Q4 2023 Molina Healthcare Inc Earnings Call
Participants
Jeffrey Geyer
Joseph Michael Zubretsky; President, CEO & Director; Molina Healthcare, Inc.
Mark Lowell Keim; Senior EVP, CFO & Treasurer; Molina Healthcare, Inc.
Albert J. William Rice; Analyst; UBS Investment Bank, Research Division
Calvin Alexander Sternick; Analyst; JPMorgan Chase & Co, Research Division
George Robert Hill; MD & Equity Research Analyst; Deutsche Bank AG, Research Division
Joshua Richard Raskin; Partner & Research Analyst; Nephron Research LLC
Justin Lake; MD & Senior Healthcare Services Analyst; Wolfe Research, LLC
Kevin Mark Fischbeck; MD in Equity Research; BofA Securities, Research Division
Nathan Allen Rich; Research Analyst; Goldman Sachs Group, Inc., Research Division
Sarah Elizabeth James; Research Analyst; Cantor Fitzgerald & Co., Research Division
Scott J. Fidel; MD & Analyst; Stephens Inc., Research Division
Stephen C. Baxter; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Presentation
Operator
Good morning, and welcome to the Molina Healthcare Fourth Quarter 2023 Earnings Call. (Operator Instructions) Please note, this event is being recorded.
Standing in for Joe Krocheski today is Jeff Geyer, Vice President of Investor Relations. Please go ahead.
Jeffrey Geyer
Good morning, and welcome to Molina Healthcare's Fourth Quarter and Full Year 2023 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our fourth quarter and full year 2023 earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release.
For those of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks made are as of today, Thursday, February 8, 2024, and have not been updated subsequent to the initial earnings call.
On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures for 2023 and 2024 can be found in our fourth quarter 2023 earnings release. During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2024 guidance, Medicaid redeterminations, our recent RFP awards and related revenue growth, our recent acquisitions and M&A activity, our long-term growth strategy and our embedded earnings power and projected 2025 earnings per share.
Listeners are cautioned that all of our 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 filed with the SEC as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After completion of our prepared remarks, we will open the call to take your questions.
I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?
Joseph Michael Zubretsky
Thank you, Jeff, and good morning. Today, I will discuss several topics. Our financial results for the fourth quarter and full year 2023, our growth initiatives and our strategy for sustaining profitable growth, our 2024 premium revenue and earnings guidance and an affirmation of our long-term growth targets.
Let me start with our fourth quarter performance. Last night, we reported adjusted earnings per diluted share of $4.38, an $8.4 billion of premium revenue. Our fourth quarter results and performance metrics demonstrated strong medical cost management and operating cost discipline. Medicaid continued to perform well, withstanding the impacts of the unprecedented redetermination process. Medicare experienced higher than target medical costs, consistent with prior quarters and Marketplace performed very well despite the late in year medical cost seasonality typically experienced.
Our fourth quarter completes a strong year of operating and financial performance. Full year adjusted earnings per share of $20.88 represents 17% year-over-year growth, squarely in line with our long-term target range of 15% to 18% and 6% above our initial 2023 guidance of at least $19.75. Our full year premium revenue of $32.5 billion represents 5% year-over-year growth, and our pretax margin of 4.8% is at the high end of our long-term target range heading into 2024.
In Medicaid, our flagship business representing over 80% of revenue, we reported an 88.7% MCR for the full year, which is within our long-term target range. Throughout the redetermination process, we have managed through a number of factors that shape Medicaid's performance, all to land the full year result at a solid jump-off point into 2024. These factors included medical cost utilization, various state corridors and MLR minimums and prospective rate changes.
In Medicare, the full year MCR was 90.7%. While the business is profitable, we did not meet our performance expectations due to higher utilization of supplemental benefits, in-home services and high-cost drugs. I am confident that our 2024 bid strategy, adjustments to benefit design and various operational improvements will return the business to target margins in 2024.
In Marketplace, we reported a 75.3% MCR for the full year, below the low end of our target range, which reflects the successful execution of our small, silver and stable strategy. This business is now positioned to grow at a rate, which allows us to sustain mid-single-digit margins.
In addition to delivering strong financial results, in 2023, we continue to execute on our profitable growth strategy to recap the growth milestones achieved in 2023. In January, we successfully re-procured our contract in Texas for the state's STAR+ program, retaining all 8 regions and likely growing market share. In July, we successfully launched our Iowa Medicaid plan following the RFP, which we had won in a highly competitive process in late 2022. In August, we announced that we were awarded a contract to once again serve Medicaid beneficiaries in the state of New Mexico. In September, we closed on the My Choice Wisconsin acquisition further expanding our market-leading LTSS franchise. In June, we agreed to acquire Bright Health California Medicare business, which we have now closed effective January 1, 2024.
Also effective January 1 and after another win in a highly competitive bid process, we successfully launched our Nebraska health plan. And finally, on January 1, we launched our expanded California platform, including Los Angeles County, which doubled the size of our business in the state.
Collectively, these acquisitions and RFP successes represent $7 billion of annual premium revenue, a portion of which was in our 2023 results, most of which is in our 2024 guidance and all of which will be fully realized in 2025. To say we are pleased with the execution of our 2023 growth initiatives would be an understatement. But the growth story doesn't stop there. The pipeline of opportunities, fueling our future growth trajectory is extremely strong.
