is true and asset have to be divested, if we are invited in to participate and looking at those assets, and we are not in and of ourselves conflicted, then we certainly would want to compete to secure some of those assets.

--------------------------------------------------------------------------------

Joshua Richard Raskin, Nephron Research LLC - Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And then just, Joe, I'm sorry, last one here. Any markets where you see potential market share increases for those 2 on a combined basis, maybe not precipitating a divestiture, but where there's an opportunity for membership to shift as the market sort of rebalances?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

There are, and I think, we spoke about this, actually, earlier this morning. It would be really speculative of me to try to infer what a state might do due to the pending merger. Texas comes to mind. Kentucky comes to mind. There's going to be all kinds of -- Florida comes to mind. Interesting dynamics as this pending transaction unfolds. I would just say that we're confident in our ability to grow our business. We're confident in our ability to win new territories. And if the dynamics of this combination actually enhance our chances well than all the better.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question will be from Sarah James of Piper Jaffray.

--------------------------------------------------------------------------------

Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [22]

--------------------------------------------------------------------------------

You talked about moving exchange pricing this year to target mid- 60s to low 70s MCR. Based on what you know so far, do you think that's where you'll end up in 2019?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we certainly, Sarah, not going to give a forecast. But given where we're performing, what I would say is that performing at the level we're performing currently with mid-teens pretax and still double-digit after-tax margins gives us the flexibility to look at our price points versus the competition in various of these rating regions, both on a gross basis and a net of subsidy basis and tweak our pricing without the sacrifice of material margin position. So the -- we can ease up on our margins, and we can grow membership given the price points -- the competitive price points that we have today, and that we can continue to have given that we have all these margins to sort of play with. So the bottom line is we are going to grow membership, attempt to grow membership next year. The margin will ease up. The loss ratio will probably move up. And our profit pool is projected to grow. And that's what we're going to attempt to do. And I think this very attractive margin position we've carved for ourselves gives us the flexibility to achieve that.

--------------------------------------------------------------------------------

Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [24]

--------------------------------------------------------------------------------

Got it. That's helpful. And a couple of questions on Ohio. First, with the behavioral health carve-in that you said wasn't rated correctly, but you expect to be fixed. Is part of that a retroactive fix? Or is it only go forward? Then last quarter, you talked about expecting Ohio RFP to be released later this year. Do you think that could include the LTSS product? Or are you just expecting it to be a rekey of what is already contracted out?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Our latest intelligence suggest that the RFP will be a Medicaid only and not include an LTSS benefit going managed. That's our latest intelligence. I believe, there was actually a legislative proposal that determined that. With respect to BH, the benefit was carved in -- the entire benefit was carved in, in 2018, and then they opened up the benefit because of some IMD facilities, which everybody started using, and it put cost pressure into our margins. And the state recognizes that. The state actuaries have recognized that, and we believe it will be included in the rate base. It -- there's always a midyear conversation with Ohio. So it could go in midyear, effective midyear. Best case would be to go in midyear, retroactive to the beginning of the year. We're not certain that's going to happen. And the worst case is, it goes into the annual rating cycle that happens at 1/1/20. So Ohio is just doing fine. It had some cost pressures due to those 2 factors in the quarter. But it's doing just fine, and effectively, those costs will end up in rates.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question will be from Kevin Fischbeck of Bank of America.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Wanted to follow-up on your comments about 2020 growth. I think you talked about 150 D-SNP counties in 2020. I think last quarter, though, you were talking about 170 new markets. What was the change in that outlook?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just as you pursue the various counties, look at your network, look at density of population, which is critical. We decided to move forward with 150 rather than 170, which is not a material change at all, but D-SNP product is very important to us. We manage it very, very well. And we believe the product line is a growth catalyst for the company.

So we're very bullish on that Marketplace. We have the high-acuity management skills. We have the distribution network. We've got a great Medicare team. And we're very bullish on the product line. But the difference between 150, 170 is not material. And it was really density of population, ability to build a network.

