Magellan Health, Inc.
Q1 2020 Earnings Call Transcript

Published: 11 May 2020

[Operator:]

Welcome, and thank you for standing by for the First Quarter 2020 Earnings Call. At this time, all participants are in a listen only-mode. [Operator Instructions]. Today's conference is being recorded. [Operator Instructions].Now, I’ll turn the meeting over to Joe Bogdan. Sir, you may begin.

[Joe Bogdan:]

Good morning. And thank you for joining Magellan Health's first quarter 2020 earnings call. With me today are Magellan's CEO, Ken Fasola; and our CFO, Jon Rubin. The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion through June 10, 2020. The numbers to access the replay can be found in the earnings release.For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 11, 2020, and have not been updated subsequent to the initial earnings call.During our call, we will make forward-looking statements, including statements related to our 2020 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict, and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release this morning and our Form 10-K filed on February 28, 2020, as well as updated or supplemental risk factors on information security and cyber-security matters, and extraordinary events including the COVID-19 pandemic, including our Form 10-Q to be filed today.In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, adjusted net income, and adjusted EPS, which are defined in our SEC filings, and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs, and other operating expenses, and includes income from unconsolidated subsidiaries, but excludes segment profit from non-controlling interests held by other parties, stock compensation expense, special charges or benefits, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions.Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013, to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles.Please refer to the tables included in this morning's press release, which is available on our website, for a reconciliation of GAAP financial measures to the corresponding non-GAAP financial measures.I will now turn the call over to our CEO, Ken Fasola. Ken?

[Ken Fasola:]