Let me begin with reprocurements. We have submitted our RFP responses for contract renewals in Florida, Virginia and Michigan. We are proven partners with all 3 of these states, and we are confident in our ability to retain and grow these relationships.
With regard to new state opportunities, including the Florida opportunity just described, there is over $50 billion of total premium revenue opportunity, active or near term, upper bid in several states over the coming years. We have already submitted bids in the states of Kansas and Georgia. With our demonstrated capabilities and referenceable track record, we remain confident in our ability to continue to win new state contracts.
With respect to our M&A initiatives, our acquisition pipeline remains robust with actionable opportunities and we are confident in our ability to deliver growth from this key component of our strategy. Since 2019, we have completed 8 transactions having acquired over $11 billion of premium for which we paid 22% of revenue. This capital allocation to M&A will continue to be a value driver.
Turning now to our 2024 guidance. We project 2024 premium revenue of approximately $38 billion, which is consistent with our previous outlook and represents 17% year-over-year growth. We project 2024 adjusted earnings per share of at least $23.50, representing 13% year-over-year growth. Mark will take you through the detailed guidance build in a few minutes. But in the meantime, let me offer some high-level commentary.
Our projected premium revenue growth to $38 billion represents a well-balanced combination of new contract wins, acquisitions and growth in our current footprint, partially offset by the impact of Medicaid redeterminations. With respect to earnings guidance in the core business, in Medicaid, our guidance fully considers the impact of the redetermination process. From a margin perspective, this is playing out as we have predicted. The impact of acuity shifts is real, but not significant. The risk corridors, acted as a financial buffer and rates, prospective and retrospective, are largely capturing the trend impact. On a same-store basis, we are projecting the 2024 Medicaid MCR to be within our long-term range.
We expect Medicare to return to mid-single-digit profitability in 2024 as a result of our bid strategy, adjustments to benefit design and operational improvements in the legacy business. Our Marketplace product has been priced right, is competitively positioned and the risk pool has stabilized. We expect the business to achieve mid- to high single-digit margins, membership to grow over 30% and revenue to grow 17%.
On top of our 2024 earnings per share guidance of at least $23.50, we now have $4 per share of new store embedded earnings, which, as you may recall, represents the expected accretion produced by our new store growth. Mark will review the components of the updated $4 per share in his remarks.
Our confidence in our 2024 guidance starts with a high-quality 2023 earnings baseline and then takes a thorough account of all the various factors, exogenous and company-specific that could impact earnings in 2024.
Now a few comments on our longer-term trajectory. Our 2024 guidance picture is one more data point that validates our long-term targets of 13% to 15% premium growth and 15% to 18% adjusted earnings per share growth. We committed to these targets at our Investor Day last May, and we reaffirm that commitment today. With the majority of the $4 of new store embedded earnings expected to emerge in 2025, we already see a clear outlook to achieving the low end of our long-term EPS growth target in 2025, even before considering the execution of additional growth initiatives and driving growth from our current footprint.
In summary, we are very pleased with our 2023 performance, our trajectory to deliver the growth and profitability inherent in our 2024 guidance and the embedded earnings outlook we provided for 2025. Our confidence in continuing to achieve our long-term targets is data-driven as demonstrated by the following historical fact set. We have re-procured approximately $12 billion in existing revenue. We have added approximately $7 billion of new revenue through wins of new or expanded contracts in 7 states. From 2020 to 2023, we achieved 21% annual premium growth and 25% annual earnings per share growth. 2024 guidance, 17% premium revenue growth year-over-year, 13% earnings per share growth year-over-year. And for 2025, we expect to harvest the majority of our $4 per share of embedded earnings.
Our strategy is clear and simple. We are in the business of providing assets to high-quality healthcare for individuals relying on government assistance. Our business model is also clear and simple. We take on capitated risk, take or make rates that are commensurate with medical cost trends, and manage those trends to consistently achieve our target margins while maintaining higher standards of quality. The execution of our strategy and business model has been and will continue to be strong, which is why we look to the future with a great deal of confidence.
In conclusion, I want to extend my special thanks to our 19,000 associates who are dedicated to delivering access to high-quality healthcare to our members. It is my privilege to serve with such a committed and capable group of professionals.
With that, I will turn the call over to Mark for some additional color on the financials. Mark?
Mark Lowell Keim
Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details on our fourth quarter and full year performance, the balance sheet redeterminations and our 2024 guidance.
Beginning with our fourth quarter and full year results. For the quarter, we reported $9 billion in total revenue and $8.4 billion of premium revenue. I will note that total revenue includes approximately $380 million in reimbursement for our California MCO tax item that was retrospective to April. This item modestly distorts our reported G&A and margin ratios, but has no net economic consequence.
On a consolidated basis, our fourth quarter MCR was 89.1% and our full year was 88.1%, reflecting continued strong medical cost management. Our full year consolidated MCR was consistent with our expectations and squarely in line with our long-term target range.
In Medicaid, our fourth quarter reported MCR was 89.2%. The MCR included a moderate impact from the net effect of redetermination acuity shifts and corridors in several states, as well as some MCR pressure from the additions of our Iowa health plan and our My Choice acquisition. Across our Medicaid segment, the major medical cost categories were largely in line with our expectations and normal quarter-to-quarter trend fluctuations. Our full year Medicaid MCR was 88.7%, within our long-term target range and consistent with our expectations.
