Molina Healthcare, Inc.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good day, and welcome to the Molina Healthcare Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ryan Kubota, AVP of Investor Relations. Please, go ahead.

[Ryan Kubota:]

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2018. The company issued its earnings release reporting third quarter 2018 results last night after the market closed, and this release is now posted for viewing on the company website. On the call with me today are Joe Zubretsky, our President and Chief Executive Officer; and Tom Tran, our Chief Financial Officer. After the completion of our prepared remarks, we'll open the call to take your questions. If you have multiple questions, we ask that you get back into the queue so that others can have the opportunity to ask their questions. Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K Annual Report, our Form 10-Q Quarterly Reports, and our Form 8-K Current Reports. These reports can be accessed under the Investor Relations tab of our company website, or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of November 1, 2018, and we disclaim any obligation to update such statements, except as required by the securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at our company's website, molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky.

[Joseph M. Zubretsky:]

Thank you, Ryan, and thank you all for joining us this morning. Last night, we reported third quarter earnings of $2.90 per diluted share and $7.60 per diluted share for the nine months ending September 30, 2018. For the quarter, net non-run rate charges were $30 million or $0.35 per diluted share. These charges resulted primarily from a mandated retroactive adjustment for a minimum loss ratio floor and risk corridor on the 2016 California Medicaid Expansion business, partially offset by the gain on the sale of MMS. This adjustment is described in our earnings release. For the nine months ending September 30, 2018, net non-run rate benefits were $54 million or $0.59 per diluted share. Therefore, from a pure performance perspective, after considering these non-run rate items, we achieved fully diluted earnings per share of $3.25 for the third quarter and $7.01 for the nine months ending September 30, 2018. I also note that the quarter included $0.34 in tax benefits, mainly to adjust our year-to-date effective tax rate to a lower projected tax rate in recognition of our improved outlook for full year earnings. The nine month results however fully reflect our projected full year tax rate. We are very pleased with the continued improvement in the performance of our business, and our financial results reflect the significant progress we are making in executing our margin recovery and sustainability plan. Now, for a deeper look into the underlying operating leverage and metrics

[Thomas L. Tran:]

Thank you, Joe, and good morning. As described in our earnings release, we report third quarter's earnings per diluted share of $2.90 and adjusted earnings per diluted share of $2.97 excluding the amortization of intangible assets. These strong results were driven by the continue improvement of our day-to-day operational processes that affect medical costs and administrative expenses, favorable cost trends across most of our products, as well as our ongoing margin recovery initiatives. First, let me quickly highlight a few of the items that we call out in our earnings release, particularly as it relates to the $0.35 earning per diluted share of out-of-period non-run rate items. Regarding California, the state imposed a retroactive risk corridor for the state fiscal year ended June 30, 2017, which we noted last quarter as a potential exposure. The state formally present their contract amendment this quarter, which we then agreed to. As a result, we record in the quarter a $57 million pre-tax charge or $0.65 per diluted share. This charge has little impact on how we view the profitability of our California Medicaid business going forward. Excluding this charge, the California Medicaid Expansion product operated within an acceptable medical care ratio in the quarter. We recorded a $5 million benefit in the quarter for Marketplace cost-sharing reduction or CSR subsidies for 2017 days of service. This benefit relates to the reprocessing of claims data for CSR-eligible members and allow us to reduce our liability with CMS. We recorded a $37 million pre-tax gain on the sale of our MMS subsidiary, which we sold for approximately $230 million. We recorded $5 million of restructuring costs in the quarter primarily related to two items

[Operator:]

Thank you. Our first question comes from Justin Lake of Wolfe Research. Please go ahead.

[Justin Lake:]

Thanks. Good morning. Joe, thanks for the 2019 outlook. Maybe you can give us a little more color there in terms of just starting with the 2018 numbers. Can you talk about what you think a reasonable jump-off point for 2018 is versus the $8.80 to $9.00? Are there areas where you don't think the margins are sustainable, like potentially the 9% to 10% in the individual business?