Thank you, Joe, and good morning, everyone. We have a lot to cover today. So I'll begin with Magellan’s response to COVID-19 followed by an update on our work to refine our strategy, including revisiting the four priorities I outlined in our February call. We'll provide highlights of our results for the first quarter, including our perspectives on the impact of COVID-19 as we look forward.Magellan has a vital, ongoing and shared responsibility in protecting the mental and physical health of millions of people. In fact, the coronavirus pandemic has made abundantly clear what we already knew; the behavioral health of individuals remains a critical societal need, presenting challenges for health plans, employers and government payers, a challenge and opportunity Magellan is well positioned to address.Serving our members and our communities through the COVID-19 pandemic is a top priority. We've taken proactive steps, first to protect our associates, and then to address the needs of our members, our provider partners, and our communities in response to the pandemic. More than 90% of our 10,000 associates are working from home within the first week of the emergency. We focused on maintaining and strengthening our provider and service delivery systems, as well as ensuring that our members, especially the most vulnerable among them, have the necessary support and access to care. We facilitated and when necessary pushed to expand telehealth services. We've seen a shift towards telehealth visits in late-March and April, particularly in behavioral health, where telehealth utilization has increased over 20-fold, represented almost half of all behavioral outpatient services in April.We believe that the general acceptance of telehealth by both providers and patients is a significant and lasting game changer because its use improves access, efficiency and productivity. We increased the amount we pay providers for the same -- to be the same for these visits as in-person visits in cases where we've not already done so. And we made advance payments available to help ensure that these clinicians or partners had improved liquidity.Beyond our care coordinators and pharmacists on the frontlines in the fight against COVID-19, a number of our clinicians volunteered their time with our support. Magellan Health has also opened a free hotline staffed by our certified licensed mental health clinicians to serve our nation's first responders and healthcare workers to help address their mental and emotional wellbeing at this difficult time.To further support our communities, we've also made donations of cash, personal hygiene products and protective equipment to food banks and community partners as they serve those in need. I'm extraordinarily proud of the resilience and spirit of Magellan’s associates who have risen to meet the unprecedented healthcare challenge we're facing with COVID-19. Magellan is a company with a noble mission and our associates live that mission every single day as they bring their passion and commitment to those we serve through their work and their volunteer efforts. I thank each of our associates for their tremendous commitment.As our strategy is taking shape, let me provide you with a vision of where we're headed. Today, we're the largest independent company providing behavioral health, specialty health and pharmacy benefits to health plans, employers and individuals. What I've seen over my now six months, strengthens my convictions and increases my resolve. Together with Jim Murray, Jon Rubin and our leadership team, I'm excited about the growth prospects for Magellan moving forward.We believe we can significantly improve outcomes and lower total medical costs for our customers and their members through a proprietary differentiated model addressing the specific needs of complex, high cost populations. Key aspects of our go forward strategy will include sustaining and strengthening our leading carve-out services, while also evolving those into a new capability and integrated whole person approach, leveraging our behavioral, pharmacy and clinical strength; then creating an integrated value proposition targeted at complex populations, supported by proprietary Magellan offerings; architecting new solutions to address major payer challenges such as oncology care and opioid management and delivering a compelling pharmacy strategy, highlighting Magellan Rx's position as the premier independent, full service PBM with superior clinical distinction and industry-leading specialty and medical pharmacy solutions.Magellan has a legacy of performance in meeting customer needs in behavioral health, specialty health and pharmacy. We intend to deploy capital to develop, strengthen or acquire capabilities that will enhance our unique value to customers in addressing the specific needs of complex high cost populations.In February, I noted that we were launching a comprehensive portfolio analysis of all of Magellan’s businesses, evaluate our value proposition and growth potential. While we were conducting this review, we received inbound interest on our Magellan Complete Care portfolio. We accelerated our review and made the decision to concentrate our focus on serving payers. We thus decided to sell the Magellan Complete Care business at an attractive purchase price that reflects the value we built in MCC. This sale tightens our focus, strengthens our balance sheet and creates a new multi-faceted strategic relationship with Molina Healthcare, a Fortune 500 company with a strong reputation for serving states and their beneficiaries’ healthcare needs.Let me summarize the key aspects of the transaction. On April 30th, we announced the sale of Magellan Complete Care to Molina Healthcare for $850 million in cash. We estimate taxes and fees associated with the transaction to be between $80 million and $85 million, which translates to net proceeds in excess of $30 a share. Over and above this, Magellan will receive an amount equal to any excess capital above regulatory requirements at Magellan Complete Care subsidiaries at closing. At March 31, 2020, this excess capital was $94 million.Importantly, Molina has entered into multiple long-term contractual agreements with Magellan, including purchasing new medical pharmacy and musculoskeletal management services for over 3 million Molina members, as well as retaining Magellan for behavioral health, radiology and musculoskeletal management services in certain MCC markets. I'd also note that Magellan Rx management will continue the existing pharmacy benefit relationships within MCC.Furthermore, Molina and Magellan have also agreed to develop an innovative integrated behavioral health pilot, leveraging Magellan's learnings and experience in Virginia. The purpose of the pilot is improving quality and lower total medical costs through best practice model using data, technology and care coordination processes. After demonstrating success in Virginia, the intent is to expand and adapt this model to other Molina markets. It will then become the foundation for Magellan offerings for the broader market. This is a good example of the innovation that will enable our strategic shift to an integrated model.Our portfolio analysis also included a review of our pharmacy Part D business. We entered the PDP market in 2016 to demonstrate competency in Medicare Part D. This was a critical component to building a full service PBM that can effectively compete for multi-line health plan and employer PBM business. After five years in the PDP business, we’ve successfully built that expertise. The time is now appropriate to exit the individual market at the end of 2020 and fully dedicate Magellan Rx’s Medicare team to focus on continued growth across our health plan and employer PBM business.Let me turn now to an update on our near-term priorities, which I shared with you in February. First, deliver on our existing commitments. Second, lower our operating costs. Third, strengthen our capabilities through innovation. And fourth, improve our ability to capitalize on growth opportunities.With respect to delivering on our commitments, let me share some highlights of our strong first quarter results.For the first quarter of 2020, Magellan reported revenue of $1.8 billion and segment profit of $74.8 million, while revenue was largely level with the prior year's first quarter. Segment profit increased by over 60%, given our improved operational execution, net favorable prior year development, and lower utilization in some areas, including the early impact of COVID-19 in the last few weeks of March. Our strong first quarter results reflect solid fundamentals across the company. Looking ahead for the balance of 2020, our industry is facing significant uncertainty about COVID-19’s impact on our businesses. While we cannot predict with accuracy the impact COVID-19 will have on our business, we are maintaining our full year 2020 guidance. Jon will provide additional details on both the actual first quarter results and the 2020 forecast considerations later in the call.Next, let me share a progress update on our transformation initiative, which we expect will enhance our customer experience by lowering our operating costs.It's early, but I'm pleased to report that the pace of anticipated savings is meeting our expectations. We're making progress in offsetting our investments in 2020 and on creating a path to meeting net segment profit improvement of over $75 million by 2022. Current focus areas with the greatest traction today include operational process improvements, including automation and self-service direction, outsourcing of non-core activities, vendor contract renegotiations, and claims payment integrity. We do not expect the divestiture of MCC to have a material impact on the $75 million of earnings benefit targeted in 2022.Our third near-term priority is innovation. We've established an innovation lab focused on consumer health, where we'll facilitate real world testing of solutions with key health companies that are part of our health ecosystem, and invest in early stage innovators with practical cutting edge ideas. We've recruited an excellent team and are seeding the lab with experts in data analytics, medical economics, corporate development and a variety of clinical disciplines.I formed a Clinical Leadership Committee that spans the enterprise. Magellan is a pioneer with a rich history of clinical distinction and academic focus and innovative solutions in the care of complex populations. The focus on clinical innovation has energized our company, and will further accelerate the pivot anchoring our strategy.Finally, Magellan is committed to a culture of growth and performance. Honoring and executing our commitments, optimizing our cost structure and delivering solutions anchored in innovation, data analytics, and clinical insight will set the table for success across the business development continuum. We're rebuilding our growth engine by establishing discipline, enterprise, go-to-market standards across strategy development, product innovation, market positioning and sales execution.We're adding senior sales leaders with proven C-suite selling skills and clinicians experienced in business development. Growth at Magellan centers around our ability, not only to share an enterprise story but also to execute a longitudinal member experience across all Magellan platforms. Our initial focus has been on immediate cross-selling opportunities within our existing customers and expanding our distribution by investing in significantly strengthening our sales capabilities enterprise-wide.As we continue to evolve to -- and integrate our product, marketing and sales strategies, we're confident the investment in our enterprise go-to-market platform will yield a differentiated portfolio and our unique integrated story.With that, I'll turn the call over to Jon to provide more detail on our results for the quarter.