In Medicare, our fourth quarter reported MCR was 93.3% and our full year was 90.7%, both above our long-term target range and impacted by increased utilization of supplemental benefits, in-home services and high-cost drugs. As Joe mentioned, we are confident that our 2024 bid strategy adjustments to benefit design as well as operational improvements will produce target margins in our Medicare business in 2024.
In Marketplace, our reported fourth quarter MCR was 79.8%, reflecting our continued success in returning this business to target margins. Our full year Marketplace MCR 75.3% was well below our long-term target range.
Our adjusted G&A ratio for the quarter was 7% as reported. However, when accounting for the California pass-through premium tax item, the ratio restates to 7.3%. This result includes new business implementation spending for new contract wins in California, Nebraska and New Mexico as well as expected seasonal expenditures from Medicare and Marketplace marketing. Our full year adjusted G&A ratio was 7.2%, recognizing the California tax item in the fourth quarter, the full year G&A ratio restates to 7.3%.
Turning to our Bright acquisition. We successfully closed the transaction effective this past January 1, at final price of $425 million net of tax benefits which was lower than our initially announced terms. The acquisition adds 109,000 members and contributes $1.6 billion in premium this year. We acquired the business with a premium deficiency reserve, which is expected to moderate first year losses, but we still expect the acquisition to be approximately $0.50 dilutive to 2024 adjusted EPS. Now that we have owned the business for 6 weeks, we have increased confidence in our assumption that the Bright acquisition will deliver an ultimate accretion of $1 per share as final run rate margin.
Given the expectation of this modest lot in the first year, we are updating the 2024 new store embedded earnings from the Bright acquisition to $1.50 per share, reflecting this $0.50 of first year dilution.
Moving on to Medicaid redeterminations. In the quarter, we estimate we lost 200,000 members driven by redeterminations, bringing the full year figure to approximately 500,000. We are now updating our estimate of members gained during the pandemic to 1 million to include new business additions in 2023 and 2024 as well as the legacy business. Given the high rate of procedural disenrollments rather than through verification, we are seeing a nearly 30% reconnect rate, consistent with previous quarters. As reconnects continue, we expect the membership losses just described to restate to a lower level over the coming months. We continue to project ultimately retaining 40% of our updated members gained, which implies a net loss of 600,000 from the redetermination process.
The offsetting positive impact from our growth initiatives is significant. We ended 2022 with 4.8 million Medicaid members, and we expect to close out 2024 with 5.1 million members, a net 300,000 member growth over a 2-year period, despite the losses from redetermination.
Moving to Medicaid rates. We now have visibility into rates impacting approximately 80% of our 2024 premium. All but one of our states have now included an acuity adjustment for redetermination for 2024. We continue to work with our state partners to ensure appropriate rates through the normal rate cycle, retroactive or mid-cycle adjustments, given the experience to date. We are confident that the requirement for actuarially sound rates will offset trends as they may emerge. Updated rates and trend assumptions have been considered in the 2024 Medicaid MCR that supports our guidance.
Turning to our balance sheet. Our capital foundation remains strong. We harvested approximately $280 million of subsidiary dividends in the quarter, and our parent company cash balance was approximately $740 million, a portion of which was used to fund the Bright Medicare acquisition just after the first of the year. Debt at the end of the quarter was 1.4x trailing 12-month EBITDA with our debt-to-cap ratio at 36.3%. These ratios reflect our low leverage position and ample cash and capital capacity for additional growth and investment.
Our reserve approach remains consistent with prior quarters, we are confident in the strength of our reserve position. Days in claims payable at the end of the quarter was 50.
Now some additional details on our 2024 guidance, beginning with membership. In Medicaid, we expect new membership from our recent new contract wins to add approximately 650,000 members. We expect to lose 100,000 members over the remainder of the redetermination process in 2024. The net result in 2024 year-end membership of approximately 5.1 million members or 12% growth year-over-year.
In Medicare, the Bright acquisition added 109,000 members. Combined with our legacy business, we expect to end 2024 with 270,000 Medicare members, representing 58% growth year-over-year.
In Marketplace, based on open enrollment, we expect to begin 2024 with approximately 320,000 members, representing 14% growth from year-end 2023. We expect growth to continue through the year, boosted by the redetermination conversions and ending with approximately 370,000 members, representing 31% growth year-over-year.
We are still 75% Silver, which bodes well for medical margin stability.
Our 2024 premium revenue guidance is approximately $38 billion, representing 17% growth from 2023. Our revenue growth is comprised of several items: $3.3 billion of revenue tied to our recent RFP wins. To this, we add $2.4 billion of revenue from our recently closed acquisitions, including $1.6 billion from Bright and $800 million from a full year of My Choice Wisconsin. And finally, $1.7 billion of organic growth across Medicaid, Medicare and Marketplace. Partially offsetting these growth drivers is a higher estimated full year impact of $1.9 billion in decreased revenue from redeterminations.