[Joseph M. Zubretsky:]

Sure, Justin. When you cut through all the puts and takes of the quarter, it's a solid $3-quarter and a very solid $9-year, our guidance at $8.90 at the midpoint. The quality of earnings in 2018 is very strong, and we think that's a great jumping-off point for planning our trajectory into 2019. I cited the various factors that one always takes into consideration when forming a plan

[Justin Lake:]

That's helpful. And then just a follow-up there, maybe another way to come out of this is just net income margins. Clearly, relative to peers, they're now towards the higher end of the range. To grow off here with a shrinking – with a topline that – looks like it's going to be down next year given the membership losses before accelerating in 2020, where do you think the margins on a net income basis can kind of sustain relative to what you've kind of put out there at the Investor Day given you're already there?

[Joseph M. Zubretsky:]

We've challenged the operating team to aspire to be the best margin producers in our space. We're going to produce Medicaid margins just under 2.5% this year after tax, Medicare margins at nearly 3.5%, and Marketplace at nearly 9%, averaging to the 3.2% after-tax margin in our guidance. Clearly, the Marketplace has outperformed our expectation this year, without question. We managed it effectively. We've put 58 points of rate into the market last year. But this year, we only put low-single digit rate increases into the market because our rate actions no longer needed to be corrective. And so I think the question on the Marketplace isn't whether we can sustain the margins, is can we continue to hold on to the membership at the margin we produced this year. But it's a solid product, it's performing well. And we're just now learning how our prices are comparing to our competitors, and we'll have a better outlook for you when we report our fourth quarter.

[Justin Lake:]

Thanks.

[Operator:]

Our next question comes from Josh Raskin of Nephron Research. Please go ahead.

[Joshua Raskin:]

Hi, thanks. I guess similar sort of line of questioning around margin sustainability. And I guess the first thing is, I think you mentioned, Joe, long term you guys want to keep I think 2018 levels of profitability, and so – or I'm sorry, levels of earnings. And so should we think about on a lower top line this 2019 – does that mean 2019 steps back and then longer term we get back to the $9.00, or is that not what you were saying? And then the second question just in terms of the sustainability looking at the G&A side, you guys are running at about a 7% ratio. And so, I'm just curious, is that a sustainable number in light of the fact that you're going to be trying to reinvigorate the growth engine? I look at things like $24 million of CapEx through the first nine months, and it just feels like that can't be sustainable if you're really trying to grow the business. So, maybe just help with the couple of those questions. Thanks.

[Joseph M. Zubretsky:]

Sure. With respect to 2019 revenue, at our Investor Day, we laid out an outlook which suggested that the 2019 premium revenue will be about $15.6 billion. At that time, of course, we were accounting for the total loss of Florida and the total loss of the New Mexico Medicaid contracts. We've since recovered two regions in Florida $0.5 billion. And the Mississippi implementation will be an incremental $300 million to 2019. There are other growth opportunities in our existing portfolio. Our Marketplace business should grow next year with rates now filed in Utah and Wisconsin. As you know, we are very successful in our Washington reprocurement where we have fewer competitors and many other regions we won, and so our membership will grow. Ohio carved in the behavioral benefit halfway through this year, we'll get a full year of that next year. And we picked up 70,000 members mid-year in Illinois, and we'll get a full year effect of that in 2019. So, all-in-all, I think the premium revenue picture, without giving you a specific forecast, is a lot better than what we outlined at Investor Day. Your second question was about G&A, there is more G&A to harvest here. We've redeployed a lot of that G&A to the frontlines. Our net 600 head count reduction was net of resources we've put in the field to control medical cost. We will spend money on many of our transformational initiatives that will produce better baseline medical costs that will put a little pressure on it next year. But we are very determined to control our fixed cost and to leverage our fixed cost, and we think there's upside to the G&A ratio as well.