--------------------------------------------------------------------------------

Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [29]

--------------------------------------------------------------------------------

Okay. And then as far as the margin commentary, I think you're doing a lot of this outsourcing. I want to say, last quarter, you guys had talked a bit about how some of these outsourcings are going to impact 2020 more than it was impacting 2019. I wasn't sure if any of the margin improvement that you're seeing is kind of pulling forward some of that benefit. Or will you still expect a lot of these initiatives to keep adding significant additional cost saves going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Now the timing is really, really important. If you look at our first quarter results, the only outsourcing, co-sourcing or rent-to-own capabilities that actually had an impact in the first quarter were the repricing of our pharmacy contract clearly; and secondly, our payment integrity technology stack; and thirdly, our improvement in risk adjustment and our relationship with Inovalon. The rent-to-own capabilities that are being executed, that have not yet manifested themselves in earnings, are our IT outsourcing arrangements with Infosys and the arrangement that we just struck with Evercore for specialty UM. So more to come on that. And every month that goes by, the value builds and compounds. And that $500 million profit improvement portfolio we shared with you a few months ago is still alive and well and being executed upon.

--------------------------------------------------------------------------------

Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [31]

--------------------------------------------------------------------------------

But those arrangements aren't incrementally new versus the last guidance. I just want to make sure that you aren't, after signing those things now, including those in your outlook for Q3 and 4. Those are still kind of [on the coming] 2020?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes, they have not yet provided benefits. They are -- they have been signed. They are being implemented, but have not yet manifested themselves in the earning stream. That's correct.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question will be from Dave Windley of Jefferies.

--------------------------------------------------------------------------------

David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [34]

--------------------------------------------------------------------------------

It's Dave Styblo in for Dave Windley. First question I had was if you guys could give us an update on the guidance where you talked about net margins being better across all 3 businesses. Is there a specific point that you could give us for those lines? As well as an update on, of the $550 million, how much of that is now in the 2019 guidance?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

Sure. If you look at our margin achievement pattern for the first quarter and what's implied in our full year guidance, I'd give you the tail of the tape as follows: Medicaid came in with a solid 2.8% after-tax margin and is projected in our guidance to be approximately 3%; Medicare came in, in the first quarter at a solid 7.5%, clearly an outperformer, but we're projecting approximately 6% for the full year; and Marketplace came in at to rather outsized 16%, and we're projecting it to be solid double-digit at around 11% for the year, all blending to be 4.2% at a midpoint that we conveyed to you. What was the second part of your question?

--------------------------------------------------------------------------------

David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [36]

--------------------------------------------------------------------------------

Right. And the second part there is, of the $550 million cost saves in the out year, how much of that is now expected to be captured in 2019 guidance?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we're not going to start parsing that every single quarter. We'll talk about it qualitatively. I would tell you that the risk adjustment, the payment integrity and the pharmacy contract clearly added value in the first quarter. Our specialty UM and IT outsourcing arrangements have not yet. But I think the numbers we gave you when we originally gave you guidance of $200 million and $100 million net is still a good framework that's included in our overall results. And we'll update you on the portfolio at our Investor Day in a few weeks.

--------------------------------------------------------------------------------

David Anthony Styblo, Jefferies LLC, Research Division - Equity Analyst [38]

--------------------------------------------------------------------------------

Great. And then just the last one, I know, Joe, you talked about moving into Phase 3 of the plan and looking for more growth and you sort of highlighted a few things between the exchange opportunities and the D-SNP expansion. I'm curious, what other carve-in opportunities -- are there adjacencies or other new reprocurements? Can you provide more visibility or color on for us?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. And I can give you some color around what you're going to hear in a few weeks’ time. We look at the growth phase very clearly coming from our existing footprint. How to leverage the core business in our existing footprint with our existing states as new product lines are introduced into these markets. That in and of itself with our very wide geographic distribution, and now 15 territories, with not all the product lines in the market and certainly underpenetrated compared to some of our largest competitors. We believe gives us ample room to grow in our existing territories. We then have new states and new territories. And with our rebuilt new business development engine, with our recent success at renewing business that we had with great proposal writing, we're very confident that we can start to win new territories as well. We'll talk about that a little bit. But very bullish on the growth of this business. We're in the right product lines. We're in the right segments. And hopefully, we'll convey it on our Investor Day that now that margin recovery and sustainability is well underway, that we can start to grow the top line again very handsomely.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

The next question will be from Steve Tanal of Goldman Sachs.