Moving on to earnings guidance. We expect 2024 full year adjusted earnings of at least $23.50 per share. Our EPS guidance reflects the realization of approximately $2 per share of 2023 new store embedded earnings, approximately $2 for the underlying organic growth across our current Medicaid and Medicare footprints, the realization of $0.75 benefit from the onetime nonrecurring implementation costs incurred in 2023, partially offset by $1.25 impact from redeterminations and $0.50 impact from the Bright acquisitions first year operating and carrying costs, and finally, $0.25 from a conservative view of earnings contribution from investment income.
Turning to MCR guidance. Our consolidated medical care ratio is expected to be 88.2%. Our Medicaid MCR is expected to be 89%, at the high end of our long-term target range. This guidance reflects the inclusion of our significant new store growth, which runs at a higher MCR in the first year. Our legacy or same-store Medicaid MCR is expected to fall in the middle of our long-term range. We anticipate our Medicare MCR to be 88%, while at the high end of our long-term target range, the MCR reflects our expected success in our 2024 bid strategy adjustments to benefit design and various operational improvements. For Marketplace, we expect the MCR at the low end of the long-term target MCR range of 78% to 80%.
Moving on to select P&L guidance metrics. We expect our adjusted G&A ratio to fall to 7% as new business implementation costs subside, and we leveraged the increased scale of our business. Effective tax rate of 25.7%, adjusted pretax margin of 4.6%, well within our long-term target range. Weighted average share count unchanged at 58.1 million shares and our quarterly EPS will be weighted slightly heavier towards the second half of the year as we drive improved performance in our new business portfolio additions over the course of the year.
Turning to embedded earnings. We ended 2023 with $5.50 per share of new store embedded earnings. Our 2024 guidance includes the realization of $2, resulting in a new base of $3.50. To this, we add $0.50 for the impact of Bright acquisition's first year loss, leaving us with $4 remaining at the end of 2024. We expect the majority of this to emerge in 2025 giving us further confidence in our 15% to 18% long-term growth rate for EPS.
This concludes our prepared remarks. Operator, we are now ready to take questions.
Question and Answer Session
Operator
(Operator Instructions) The first question today comes from A.J. Rice with UBS.
Albert J. William Rice
Maybe 2 things. On the Medicare MLR margin, it sounds like you're attributing your improvements that you're expecting largely to benefit design changes and operational improvements. Any comment on what you're assuming relative to underlying utilization trends?
And then just on the Medicaid, you're sounding like you'll be on the legacy business in the middle of your long term MLR targets. How are you thinking about margin profile coming out of redeterminations? Is there an opportunity for further improvement? Is it steady? Any thoughts on that?
Joseph Michael Zubretsky
Sure, A.J. With respect to the Medicare MLR question, we have 3 components of medical costs that ran higher than expectations. One was LTSS hours on the Medicaid side of the MMP business; second, high-cost drugs; and third, supplemental benefits, vision, dental, cash card, over-the-counter was a little too richly designed in 2023, to be honest. We pulled back on those benefits in our 2024 product design and bids. We reshaped some of the allowance based benefits to be more managed, and we're confident that, that cost category will come back into line.
On LTSS hours, on the Medicaid side of the MMP benefit, we know where, we know why and those corrective actions are in place. And it's not unusual in a soft economy for in-home service hours to increase. So we are very confident in the restoration of our MCRs back to the top end of the range in Medicare to 88% in 2024.
You also asked about the Medicaid MLR. And let me frame it this way, and then I'll turn it to Mark. The redetermination process actually unfolded exactly and as we had predicted. The acuity shift was noticeable, but it was -- it wasn't dramatic and it wasn't significant, but it was noticeable. And that began to happen as the redetermination process began. We then said, and it occurred that the first financial cushion would be the corridors, the payments into the corridors that existed in the latter half of 2023. That acted as a financial buffer. In the meantime, as the acuity shift became noticeable to our state partners, they began to introduce rate adjustments to account for the acuity shift. So going into 2024, the rate actions completely compensated for what we call core medical trend, completely compensated (inaudible) acuity shift and that's why we're able to print an MCR in Medicaid at the high end of the range at 89%, which includes a little bit of pressure from the new business that we put on the books.
Mark Lowell Keim
Joe summarized that well. Look, we finished 88.7% in 2023 for Medicaid. And as Joe mentioned, that included a little bit of pressure from the acuity shift from redebt but also, as we projected, the benefit of some corridors. So really tracking exactly where we expected.
Here in the new year on our legacy book, trend roughly equals the rates that we're getting from our state partners. So on our legacy book into '24, we're roughly seeing about a flat MLR versus where we finished 2023.
Now why are we at an 89% in guidance? Just as Joe mentioned, we're adding significant new store business through both our acquisitions and a number of big wins. Whenever we have new store and go into our portfolio, it tends to be a little bit hotter in the first year on an MLR. So we're seeing a pretty much flat carryover on legacy, a little bit of increased pressure on new store. That's how you get to that 89% that we have in our guidance.
Operator
The next question comes from Cal Sternick with JPMorgan.
Calvin Alexander Sternick
I wanted to ask about the marketplace. It sounds like the book is running really well and I think you were a little bit more competitively priced this year than you were previously. So I guess, first, the expectation we talk about mid-single digit to high single-digit margins that you're within sort of that 5% to 7% range, do you expect to be towards the upper half of that or maybe a bit above?
And then second, how do you think about the market and the positioning for 2025? Do you think you're still going to maintain the current pricing position? Or do you expect to, I guess, be more competitive across your total footprint again?