[Jon Rubin:]

Thanks very much, Ken. And good morning, everyone. For the quarter, revenue was $1.8 billion, an increase of 3% over the same period in 2019, due to growth within Magellan Complete Care. Net income was $18.3 million and EPS was $0.73. This compares to net income and EPS of $0.4 million and $0.02 a share respectively for the first quarter of 2019.Segment profit was $74.8 million for the first quarter, including approximately $12 million of favorable out-of-period items, primarily related to MCC reserve development. As Ken suggested, this represents strong growth compared to $45.6 million in the prior year quarter. As a result, first quarter adjusted net income was $28.6 million, an increase of $19 million from the first quarter of 2019 and adjusted EPS was $1.15.Now, let me share the detailed operating results for the quarter. Healthcare business results were strong for both our MCC and behavioral and specialty health care businesses, with segment profit for the first quarter of 2020 of $62.1 million. Segment profit increased $17.1 million versus the first quarter of 2019, driven by favorable prior period development and utilization results, particularly in MCC of Virginia and New York, as well as the reinstatement of the Health Insurer Fee. As it relates to COVID-19, we've seen some reduced levels of medical utilization since the last two weeks of March, due to a reduction in elective services across our healthcare businesses. This reduction has more than offset the direct medical costs associated with the coronavirus and early pharmacy refills with our health plans.As I'll discuss in a few minutes, we expect to see the full impact of this favorability in our second quarter results with the magnitude, as well as the timing of any potential utilization increase later in the year remaining uncertain.Now turning to Pharmacy Management, we reported segment profit of $20.9 million for the quarter ended March 31, 2020, which was an increase of $12.6 million from the first quarter of 2019. This year-over-year increase was primarily driven by improved gross margins in the PBM business, as well as strong performance within our specialty drug management portfolio. We saw a slight uptick in PBM script volume towards the latter part of March as we made early refills available to patients. The script volumes have since returned to normal levels.Regarding other financial results, corporate costs inclusive of eliminations but excluding stock compensation expense, totaled $8.2 million, compared to $7.7 million in the prior year's quarter. Total direct service and operating expenses prior to stock compensation expense and changes in fair value of contingent consideration were 15.7% of revenue in the current quarter, compared to 15.1% in the prior year's quarter. This increase was largely due to the reinstatement of the Health Insurer Fee.Stock compensation expense for the quarter ended March 31, 2020, was $6.1 million, a decrease of $3.6 million from the prior year's quarter. This change was primarily related to the timing of vesting of certain equity awards. The effective income tax rate for the quarter ended March 31, 2020 was 47.6% compared to 55.6% for the prior year's quarter. The tax rate for the first quarter of 2020 was higher than the federal and state statutory rates, primarily due to the non-deductibility of the Health Insurer Fee, while the rate in 2019 was higher than the statutory rate, primarily due to book to tax differences and stock compensation expense. We anticipate the 2020 full year tax rate will be approximately 43%.Magellan's liquidity position is strong. Our cash flow from operations for the quarter ended March 31, 2020 was $31.7 million. As of March 31, 2020, the company's unrestricted cash and investments totaled $281.2 million, an increase of $85.8 million from the balance of December 31, 2019. Approximately $123 million of the unrestricted cash and investments at March 31, 2020 is related to excess capital and undistributed earnings held at regulated entities, including $94 million at MCC entities. Thus, we had over $150 million in unrestricted cash at the parent as of March 31, 2020.Finally, we have $320 million in untapped revolver capacity, and a debt-to-total capital ratio of approximately 34% at quarter end.Now, let me address our 2020 guidance. In addressing our full year guidance, we're benefiting from a strong first quarter and expected second quarter favorability associated with lower utilization of discretionary healthcare services. However, the full impact of COVID-19 remains uncertain over the balance of the year, which increases the level of potential variability in results. As such, and as Ken noted previously, we're maintaining our full year 2020 guidance.Prior to reporting MCC on a discontinued operations basis, this guidance includes