--------------------------------------------------------------------------------

Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

--------------------------------------------------------------------------------

I guess I just have one more follow-up on the after-tax margins. So for -- just looking at the change in the guidance, I guess Medicare is where you have the biggest sort of uptick. Can you give us a flavor for what's coming in so much better there? Is that -- obviously, very strong rate update in '19, but is that more about cost trend? Or things you're doing? Anything specific to call out in Medicare.

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [42]

--------------------------------------------------------------------------------

Stephen, Tom here. There are really 2 factors primarily, one, Joe mentioned a few minutes ago that we have done a much better job in our risk scoring, risk adjustment. That also apply to our Medicare line of business. And second is that we've been very effective and -- in managing the cost line as well, primarily on medical cost side. So it really impact at both side of the house.

--------------------------------------------------------------------------------

Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [43]

--------------------------------------------------------------------------------

Perfect. Maybe just one follow-up, Tom, for -- and this is probably more for you. Just the PYD, the $55 million pretax call out, $0.65 EPS and then, of course, there's a table in the release, which is, I think, are best way to try and track this that shows $189 million of favorable prior-period development. Is the difference between those 2 numbers sort of the offset? Will you would view as reserve building in Q1? And is there any way, we can sort of see that number any -- in any of the filings or try to track to it? Or is that -- am I thinking about that right? And how should you -- how would you tell us to keep tabs on all of this?

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [44]

--------------------------------------------------------------------------------

Sure. In the -- obviously, in the table you referred to in our release. So also we'll see that in the 10-Q when we filed today as well. Essentially, you see the walkover from one quarter to the next. And that includes the margin release each quarter and our intention every quarter to be consistent with our reserve approach is to rebuild that margin. So if you net out the prior year development from that number, essentially the remaining piece is primarily a reserve margin that we intend to reinstitute.

--------------------------------------------------------------------------------

Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

--------------------------------------------------------------------------------

Got it. Okay. And that's just not disclosed anywhere separately there, right? So that's sort of what we lean on these calls for -- I take it.

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [46]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

--------------------------------------------------------------------------------

Got it. Okay. And may be one last quick one, Joe, more for you on the marketplace. Just a commentary around sort of viewing it as a -- as -- I think you said a pure extension of Medicaid. Obviously, a very different margin profile right now. And so how do you sort of bridge that in your head? Is -- what sort of the right level, if there is such a thing, for the Marketplace business? Or is it truly just what the market will support? And how do you think about that long term?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [48]

--------------------------------------------------------------------------------

Well, as we mentioned many times, both when we gave original guidance a few months ago and just recently, we do believe that the right equilibrium can be struck where we can begin to grow the overall profit pool at a lower margin but at a faster rate. We were forced into this conservative posture we took because the business needed to be repriced 2 years ago. If you recall, the 60% price increase on average that went into the market. And then last year, if you recall, with only 3 months under our belt before putting new prices into the market, we had yet to see the very robust profit picture emerge in 2018. Now that we've seen the risk pool settle, we understand, who the 330,000 members we have and what their cost profile is. We can then use that as a great launching point to begin to grow the overall profit pool once again. Ease up on the price. Ease up on the margin. Create the right equilibrium. We have highly subsidized members where the price isn't as sensitive to their buying decision as it would be for a mass affluent individual. And it's a great business for us. And except for the fact that it's brokered and run by the DOI in the states and looks more like an insurance product, it really is servicing the working poor who have incomes that don't qualify them for Medicaid. So in that way, it is a pure extension of our Medicaid business and does really well for us. So the overall profit pool should grow at a lower margin, and we think we have the flexibility to pull that off.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

The next question will be from Peter Costa of Wells Fargo Securities.

--------------------------------------------------------------------------------

Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [50]

--------------------------------------------------------------------------------

Joe and Tom, nice quarter. Can you talk about where the PYD is in this quarter? Is -- what business line is this really coming from? And particularly, I'm interested in how much relates to the exchange business? And how much relates to the states that you're doing less business in?

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [51]

--------------------------------------------------------------------------------

Sure. We don't disclose PYD by product segment. But it would be fair to say that with Medicaid being the lion share of our business is the -- a good chunk of that within that line of business.