Joseph Michael Zubretsky
Cal, our strategy in Marketplace until we were satisfied that the risk pool was stabilized is to keep it, as we say, small, silver and stable. But as the risk pool has stabilized, irrational pricing has pretty much left the market. We will allocate more capital to this business, and we'll grow it at a rate that allows us to earn mid- to high single-digit margins. That's the key for us. The risk pool can have inherent volatility, and we believe that a margin target of 5% to 7%, as you suggested, is the right target margin, and we will grow the business at a rate that allows us to achieve that target margin.
We're very competitively positioned this year. We are in our silver product, we were #1 in (inaudible) 30% of our counties this year as compared to 20% last year. 75% of the book is still silver, 50% of the book is renewal, which gives us good insight to capture appropriate risk scoring. The book is very well positioned to grow. 31% membership growth, 17% revenue growth just this year. And hopefully, we'll be able to grow it at this rate in the future. All with the goal of achieving mid- to high single-digit margins.
Operator
The next question comes from Kevin Fischbeck with Bank of America.
Kevin Mark Fischbeck
Maybe 2 questions, if I could sink it in. I guess the first one on the Medicare side. I just want to make sure I just take your commentary around MLR because you're bringing in Bright with a PDR, but you're still saying you're going to be at the overall target margin, are you talking about the core business being at target margin or even with Bright losing money, you'll be at target margin on the consolidated book?
And then thinking about the exchanges, I guess, there was potentially some issue about redetermination to keep people off and then the sickest part of that population comes on to the exchanges. Are you seeing any of that? Or does the risk pool benefit of lower subsidies, just kind of make that not really an issue?
Joseph Michael Zubretsky
Kevin. I'm going to kick it to Mark for a detailed commentary on the Medicare MLR, but I think it's really important to frame the Medicare business and its component parts. They're somewhat different and situationally, they are quite different. You have $6 billion of revenue forecasted for 2024 in Medicare, $1.6 billion is Bright newly acquired, subject to the premium deficiency reserve, as you suggested, and Mark will explain that in a minute. $2.4 billion is our legacy DSNP business and $2 billion are the MMP demonstrations where rates are received from CMS, you're not [bidding] against the benchmark.
So the dynamics in the book of business are quite different. You need to look at the 3 components in order to develop your view of the various profitability components.
But with that as the backdrop in the context, I'll kick it to Mark for detailed commentary on how you build the Medicare MLR, particularly with respect to Bright and the premium deficiency reserve. Mark?
Mark Lowell Keim
Yes. Fantastic. So break comes to us with a PDR in place. With that PDR, the benefit goes into the MLR line and effectively reduces the MLR. So on the Bright component, which is 1/3 of our book, you'll see an MLR that's below our target range at the moment. On the DSNP, which is another 1/3 of our business, we're seeing trend of probably around 4%. But overall, we're able to offset that and pull that into our target range. And of course, on MMP, which is the third component of the book, the rates that we're getting from our state and CMS partners, we feel are quite adequate to bring us all told to that 88% in our MLR guidance.
Joseph Michael Zubretsky
With respect to your second question, if I remember correctly, you had to do with the exchanges and members coming off of the Medicaid roles into the exchanges. If you look at the last couple of years, membership has already -- always started the year at a higher point and ended the year at a lower point due to the natural attrition of the book. This year, we're starting the year at 320,000 members and plan to grow it to 370,000 by the end of the year. The natural attrition rate is still 2% or 3% inside that number, but we do plan to pick up more members from not only our own Medicaid plans, but competitors' Medicaid plans. I think we're seeing a penetration rate of people coming off Medicaid of about 10% of members lost.
Mark, anything to add?
Mark Lowell Keim
Yes. In the past, when we picked up SEP members, they put a little pressure on our MLR. What we're seeing in the third and fourth quarter in '23 and what I expect into '24 is they'll come over at more sustaining and normalized levels. That is they won't put pressure on because they're coming off normal using services. There's not pent-up demand. They're not new to the product. So I'm expecting to see a good pickup on SEP as we did in Q3 and Q4 and not pressure on the MLR.
Operator
The next question comes from Josh Raskin with Nephron.
Joshua Richard Raskin
Two for me as well. Just the health insurance exchange membership up 31%, but revenue is up 17%. Is that state geography mix related? Or is that reductions in prices? And what's driving that versus a market that's generally raising prices?
And then I'm still confused on Bright, how the target -- how the MLR for Bright that you're booking this year is below the target range, but you're actually increasing the embedded earnings by $0.50 to $1.50? Maybe just help us understand those 2 parts.
Mark Lowell Keim
So a couple of things, Josh. Our metallic mix has remained unchanged. So what you're seeing in Marketplace is not at all metallic or mix related, that's state footprint related. As you know, we're in 14 states. And our mix among the states as we're more competitive in some, maybe not so much in others, our mix does shift a little bit. So that would be the driver there.
On Bright on the PDR, with the PDR that was booked before we bought the business, that benefits the MLR and pulls it down to a level that's actually a little bit below our target range. Now remember, our target range is largely DSNP and MMP because that's our legacy Medicare book. On the Bright, with the PDR in the MLR line, it does pull it down a little bit below our target range.