[Ken Fasola:]

Thank you, Jon. For the balance of 2020, we will be focused on delivering on our promises in these unprecedented times. In MCC, this means continued delivery of our high quality Medicaid services while executing against our cost-of-care initiatives, as we work in conjunction with Molina to obtain the regulatory approvals necessary to transition this business. This divestiture will provide Magellan with additional financial flexibility to invest in our remaining businesses.For our behavioral health operations, we're working in earnest to enhance our services by developing or acquiring capabilities for self-service, telemedicine, and digital and primary care collaboration solutions that will allow for more effective, more efficient member and provider experiences. According to a 2017 Milliman study, the medical cost for people with comorbid behavioral and physical health conditions is over $400 billion in the United States. Magellan is uniquely qualified to help improve the quality of care these people receive, while recapturing some of the spend for payers.In specialty health, we see opportunities to strengthen and deliver our services more efficiently and to expand our suite of management solutions to cover additional high cost, high trend areas of healthcare spend.Finally, within pharmacy, we're uniquely positioned to capitalize on emerging trends in the marketplace that create compelling opportunities for growth, both organically and through acquisitions. As new scientific advances emerge in the pharmaceutical management, total drug costs continue to accelerate, and the clinical management of drug therapy is becoming increasingly complex. With rapid growth across specialty drug categories, including novel cell and gene therapies, our proven clinical programs, and differentiated specialty and medical pharmacy capabilities enable Magellan Rx to deliver meaningful and disruptive solutions that address these emerging market needs. The marketplace is in need of an independent alternative partner for comprehensive pharmacy services, our intent is to fill this need.Our team is excited about our vision to become the leading independent payer services company offering behavioral health, specialty health and pharmacy management solutions for high cost chronic populations on a carve-out or integrated basis. I look forward to providing you with updates on these initiatives as the year progresses.I'll now turn the call back over to the operator for questions.

[Operator:]

And thank you. Our first question is from Scott Fidel with Stephens. Your line is open.

[Scott Fidel:]

First question, just interested in some of the impacts from C-19, a little more detail. And maybe starting first with utilization just in the behavioral and specialty segment. Interested if you can maybe give us any color if that’s possible just in terms of what you've seen specifically on utilization trends in terms -- in April, any insight there? And then also just, I remember in the back half of last year, you guys did see some spikes in behavioral utilization. I’m assuming that COVID probably heads it up, working as a corrective action plan around muting out that uptick in utilization. But just interested in clarifying exactly whether you saw that occur?