[Joshua Raskin:]

Got you. And I'm sorry, so just to clarify, my question on 2019 was with the understanding that premiums probably go from about $17.5 billion this year to maybe just under $17 billion next year now, obviously, a lot better than what you guys were talking about previously. My question was around the earnings. I think you'd made the comment that 2018 that long term you wanted to maintain that level of profits that you're seeing in 2018, that run rate $9.00 number. So, I was just asking more on the combination, if you've got a little bit lower top line on a year-over-year basis, did it sound like earnings per share in your mind for 2019 just directionally would have to take that step back on lower revenues and then eventually get back to where you were, what was that now what you were implying?

[Joseph M. Zubretsky:]

Again, without giving a specific forecast, even with the revenue declines next year, we are pretty committed to growing earnings per share and pre-tax earnings off of the 2018 base. Too early to give you the specific 2019 trajectory, but we are committed even in the phase of the revenue decline on the two lost contracts, we're committed to that long-term objective.

[Joshua Raskin:]

Got you. Got you. That's perfect. Thanks.

[Operator:]

Our next question comes from Ana Gupte of Leerink Partners. Please go ahead.

[Ana Gupte:]

Yes, hey. Thanks. Good morning. Yeah. So, again, following up on the margins with the 3-plus net margin that you have right now, do you expect there's still runway for expansion? And is that likely to come mostly from additional mix shifting to the exchanges which are really high margin? Or is there still core MLR improvement from claims editing, payment integrity, PBM, or anything else in Medicare/Medicaid? And then on G&A, are you still looking to drive more efficiency, or are we just looking at leverage at this point as you grow on the cost side anyways?

[Joseph M. Zubretsky:]

With respect to our margins, you specifically, Ana, mentioned Medicaid, with an 89.9% year-to-date MCR, there's still room for improvement in our core Medicaid business, maybe 100 basis points or 200 basis points long term in the MCR. And we're committed to improving our Medicaid margins. On the G&A side, yeah, there's more efficiency, there's fixed cost leverage as we grow, there is more efficiency, and we will redeploy some of that efficiency back to the frontline to make sure that we do not skimp on utilization control resources, which was part of the medical cost problem the company experienced. We also are going to invest in some of these transformational initiatives. It will cost money if we outsource or co-source our IT operation. We are spending more money on payment integrity routines and frontline utilization control. So, there will be a little bit of upward pressure on the G&A ratio as we improve our processes, but it should have a corresponding and exponential effect on our medical cost line.

[Ana Gupte:]

And then on the rate side, just finally, you have like a mid-60s exchange loss ratio, and you said only one region had the MLR floor issue. But are there any rate pressures that states may be bringing to your attention with such low loss ratios, you're probably not alone? And then on the tax reform side, might they start to put pressure on the rates in Medicaid, is that sustainable over the long run?

[Joseph M. Zubretsky:]

On the second question, the Medicaid rates, it's a very rational rate environment right now as we accept the Medicaid rates that are being offered to us. For the most part, the rates are actuarially sound. They always seem to come in a little bit lower than your absorbed medical cost trend, but they'd suspect you to find managed care savings, and we do that routinely. The tax reform conversation really isn't part of the rate dialogue with the states. On the Marketplace side, we're just now learning how our rates are going to stack up against our competitors. Our average rate increase for the Marketplace that we filed in 2018 for 2019 was 4%. These rate increases no longer need to be corrective, they just need to accurately reflect medical cost trend, the acuity of our population and the metallic benefit designs that we've put into the market. So we're pretty comfortable that our strategy in the Marketplace which was to hold on to our membership ranks and maximize contribution margin dollars for 2019 will hold, and that will position us well to file rates in 2019 that will allow us to grow into 2020.

[Ana Gupte:]

Thanks for the color. Appreciate it.

[Operator:]

Our next question comes from Sarah James of Piper Jaffray. Please go ahead.