Joshua Richard Raskin
And so how does that impact -- I'm just trying to -- so it feels like with the PDR, which you guys will sort of reverse that through the year, how does the embedded earnings go up, right? I'm confused that how was Bright's MLR low, but they're losing more money.
Mark Lowell Keim
It's a good question, and thanks for raising that. I knew we were going to get that sooner or later. So with the PDR, as you know, the PDR should largely normalize expected operating losses on a contract year. PDR accounting doesn't allow you to put all of the losses into the PDR. There are certain accounting matters that are still held out. So even with the PDR, I'll have a very small operating loss, Josh. But the other thing is, when we talk about embedded earnings, we always include the carrying costs. The embedded earnings are essentially fully capitalized or fully funded for their carrying costs. So when I say I have about $0.50 of dilution this year, it's about half operating costs that aren't covered by the PDR and about half carrying costs. Remember, we paid about $0.5 billion. The opportunity cost or interest on that is maybe the other half of the $0.50.
So as a result, I'm carrying a $0.50 hole in this year's EPS bridge. Since that's a $0.50 hole, I said I'd have a $1 of ultimate benefit from this property, the $1 now goes to $1.50 because I'm going to crawl out of that hole over the next couple of years.
Operator
The next question comes from Justin Lake with Wolfe Research.
Justin Lake
Just want to follow up on Bright. So a few things here. First, can you give me the PDR number that you put through there for 2024?
Mark Lowell Keim
Sure. We acquired the business with a $75 million PDR on the balance sheet.
Justin Lake
Okay. And so you're saying the -- I understand the PDR getting it to normal levels potentially, but how does the PDR get it below normal MLR levels?
Mark Lowell Keim
The PDR books all of the losses. It picks up a little bit of the G&A losses with the medical cost losses and books them into the medical cost line. So to the extent that there were some G&A items, it will get picked up in the MLR line. It's just an accounting convention where the net of losses get picked up in one line item or the other.
Justin Lake
Okay. So your point is that just thinking about the math of this, the MLR is going to go up next year because it's actually below normal, and you're seeing the SG&A will come down?
Mark Lowell Keim
There will be a little bit of that, Justin.
Justin Lake
Okay. And you expect to get this full $1 back plus in 2025?
Joseph Michael Zubretsky
And that's the important point. The important point here, first of all, the first year losses were fully contemplated in the value we paid. So there was no surprise there. The business is running at a 92% MCR and a 14% G&A ratio. We plan to get the 92% down to 88% to 89% and the 14% down to 9% to 10%. So half to 2/3 of the turn is G&A related, and we have a very, very clear line of sight to how to take their cost burden down from 14% to 9% or 10% where it should be.
That $1 of accretion is expected to emerge in the third full year of ownership. First year protected by -- mostly protected by a PDR. Second year breakeven to probably slightly profitable, full $1 of accretion and your first and third full year of ownership, getting the MCR from 92% down to 88% or 89%, getting the 14% G&A ratio down to 9% or 10%.
Justin Lake
Got it. And then lastly, just on -- there's a big RFP, as you know, in Florida, I think a lot of anticipation there around when that might be communicated. My understanding is we're kind of into the second round of negotiations. I assume you can't tell us whether you're still kind of in the running there. But any idea given where you are today, any idea when you think that under normal conditions that MLR would be announced? -- or it should maybe RFP would be announced, not the MLR.
Joseph Michael Zubretsky
Sure. And we appreciate your sensitivity to the situation. Yes, we observed the sanctity of all these bidding process, including the ITN process, so we can't comment specifically on it. But look, as we run a nice business in Florida, it's smaller than it used to be through regions. We used to be (inaudible) statewide back in 2017, it runs really well. We're the only 4-star plant in Florida and the same team that works on all our successful bids, our $12 million of re-procured revenue and our $7 billion of new contract wins is the same team that worked on this. So we go into it with a great deal of confidence, and we would hope to expand our footprint in Florida.
There's $14 billion of Medicaid revenue in Florida regions where we are not currently represented. But let's see how the process plays out and hopefully, something will be announced -- awards will be announced some time later this spring.
Operator
The next question comes from Stephen Baxter with Wells Fargo.
Stephen C. Baxter
I appreciate all the commentary on your Medicaid expectations for the year. I was hoping you could help us think about the bridge from your Medicaid MLR exiting the year to your same-store Medicaid MLR in 2024, the -- or around the midpoint of the range. I'm curious if you think that the core could kind of get there earlier in the year because some of the 1/1 rate adjustments that we've been focused on? Or do you think that will take some time to kind of work through the business and other seasonal factors play out?
Joseph Michael Zubretsky
As a general framework for how we stay within our long-term range year-over-year, in fact, on a same-store basis, almost equivalent. We talk about the redetermination process, which late in 2023, began to put pressure on the MLR until rates caught up with it. As Mark commented in his prepared remarks, we know about Medicaid rates on 80% of our revenue for 2024. That rate increase came in at 4%, so that blends to about 3.2%. We forecasted the other 20% at less than half that. So we have a 3.5% rate increase built into our 2024 guidance. And that was exactly commensurate with trend, trend even as influenced by the modest acuity shift that we and our state customers have observed. So pretty much business as usual. There's no medical cost category that needed to be accounted for or accommodated. It's actuarially sound rates impacted by acuity adjustments at 20 of 21 of our states included, and it was completely in line with our contemplated medical cost trend even as influenced by an acuity shift.