[Jon Rubin:]

Hey, Scott. It's Jon. Let me start and Ken can add color afterwards. First, in terms of what we're seeing on COVID-19, really it is still very early. And as I mentioned in my comments, the change or the impact in utilization, we really saw at the very tail end of the month of March and obviously now we've had the benefit of the majority of April. So let me talk about some of the utilization trends we're seeing, but again, most of it will have impact in second quarter. First, we've seen lower utilization of discretionary services. So, if you think about our book of business, that really comes through both in our behavioral and specialty business, particularly in the specialty healthcare business, where you have more discretionary services across a variety of different specialties.On the behavioral side to a lesser extent because what we're seeing in behavioral is some reduction on inpatient care, but on the outpatient care, really is shifting from in-office utilization to telehealth as we've ramped up our telehealth capabilities. And then, on the pharmacy side, we saw actually in early spike in volume towards the end of March as people were getting early fills. And as I mentioned in my comments, that settled down more to normal levels. So, at this point, again, there's a lot of uncertainty in terms of what will play out. What we're assuming though is continued lower discretionary services in second quarter, again, primarily on the specialty side in areas like diagnostic radiology. On the behavioral MCC side, it will be much more modest in terms of utilization. And -- but we are assuming at this point that we will see an uptick in utilization in some of the same areas where there might be pent up demand in the second half of 2020. That obviously still remains to be seen but that's really what's in our assumptions.Relative to your question on behavioral, if you remember, last year, we saw an increase of behavioral health utilization really starting in second quarter of the year, in -- really across the book in a number of different areas. We did reprice our business in 2020. Behavioral utilization has settled down in first quarter and we did get the business priced appropriately. So, this year, I would say things have played out -- prior to the impact of COVID played out as expected, as we've headed into the year.

[Scott Fidel:]

And then a follow-up question just on COVID-19 impacts, and Ken, maybe just one for you just on how -- what you're seeing in terms of the impact from the crisis just on the sale cycles for specialty and behavioral and in pharmacy? And then also, I know that a big focus of yours is just on interacting a lot with some of the payer organizations around, working on coming up with new, innovative solutions to work with them on around behavioral and specialty. And just interested how the dialogue I guess is progressing at this point, just given probably a lot of other distractions and urgent dynamics out there around how everybody is dealing with the COVID right now.

[Ken Fasola:]

Yes, thanks, Scott, and good morning. With respect to -- we'll start with the first part of that and then move to the second with the pharmacy business. We have seen a little bit of slow down in the pipeline, but also the persistency of our business is likely to hang in there, if not improve a little bit for the same reasons, right? So the market has slowed down a little bit as a result of that. It's not keeping our staff from creating conversations and working to protect and maintain existing relationships but I think both -- it represents both headwinds and tailwinds.On the specialty and behavioral health business, the conversations are increasingly moving towards the lingering impacts of COVID-19 on populations, particularly with respect to the -- and it's -- this has been relatively well documented the likely increase in demand for mental health services as a result of both the actual mental health impacts of the virus itself on first responders, caregivers, but also the impact of the financial stress that people are under is contributing to mental health as well. And we know that the combination and impact of behavioral health on physical health is going to become an increasingly important challenge for payers. And I think this is an area where our pivot is going to serve us incredibly well as we move to take product ideation through innovation to enhance capabilities around integrated care, I think are going to create a really good story for us as we strengthen our C-suite selling skills and reintroduce Magellan at a different level.

[Scott Fidel:]

And then just last one from me. Jon, do you have, what the MCC contribution was to segment profit just in the first quarter? I didn’t see that in the release, so just want to see if you have that?

[Joe Bogdan:]

Yes, I'll give you sort of ballpark numbers, and remember, again, we had material prior period development in the numbers. Almost all of that was MCC. So we talked about $12 million favorable out-of-period. Including the benefit of that out-of-period, MCC segment profit, call it, in the mid 20s for first quarter, just to give you a sense. And again that includes the benefit of the prior period development.

[Operator:]

Our next question comes from Kevin Fischbeck with Bank of America.

[Kevin Fischbeck:]

I was wondering if you could help us kind of think about what the growth profile of core Magellan is going to look like as we enter 2021, '22 and beyond? I mean what -- actually the prior management team kind of got into MCC in pharmacy because they didn't really view the specialty and behavioral businesses as growing as quickly. So, I mean, you obviously see a lot of opportunity now, just trying to get a sense if you can give us some kind of guidepost for what core Magellan should look like going forward?