--------------------------------------------------------------------------------

Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [52]

--------------------------------------------------------------------------------

And does that relate to the states that you're doing less business in?

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [53]

--------------------------------------------------------------------------------

There's -- Florida and New Mexico is a component of that, so we don't parse that out. But Joe comment before, we managed to run that very well. So a component of that prior year development is part of those 2 states.

--------------------------------------------------------------------------------

Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [54]

--------------------------------------------------------------------------------

Okay. And then the G&A expense in the quarter, how much of that improvement is really sort of just delayed G&A expense towards later in the year versus your expectations from before?

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [55]

--------------------------------------------------------------------------------

Sure. There is a number of different factors here. One is that we continue to manage our expense well. From Q4 to Q1, you see expense went down roughly about $30 million in total. However, the ratio has gone up a little bit, maybe 20 basis point or so. So -- and then comparing to our own expectation, it's actually running a little bit better than our expectation. We managed the cost well. There's some timing of spending on infrastructure that will appear in second to fourth quarter. These primarily relating to investment in capabilities to grow our business. Joe mentioned D-SNP Marketplace, investment in really provider member enhancement to their experience as well as building up -- really upgrading a number of our technology facility as well. So that's how you're going to see that play out over the next couple of quarters or so.

--------------------------------------------------------------------------------

Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [56]

--------------------------------------------------------------------------------

So let me put words in your mouth there -- relative to your prior expectation, this is a little more skewed to the back half of the year than this first quarter? Is that...

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [57]

--------------------------------------------------------------------------------

That's correct. That's correct.

--------------------------------------------------------------------------------

Thomas Lacy Tran, Molina Healthcare, Inc. - CFO & Treasurer [58]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

The next question will be from Steven Valiquette of Barclays.

--------------------------------------------------------------------------------

Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [60]

--------------------------------------------------------------------------------

Joe and Tom, I'll echo the sentiments of everyone else of these results continued to be impressive. The MLR trend in Medicaid in 1Q is pretty solid. I think everyone on this call has heard some other managed-care companies talk about some pockets of elevated cost trends in Medicaid in 2018 that may have lingered a little bit into early 2019. It doesn't seem like Molina is really seeing that based on your results. Or maybe just, perhaps, you can comment on your view around this concept of pockets of elevated Medicaid cost versus industry dynamics around Medicaid cost overall?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Great. Yes, I think the 2 cost pressures we observed in the quarter were really more related to incidents and events rather than trends in our view. So you take on 30,000 new members in Washington due to a very successful reprocurement and handle a newly carved-in behavioral benefit, you're going to get some cost pressure. We believe this will abate in the upcoming months. In Ohio, we did observe a moving of membership off the Medicaid [road] late in 2018 due to a very focused reeligibility, redetermination effort. And as many suspect, and is generally true, it is healthier people that going back to work, meaning that you're left with a slightly higher acuity risk pool, and we saw some cost pressure there. And as I said before, the state of Ohio actuaries have already recognized that this is clearly a phenomenon that needs to be rated. So we believe these cost pressures are temporal. They will be effectively rated. And those 2 businesses do really well for us and are 2 of our better run health plans.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

And the next question will be from Scott Fidel of Stephens.

--------------------------------------------------------------------------------

Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [63]

--------------------------------------------------------------------------------

So it looks like that CMS may be trying to breathe some new life into the duals pilots with this recent letter that they sent to the State Medicaid Directors. So Joe, just interested in your thoughts on some of the concepts that CMS discussed in that letter. And whether you think this could be a catalyst here for some improved growth momentum around those pilots?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [64]

--------------------------------------------------------------------------------

Well, I think 2 things, Scott. One is CMS has voiced increasing support of -- for the integrated approach, the MMP product whether it's a demonstration or permanent. And with $2 billion of Medicare revenue, $1.4 billion of which is in the MMP demonstrations, we're very well positioned no matter which way they pivot. So the fact that they've voiced support for this fully integrated approach is certainly a strategic coup for us.