Mark, anything to add?
Mark Lowell Keim
No, I think that's exactly right. As we look at the rates and the trend being roughly equal, our legacy book pretty much holds flat. As you know, we're bringing in a bunch of additional new business that puts a little more pressure in the first year, which ramps us out at the 89% that we have in guidance.
Operator
The next question comes from Nathan Rich with Goldman Sachs.
Nathan Allen Rich
I wanted to ask on the Marketplace MCR, I guess moving back to the low end of the long-term range, so up about 300 basis points year-over-year. Can you just talk about what's driving that increase year-over-year? Is that just a function of the membership growth that you saw?
And then have you thought -- how, I guess, are you thinking about maybe the long-term target for that business? Is 78% to 80% still the right range to use?
And then just one clarifying question for Mark. I think you said quarterly EPS is weighted towards the back half of the year. I think usually, the back half is about 45% of the total year. So does that mean this year will be over 50%? Or is that not the right way to interpret the comment that you made?
Joseph Michael Zubretsky
Nate, I'll take the Marketplace question first. We were running really well in the middle of 2023. Our experience was quite positive. So we consciously, consciously bid to grow the business modestly and moderately as we suggested we would. And so we price somewhat below the observed trend, not hugely below the observed trend, but slightly below the observed trend to essentially invest some of the excess margin. We earned nearly 10% pretax in that business in 2023. So in a sense, we invested some of the excess margin in growth, hence, the 31% membership growth and 17% revenue growth.
Mark, on the phasing -- the quarterly phasing?
Mark Lowell Keim
Yes, absolutely. Nathan, yes, you got it right. We're normally 55-45 on the front half versus the second half of the year. I'd almost flip that around this year because the dynamics are a little bit different. One, we put on a lot of new business this year, as you can see in our revenue bridge. We got $5.7 billion of new revenue coming into the company, which always comes in just a little bit warmer in the first year, but in the first quarter in particular. So I'm expecting to get some momentum on MLRs in Medicaid and Medicare as we kind of grow into our new footprint there. So that will change the dynamic a little bit.
The other thing is, and I think Joe touched on this, very often, marketplace has attrition throughout the year such that marketplace declines during the year. This year is a little bit different. With all the members rolling off on redebt and that's expecting to pick up our fair share of them in Marketplace as they convert, we'll see a growing book in Marketplace. And as you know, we've got some confidence on the margins given that we really prioritize margin over volume in Marketplace.
So for those 2 reasons, you're going to see a little bit more of a back-end loaded EPS trajectory this year. I think that should address your question.
Operator
The next question comes from Sarah James with Cantor Fitzgerald.
Sarah Elizabeth James
Can you clarify for us what you guys contemplated in for 2 midnights and V28 into your 2024 plan design and also for Bright? And when you mentioned the pressures that you were seeing on Medicare, you guys didn't flag outpatient or some of the inpatient trends that the rest of the group is seeing. So I wanted to clarify if you are seeing this.
Joseph Michael Zubretsky
Sarah, I'll kick it to Mark for -- we had a very detailed analysis of the changes in the risk adjustment rules and what it meant to our book.
In answer to your second question. One of the reasons I articulated earlier, the configuration of our book of business being somewhat different than what I call mainstream Medicare Advantage is that we have a low income high-acuity population. Our members are using services from the first day of the year to the last day of the year. They're chronic, they have comorbidities of polychronic, and so the notion of discretionary utilization means far less to our business based on its mix than it might be to a mainstream population where discretionary orthopedic procedures are being done, screenings are taking place, perhaps pent-up demand from the pandemic. In our book of highly chronic patients, high-acuity members, that's less of a dynamic. And so the 3 cost categories that I articulated previously, LTSS hours, high-cost drugs, GLP-1s and the supplemental benefits were really the drivers in our book.
Mark, do you want to take the risk adjustment question?
Mark Lowell Keim
Sure. And I think, Sarah, it's important, as Joe mentioned, when we talk about Medicare, it's in fact, 3 things. Your probably question is most aimed at the DSNP or high acuity component of our Medicare, which is 1/3 of the book. Obviously, it's less relevant to MMP. On the 2 things you mentioned, on the 2 midnight rule, I've seen a little bit of buzz about that lately, and we're a little bit surprised because it's certainly not new and many of us have factored this in for quite some time. And what I always remind folks is even though there's a 2 midnight rule, providers still have to prove medical necessity. So there's really not a big window there for a change in trend or a change in risk adjustment issues as we can see it.
On V28, that's got some interesting dynamics. It is certainly a drag in many places for folks, but there's an interesting dynamic around V28 and high acuity. On single chronics, people use the example of diabetes where there's diabetes, but there are some other conditions that kind of correlate or highly associated with diabetes. V28 will be a reduction on risk adjustment for those kind of situations. But when there's polychronics, where there's different comorbidities that are, in fact, quite different than each other. V28 is actually helpful. And in our high-acuity chronic book, we actually have many of those polychronics, so we don't quite see the same dynamic that maybe some of the other folks do out there.
Sarah Elizabeth James
That's helpful. And one more clarification, if I could. Just on your comments with the exchanges, I know you guys are guiding to a really favorable MLR for this year, but is there still step-up in earnings as you mature this new book? I guess, in other words, your year 1 is still slightly below target range, right, on new members and then there would be an implied earnings lift as that book moves into the second year of operations?