[Sarah E. James:]

Thanks, and congratulations on the turnaround execution. You've previously talked about focusing on the turnaround before you turn back to top line growth acceleration. Given the progress is running ahead of schedule, how are you thinking about when it's right to explore top line opportunities again thinking specifically of non-incumbent RFPs, M&A, but also anything like organic M&A or fixed (41

[Joseph M. Zubretsky:]

Well, as we continue to focus on our margin recovery and sustainability efforts, as you suggested, there is still more to do. Some of those opportunities have yet to been harvested. And that is our primary focus here at the company. In the meantime, we also recognized that the sales cycle in this business is very long. And if you don't start building the engine today to grow, then you won't grow in 2019, 2020 and 2021. So we are hard at work rebuilding our RFP response unit, we're hard at work rebuilding our new contract business development unit. In the meantime, there are plenty of opportunities in our existing footprint, in our existing product line, to grow. If we can win more regions in Texas, when Texas finally announces the STAR+PLUS contract, if we won seven more regions and add our current market share, could be over $1 billion of incremental opportunity. Ohio strongly considering putting their ML – their long-term services and supports business into managed care. So there are plenty of opportunities in Marketplace. We believe that business could be twice the size it is today, and we can hold onto our margin, and have it be a very good allocation of capital in the portfolio at a very attractive margin. So before we go into new-new, I think there's plenty of opportunities in our existing footprint and our existing product line to grow. But in the meantime, we are rebuilding that greenfield business development operation so we can participate in RFPs in 2019, 2020 for the benefit of 2021.

[Sarah E. James:]

That's very helpful. And one more, you've previously talked about $0.50 upside not in guidance from capital deployment related to debt and converts, can you update us on how much of that has been achieved, and if the remainder is on the table for 2019, or if we should be thinking further out? Thanks.

[Joseph M. Zubretsky:]

We originally – I gave you a $0.50 estimate, and if you recall, I think at the time, our share price was about $85, which meant that the cash that we've used to buy in the converts was purchasing a lot more of the converts than it is at $125, $130. So, that estimate for the full year is now $0.30, but we've bought in a lot of those convertible notes. We've reduced our share count and the potential volatility in EPS as a result of it. But I think Tom said in his prepared remarks that the estimate for the year on our capital actions is about a $0.30 benefit for the entire year.

[Sarah E. James:]

Thank you.

[Operator:]

Our next question comes from Steve Tanal of Goldman Sachs. Please go ahead.

[Stephen Tanal:]

Good morning, guys. Thanks for the question. So, it seems like you're implying further improvement in the Medicaid loss ratio next year will offset likely lower margins in the Marketplace. And I guess if I think about that, is that now about the TANF population with where the Medicaid sort of loss ratio is running there? And does that become inevitably more dependent on rate updates to the extent that's sort of a lower acuity, lower utilizing population where there's maybe I guess in theory less you can do?

[Joseph M. Zubretsky:]

Well, we definitely think there's upside to our core Medicaid performance. Citing some facts here, TANF is still running over 89% year-to-date. ABD is running at 92% – just under 92%, which is respectable. But we actually think that we can more effectively manage the long-term support and services benefit that's embedded in the ABD product more effectively and we can improve on that 92% performance. And Expansion is doing well at 87%. We're still getting very, very effective rates. So, the business is performing well. I think that there is upside in our ABD line and upside in our TANF line. Just being more effective on the frontlines and the utilization controls, the rate environment if it continues to be stable and we can continue to effectively manage our medical cost baseline and trend, we all believe that there's upside to those performance statistics.

[Stephen Tanal:]

Okay, that's really helpful. And just sort of separately on the Marketplace business, kind of given the way minimum MLR rebates are assessed on a rolling three-year basis, is there anything you can tell us about the impact of I guess what would effectively be swapping 2018, obviously really strong year with 2015 less strong on sort of the outlook for earnings or margin next year?

[Joseph M. Zubretsky:]

Good observation. The old, poorly-performing years are rolling off, but we still have room. As you suggested, it's a three-year rolling average. We only triggered the minimum MLR in one state, that being New Mexico. And we fully considered our position as we filed our 2019 rates. So, no, we don't expect – the rates that we filed still do not imply a triggering of the minimum MLR in any of our other states. And if we did, we certainly would include it in any forecast we give you for 2019.