[Ken Fasola:]

Well, I'll start and Jon could certainly jump in and I want to speak generally. Obviously, we are making a relatively strategic pivot in favor of our sovereign skills around behavioral and complex care management, particularly with respect to integrating those capabilities more broadly across Magellan. Bringing in our specialty pharmacy experiences, we look at new areas of opportunity. And we mentioned in the call, oncology and opioid is a great example, just two areas. But we think that the opportunity to become a -- I would use the term partner or carve-in as opposed to carve-out, where we have a seat at the table kind of special teams coach and integrated -- in an integrated approach to managing the whole person, which we believe has the potential to be really, really powerful for us. And the combination of behavioral and physical solutions together I think represent a giant opportunity, I think we quoted somewhere in the neighborhood of over $400 billion, that's probably light. I know that was a Milliman study from 2017. But the opportunity to go at behavioral and mental health impacts and comorbid with members who have multiple challenges, we think really represents a unique sweet spot for Magellan to power forward. So without putting any math around that right now, I would tell you that the innovation lab and the work we're doing in the transformation office to create a cost structure that allow us to price more competitively, I think there's going to -- those -- the combination of those things are going to be really powerful. So, we've lost a little ground relative to our competitive position. And I think the great work that Jim Murray and his team are on in the transformation office, which is on track, despite COVID, really is going to build some nice momentum as we position the company forward.We also -- we had pivoted our sales expertise away from that core business as well. And we weren't having the kind of strategic conversations that we're having now. And I can tell you, even in the conversations we had with those who were also suitors in the MCC conversation, that the opportunities in and around behavioral health are not insignificant. And so I'm not sure anybody is doing that really well yet. And I think when you look at the continuum of care, from mild to moderate through to more complex, carrying that the whole way through puts Magellan in a really strong position. So I think the things you'll see us invest in moving forward, strengthen our capabilities across that continuum but recognize that for over 25 years Magellan has done the hard stuff really, really well and we're going to continue to lever that.

[Kevin Fischbeck:]

I guess just to clarify something you said in there, the $75 million kind of cost cutting initiative. Are you thinking about that as kind of additive to segment profit? Are you thinking about that as if -- kind of in your back pocket and you think about pricing and delivering the more affordable product into market?

[Ken Fasola:]

I additive to segment profit -- and Jon, you’re welcome to add any additional color that you want.

[Jon Rubin:]

Yes, no, that's correct, Kevin. The only other note I’d make to Ken's earlier comments are in addition to what Ken mentioned in terms of our enhancements we’re making to our behavioral and specialty business. Our pharmacy business as well has been a strong performer. It’s performed well in the quarter. We're continuing to achieve the growth. We talked about the win in California on our last call in the pharmacy benefit administration contract. We're starting to get increasing trust from other states in doing the same, carving out of -- pharmacy out of the -- of health plans. And we're continuing to also continue to have strong results, both growth and financially on the specialty pharmacy side. So I just wanted to supplement Ken’s comments on the behavioral specialty side to note the opportunities in pharmacy are real and substantial as we go forward.

[Kevin Fischbeck:]

And then, how do you think about the ability to grow this business during a recession. Obviously, if you have MCC, you'd have kind of a hedge in there. But when you think about the opportunity, it sounds like a lot of is kind of more focused to either commercial employers or other health plans that might be commercially focused or is it more diverse as far as the end target?

[Ken Fasola:]

Yes, I'll start and again Jon can jump in. I actually think that there's a great opportunity for us that we’re -- while we're divesting MCC, we're not getting out of the Medicaid business. So Medicaid and Medicare, where Jim and I actually have a great deal of not only experience, but interest, I think are two areas that represent great upside for us as we think about, again, this management of complex care and a more integrated model. And I think that's going to be a big part of our business going forward. Jon, anything you'd add to that?

[Jon Rubin:]

No. I would just reinforce that, like Kevin in saying that, even with our existing behavioral specialty business, in behavioral and specialty, we've got significant focus in books of business on the Medicaid and on the exchanges. And in pharmacy as well, as I talked about we’re the largest pharmacy benefit administrator for state Medicaid programs. So, with the outlook for growing Medicaid both through the current economic environment and beyond, should serve us well in terms of both our existing books and our focus as we look ahead.