Joseph Michael Zubretsky
I'm not quite sure I've captured the essence of your question, but we are forecasting a 78% MCR for the year, which is at the low end of our long-term target range, which means we'll be operating high single-digit margins, certainly not the 10% pretax we achieved in 2023.
But look, if you grow the book more aggressively, more of your members are going to be new to the book. And so you have to -- in our view, you have to strike a balance about how fast are you going to grow and how many new members you want. Every new member that comes in, you need to find risk adjustment. If they come in during SEP, if they're chronic, you better find risk adjustment quickly or they won't get to profitability in the near term. So there's very much a balance between what you get in annual enrollment, what you pick up in SEP and how one thinks about how fast do I grow the book to achieve mid-single-digit margins when the maturity of the membership and the duration of the membership is pretty important to the stability of the risk pool. You have to balance those 2 factors.
Operator
The next question comes from George Hill with Deutsche Bank.
George Robert Hill
I think Nathan and Sarah kind of covered everything I wanted to hit on the exchange, but I'll try to bring up one more topic, which is, I guess, can you talk about underlying utilization trends and kind of cost growth trends there. Because it sounds like you guys priced the book for growth in 2024, but the utilization is going to kind of continue to remain low. So I guess I'm trying to parse the spread between utilization trends and price growth for the margin expansion. Kind of any color on that would be helpful.
Mark Lowell Keim
And George, your question is focused on Marketplace?
George Robert Hill
Yes, Marketplace.
Mark Lowell Keim
Yes. Look, as Joe has been very clear, we're prioritizing margin over volume in this space -- in this business. And the way we do that is we keep it silver, which we believe is the best product for both the member and the payer. But we keep it stable, which means we continue to have really good renewals.
As we look at our pricing objectives here, we're putting price into the market to make sure that we can defend reasonable margins here. We did concede a little bit of margin in our pricing for 2024, just because we were well below our target range. Remember, our target range is 78% to 80% and we printed something a little bit south of that in '23. So there's no reason to leave volume on the table if we can put a little bit of price back, drive some volume and still hit our margin targets. I hope that helps.
George Robert Hill
It does. And maybe if I can just sneak in a quick follow-up. I know it's a tiny piece of the business. But could you talk about kind of the expected disruption in PDP in '25 given the changes from IRA?
Joseph Michael Zubretsky
I'm sorry. We didn't -- we had trouble hearing the last part of your question, George. PDP?
George Robert Hill
Yes. But like I said, I know it's a tiny part of the business, but we're expecting kind of PDP to be pretty disruptive or disrupted in 2025 because of the IRA changes. I know it's a tiny part of the book, but if you guys have any commentary on what you're saying would be helpful.
Mark Lowell Keim
Yes. So on PDP, as you know, we don't price the PDP product in the IRA or the Inflation Reduction Act that you're pointing out. It's certainly a headwind for that sector, but that's not too relevant to our business, George.
Operator
The last question today will come from Scott Fidel with Stephens.
Scott J. Fidel
I just was interested if you can walk us through your preliminary analysis on the 2025 MA advance notice? And whether you're able to parse that down between the legacy business impact and then what you're projecting will be the preliminary impact on the Bright book?
Joseph Michael Zubretsky
Sure, Scott. I mean, on balance, our view is the same view that you've heard from others is that the advance notice does not appear to be adequate to compensate for trends that were all reserving. I think in our book, if you take the CMS advance notice and projected to our book, I think we're projecting about a 50 basis point, 0.5 point of rate increase, which we believe is, along with others, is insufficient, and we'll see where the final notice comes out. It usually comes out, as you know, better than that. But our view is not any different from anybody else's.
Mark Lowell Keim
Yes. Just to build on that, and a lot of this data is in the public domain at this point. On the effective benchmark rates in the advance notice and then risk score normalization, most folks are seeing across the entire market, the net of those at about 0, right? As Joe mentioned, we see a net of about a positive 50 bps. So we're a little bit better on the benchmark rate, and we're a little bit not so bad on the risk or normalization for some reasons I alluded to earlier. So we're seeing about a 50 bp benefit there. And obviously, the rest of STAR's impact and what ultimately everyone does with risk scores has yet to play out. But that's our initial point on the legacy book.
Scott J. Fidel
And then just to clarify, so the 50 bps, that's for the overall book, right? And then I would assume that directionally the legacy book probably better in the Bright book, a little worse than the legacy in that. Is that a fair assumption?
Mark Lowell Keim
We're still working our way through that. There will be a couple of things going on there. As I mentioned earlier, we're 6 weeks into owning it. We're working through those issues with the team there. There will also be a bunch of dynamics that happen this year. There are actually 2 entities there. One is community health plan and the other one brand-new day. There will be some issues between them on exactly how we balance the effects of all this between those 2 entities. So a little bit of work there and not ready to comment on that one.
Joseph Michael Zubretsky
But I would say that we're not anticipating in any analysis when completed on rates that would move us off of achieving the $1 accretion in the third full year of ownership. We're pretty confident in that trajectory.
Operator
This concludes the question-and-answer session and also concludes the conference call. Thank you for attending today's presentation. You may now disconnect.