[Stephen Tanal:]

Awesome. Really helpful. Just lastly for me, just on Marketplace enrollment, the expectations for increased enrollment there, can you talk about any new markets or geographies you're entering, or should we think about that as more of a same-store end-market growth rate?

[Joseph M. Zubretsky:]

We're in seven. We re-filed – if you remember, we were in Utah and Wisconsin a year ago. We came out in 2018. We're going back in for 2019. We expect that Wisconsin and the positioning of our pricing and our product will provide some meaningful membership growth in Wisconsin. Utah, probably less so. But those are the two states. So, we'll be in nine states in 2019 and we're going to consider expanding our Marketplace footprint to be everywhere we're in Medicaid in 2020, which would be I think South Carolina, Illinois and New York.

[Stephen Tanal:]

Awesome. Very helpful. Thanks a lot, Joe.

[Operator:]

Our next question comes from Dave Windley of Jefferies. Please go ahead.

[David Howard Windley:]

Hi, good morning. Thanks for taking my questions. So, Joe, thinking about your $500 million plan, just a few sub-part questions here. One, has this year benefited from anything that would have been, say, outside of that plan? Two, you mentioned that you've harvested some of that plan, but still a lot of it to go. Would you care to put numbers on or maybe a proportion of the $500 million that you think you're already seeing flow through the P&L? And then, as you I guess in the extreme, and it's been asked a little bit already this morning, but in the full harvesting of the $500 million, Molina would seem to get to margin levels that would be very high relative to peers. And I guess I'd be curious your view on the difficulty or the reasonableness of pushing margins at Molina kind of to that spread against similar books of business.

[Joseph M. Zubretsky:]

Well, thanks for the question. And as a reminder, I always remind folks when we talk about these profit improvement plans that one, it first goes to fund any deficit you get in rates. Rates always seem to lag medical cost trend by 1 basis point here or there, and it first goes to fund that. If you remember the charts we showed you at Investor Day, we had this sort of contingency reserve sitting out there suggesting that somewhere you'll get a bad rate, somewhere the rate might be actuarially unsound. And you're always using your profit improvement issues to first offset that deficit before anything drops through. And as you suggest, you're absolutely correct; we would then look at our profit improvement plans and the margins that we're creating as a result of it to reinvest in growth. We would not push margins up as high as you suggest and sacrifice growth when the time comes. So, the $500 million could drop through to margins. And if we aspire to be the best margin producer in the industry, maybe we get there or maybe we'll reinvest it in top line growth. Your original question was about how much of the $500 million has fallen through to 2018. And without parsing it item by item, we definitely benefited this year by more effective utilization management. We definitely benefited this year by working the network harder, claim payment integrity certainly added some benefit this year to our medical cost line. And as we suggested, we continue to be more effective at SG&A control. I would say that the more technically challenging, the more operationally complex items that you saw on our chart at Investor Day still have yet to be harvested. So, bottom line, I would say a significant amount of the $500 million has yet to have been harvested and manifest in earnings. You'll be seeing over the next two to three months announcements from us on partnerships that we are creating with world-class vendors to partner up and take advantage of high acuity care management, maybe a re-contracting of our pharmacy. Clearly, we are anticipating co-sourcing or outsourcing our IT operation, you'll see some announcements for us on that front over the next two to three months.

[David Howard Windley:]

Helpful. Thank you.

[Operator:]

Our next question comes from Steven Valiquette of Barclays. Please go ahead.

[Steven Valiquette:]

Yeah, thanks, and good morning. I think most of the good questions have been addressed already. Just talk a little bit on that last one. Looking at your citing and throughout this year that some lower in-patient cost has also been part of the upside. So, I was curious kind of where you stand just because (51

[Joseph M. Zubretsky:]

Yeah, I think we'd managed our in-patient cost very effectively. We had some cost pressures in Washington that we previously announced. We had some behavioral in-patient pressures in New Mexico that we previously talked about. But for the most part

[Steven Valiquette:]

Yeah, okay. All right. Great, thanks.