[Kevin Fischbeck:]

And last one for now, the Part D business exit, is there any statutory capital that we should think about as freeing up when you exit that business?

[Jon Rubin:]

Yes, there is. So we can reconcile with you offline, but there's actually a number of capital items relative to Part D. So there is some statutory capital and that'll be freed up. Also, there's -- there are significant receivables, both receivables from CMS relative to reinsurance that gets trued up 12 months post -- for almost 12 months post the end of the year, it's usually October the following year. And then we also have a lag in terms of rebate receivables from our rebate aggregator. So, if sum that up, it's actually well over $100 million in terms of capital that's tied up in those pieces. We can offline kind of reconcile what some of those pieces are, but that at least gives you some sense for it.

[Operator:]

Our next question is from Dave Styblo with Jefferies.

[Dave Styblo:]

I was hoping you guys could provide maybe some refreshed views on your $350 million to $400 million of out-year segment profit. I think you certainly reiterated the fact that you think you can still achieve at least $35 million from transformation savings. Curious why maybe some of that doesn't go away with Magellan Complete Care being divested? And then separate from that, are there other moving parts that you could help us understand the impact of specifically how much was MCC contributing to that $350 million to $400 million? And it sounds like with the Part D, maybe there's another $10 million of savings in there. But just curious if there's any other parts to those as well as quantifying the MCC contribution?

[Jon Rubin:]

Yes. So, let me start with that. First, in terms of the transformation benefits, the real focus of our transformation efforts was really on behavioral specialty and pharmacy, as well as some of the corporate areas and essentially very little because we recently built MCC and have largely been separately focusing on that profitability improvement plan, which was prior to launching transformation, we really didn't have much at all built into our transformation plan related to MCC. So that's really why that $75 million gets maintained.What I would think about relative to 2021 and beyond and we've talked about it, I think many of these pieces before are, MCC, this year -- and again, it does include some of the favorable development we reported first quarter, but we expect around $80 million of segment profit. And we would have gotten that to kind of not fully competitive but to decent margins this year. So, while you see some continued growth of that, the growth going forward would be not more normal versus the big step functions we've seen over the last couple of years. We talked also about the fact that we have startup costs this year on the Medi-Cal program. We'll have margins next year. We talked about the $75 million to $80 million of revenue with mid to high teens or higher margins on a contribution basis. The transformation benefits, $30 million in '21, $75 million in '22 and beyond. And then the -- some of the newer items we talked about here are the exit of Part D which we believe has an ultimate gain of around $10 million. And obviously the management contracts with Molina which we're very pleased to have a great company like Molina as a partner going forward. We expect initially about $125 million to $150 million of revenue with some opportunity for growth as we go forward.So, those are some of the pieces of how we think about things over the next year or so. But as Ken mentioned, as we really enhance our current capabilities and behavioral specialty kind of continue the investments and growth on the pharmacy side, we think we can have good growth in the core businesses as well.

[Ken Fasola:]

Yes, Dave, I would just add to what Jon said, was -- I think was a great and comprehensive answer. Just back to the transformation office, again, the early tractions around process improvement, IT and outsourcing. And on the process improvement side, I’ like to say, we’ve a lot of -- we wanted to help clinicians work at the top of their licenses. We have a lot of $50 people doing $5 work, because we had an automated and brought efficiencies to those processes, and I think you're going to see a lot of pickup in there early, which is also going to strengthen the quality and the caliber of the relationship we enjoy with these partners, enabling them to work more efficient, both those that are employed here and those that are an important part of our growing network.

[Dave Styblo:]

And then Ken maybe from your seat, you're going to have close to $1 billion of proceeds from the divestiture. Curious about the use of that cash. I know some of that, it sounds like it's going to go to take down some debt, so your leverage maybe doesn't change. And then it sounds like there would be some investments and to the extent that you'd find any acquisition opportunities out there, is that something that's on your radar? And what is sort of the timeline that you'd be putting on the cash in terms of, it not being used such that it would go towards buybacks?