In terms of some of the rating factors and the way they're going to manage the program whether there are profit caps, et cetera, remains to be seen how well that plays out. But we've done very well at the MMP product line. We're absolutely certain that if it expands, we'll play there. If they convert it to more of a permanent type of D-SNP program, we're well positioned to capture it. And we're just really good at managing these high acuity populations, no matter what the wrapper they choose to put it in. And that's what we're focused on right now. So we're following the regulations closely. We've been able to be adaptable and flexible in dealing with every regulation that's been thrown at us in the past. We have a great team, and we know we'll be able to implement whatever changes are put to us, and we'll manage it very effectively.

--------------------------------------------------------------------------------

Scott J. Fidel, Stephens Inc., Research Division - MD & Analyst [65]

--------------------------------------------------------------------------------

Got it. And then just had a follow-up question. Just going back to that Washington public plan and totally got you in terms that are being tons of different rhetoric and proposals and a lot of them don't have meat on the bone. But just have one specific question on that one. Since in the bill, they did talk to sort of the reimbursement levels that would be included in the public plan and talk to 135% for primary care, [of course] Medicare and then a cap of 160% for hospital and other. Just interested in terms of competitively how that may compare to how reimbursement rates tend to be negotiated in the exchange market? I know that it's around 167% on average for the overall commercial market. But I would assume that given the tighter networks in the exchanges that it's probably more comparable with some of those ranges that were in the Washington bill, but just interested in your thoughts on that.

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [66]

--------------------------------------------------------------------------------

Scott, I will claim not to have caught up with the specifics in the Washington bill, but more generally to the point you're making, we find it rather plausible and realizable that when we are putting together a network for the Marketplace off of our Medicaid network that negotiating up from a Medicaid rate actually proves to be more cost-efficient than a commercial player coming in and negotiating down from a commercial rate, which means that our network plays well because it's the working poor, but it's also priced right. So I think that's the point you were referring to. We continue to be successful in managing and leveraging our Medicaid network into the marketplace due to the highly subsidized nature of the population, and it's priced right as evidenced by the margins we're achieving, and the amount of margin we'll be able to put back in to pricing to grow the business again.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

The next question will be from Charles Rhyee of Cowen.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [68]

--------------------------------------------------------------------------------

I just wanted to follow-up on earlier comments, Joe, when you talked about -- I appreciate the comments you said about potential for gains through divestitures, obviously from some of the potential transactions out there, but you also made -- is that what you were talking about in your earlier comments when you were kind of referring to some opportunities for M&A in the future? Or were you talking more separately about just general opportunities you see to expand traffic areas?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [69]

--------------------------------------------------------------------------------

Charles, we're actually referring to both. Certainly, this specific M&A transaction we're referring to -- let's wait and see how it unfolds. And we'd hope to be invited in and take a serious look at those assets. But more generally speaking, we do have a business development team here, one that I've used in the past. They're very good at what they do. And as we look at new geographies or expanding existing geographies, there are many, as you know, small provider owned plans, [501(c)(3)s] Scattered across the United States that dabble in Medicaid. Many of these plans are undermanaged, sort of orphaned. They're hard to find, but they can be incredibly valuable if you can absorb someone's membership on top of our -- the cost structure that we've proven to be best-in-class. These could be tremendously achieved

(technical difficulty)

They're not going to make major headlines because most of the names are nondescript. But we are looking at plans around the country in existing geographies and to light up new geographies.

--------------------------------------------------------------------------------

Charles Rhyee, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [70]

--------------------------------------------------------------------------------

Great. Sorry about that. And just a follow-up though, when we think about these kind of opportunities, should we think about them as a potential '19 event? Or is this really as we think about 2020?

--------------------------------------------------------------------------------

Joseph Michael Zubretsky, Molina Healthcare, Inc. - President, CEO & Director [71]

--------------------------------------------------------------------------------

I mean we're looking at opportunities now. And obviously, without anything announced in the time to close, I would say that anything we would even action this year is likely not to have benefit for 2000 -- until 2020. As I said, we never do project the benefits from inorganic or pseudo-inorganic growth assuming other plans. They're hard to do. It's a biparty or sometimes a tri-party transactions. They're hard to predict. But we're actively at it and looking for these sometimes value-creating opportunities. We've done it before, and the team I have knows how to execute.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

And, ladies and gentlemen, this will conclude our question-and-answer session, and will also conclude the conference call for today. We thank you for attending today's presentation, and at this time, you may disconnect your lines.