[Ken Fasola:]

Yes, the -- obviously first and foremost, we want to make sure we stay focused and move through the required regulatory processes to get this closed in efficient time. And so beyond that, at the same time, the work that's underway in the innovation lab and around looking at the solutions required to further advance our business and the capabilities that are necessary to deliver those. We're going to be disciplined, as we think about how and when we move forward. And so the goal is to enhance our value proposition to create and drive value for our shareholders. There'll be a lot of focus around, as I said before -- when we talk about an integrated model it hinges on our ability to get access to data, to interpret that data to analyze it, bring clinical insight, and then tie it to the operational rigor that is working in parallel. There'll be a byproduct of the work we're doing in the transformation office, allow us to bring these new and reinvigorated solutions to the market at a very competitive price. And I think that'll enhance and build momentum as we think about business development going forward.So, we're going to focus on our core disciplines. We're going to be thoughtful and deliberate. And so the money is not going to burn a hole in anybody's pocket. It's going to be used efficiently and effectively. You mentioned the -- obviously, debt is an area you've highlighted first. And then if share repurchase makes sense for our Board and our investors, we'll certainly consider that. But I like the early work that's underway in the innovation lab to identify enabling capabilities to drive deeper solutions around complex care management. And I think as the quarters progress and we have an opportunity to update you, I think you'll be pleased with the direction we're taking the company. And everybody is talking about telehealth, as one example, but the fact of the matter is, I said game changer in my early -- or prepared remarks. But the nature of the way healthcare is delivered particularly in and around behavioral health is -- has and will continue to evolve by virtue of COVID-19. And we're going to leverage that. These are things that we had already been doing that are now building momentum and I think will not only create more opportunities for improved productivity and efficiency, but also help drive down costs and broaden access.

[Dave Styblo:]

Okay, thanks. And then just lastly for me just to get a little more color on what the pilot with Molina looks like in Virginia? How -- what can you tell us about that, that pilot? How is that financially structured, are you sharing risk there? Is that a PMPM model? And what are the milestones to look at from that before perhaps something larger could happen? Is it sort of a 6-month evaluation, a year evaluation before you two would look at each other and say hey this is working, let's expand the contract. And is that the only pilot that you have going on? I know you've been in conversations with other players to advance those but curious where you're at maybe with other MCOs out there?

[Ken Fasola:]

Well, whether it’s the word pilot or whether we're working in collaboration or partnership, we are talking to other payers that taking this concept of a more integrated model, leveraging the impact or experience around helping to manage the impact of behavioral mental health on physical health, I've been really, really impressed and pleased with the job our Virginia team has done in advancing our collective efforts here. And I think it was a big part of -- and we talked about pilot, it's really working to bring answers to the very specific questions you asked about. Okay, so what does this look like as we think about our relationship with Molina going forward? And then it’s the basis for which we will take this out more broadly into the market. So, a lot of the questions you asked are still among those that we will be resolving as we move forward. That's why the word pilot that -- we're benefiting from the great efforts of our team in this area already in Virginia. So now it's talking about how do you take that and evolve that in a way that we can expand it more rapidly.I don't know -- the key elements obviously are looking at all the data and not just segmented data around behavioral health. So data aggregation, having the primary care doctor at the center of that relationship and a focus on population health, with a technology platform that will enable us to make -- ensure that we and our provider partners are able to work efficiently. And all that will benefit from earlier identification, so that we can get ahead of these potential -- those situations that have potential to become higher cost by virtue of not catching them quick enough.So, those are just some of the headlines I think about what that relationship is ultimately going to look like. Again, it's a pilot. In terms of nature of the way we're going to move it forward with Molina but become core in terms of how we're thinking about existing conversations underway with current and future customers.

[Jon Rubin:]

And Dave, one other quick thing on this is, what is another thing that's different about this that supports what Ken described in terms of the best practice model, with data technology and care coordination designed to lower total medical costs, is that we're actually structuring this as a gain share, based not just on the behavioral health savings, but on the total medical cost savings produced with members of behavioral health needs. So, that's part of what’s unique about the -- what excites us and we think presents a potential opportunity not just for expansion within Molina if we do a -- that’s a great job as we expect to, but more broadly in the market.

[Operator:]

And at this time, I see no further questions.

[Ken Fasola:]

All right. Well, listen, I want to thank you for your participation on today's call. We look forward to speaking with you in July, when we'll update you on our progress both on our strategic plan and our second quarter results. Stay safe.

[Operator:]

And thank you. This does conclude today's conference call. You may disconnect your lines. Thank you for your participation.