[Operator:]

Our next question comes from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

[Kevin Mark Fischbeck:]

Great. Thanks. I just wanted to circle back with the G&A commentary because it seems like you're talking, on the one hand, about significant savings, but then also kind of making some investments that might push up G&A with the MLR benefit. And then I guess separately, I guess you're talking about maybe investing for growth in RFPs in the future, I wasn't sure if that was going to put upward pressure on G&A. I guess when you put that altogether, are you looking for G&A as a percentage of revenue to continue to trend down, or this is more about, hey, there's savings that we can reinvest elsewhere to drive improvement elsewhere, either top line or MLR?

[Joseph M. Zubretsky:]

Kevin, we're not prepared to give sort of a pinpoint forecast on our G&A ratio beyond 2018. But those are the headwinds and tailwinds to our G&A ratio. And I view the upward pressure – if we continue to invest in things that improve our medical cost baseline; I consider that to be -have an excellent return, and we would make that trade all day long. So, yes, there are going to be some upward pressures as we invest in some of these processes that will produce significant benefits to the company. Certainly, when you're chasing top line revenue, it costs money. But there is more fixed cost leverage and there's more efficiency to be gained in our operation. Those are the ups and downs, but we're just not prepared yet to give you a pinpoint SG&A ratio forecast beyond 2018. But it's there, we're managing it very effectively, and we definitely think there's a more effective way to deploy our SG&A dollars.

[Kevin Mark Fischbeck:]

Okay. And then, I guess, when we think about getting back to the growth side of the equation, Molina has been historically much better at protecting and expanding in markets where you already are located. I mean, what do you have to add capability-wise to be successful in entering new markets?

[Joseph M. Zubretsky:]

Well, we are currently sketching out the rebuilding of our business development engine. You need to have a ground game, you need to be in the states developing network relationships and governmental relationships before the procurement drops. And in the past two years, this company has not really invested in any of that given the issues it was going through. So, we're rebuilding all that under Pam Sedmak's leadership. We will develop a new business development engine that we think can compete with our rivals, and we can win our fair share. It's really not about the money, it's about really establishing yourself locally building the relationships with the Department of Health Services and the regulators and making sure you have great network relationships, so when the RFP drops, you're prepared to go.

[Kevin Mark Fischbeck:]

Okay.. Thanks.

[Operator:]

Our next question comes from Gary Taylor of JPMorgan. Please go ahead.

[Gary P. Taylor:]

Hi, good morning. Really amazing performance this year. So you've done a great job. Two questions about that performance. The first one, just going back to exchanges a little bit, can you help us bridge this comment that you're looking – you're either running or anticipating for the year 9% to 10% after-tax margins in the exchange business with the 58% year-to-date MLR. And I guess presuming some seasonal uptick in the 4Q, maybe you end the year closer to 70%, but still implies somewhere between a 20% and 30% G&A load to only get to a 9% to 10% after-tax margin, can you bridge that for us?

[Joseph M. Zubretsky:]

Go ahead, Tom (56

[Thomas L. Tran:]

Yeah. Your numbers are directionally in the right zone there. So in this business, the G&A tend to be high. You have commission, you have sales, marketing. So certainly, it's really in the upper-teen to as much as 20%. And our fourth quarter, you're right, the medical care ratio is going to be higher than what we experienced so far year-to-date. In the last earnings call, we talk a little bit about that, that they tend to be somewhat in the 80s, but we believe that given the trajectory that we are in today, it will be much less than that, more likely start with a seven as opposed to an eight in front.

[Gary P. Taylor:]

So, if we think about ultimately minimum MLRs at 80% in this business and G&A in upper-teens to 20%, I mean that would imply a longer-term after-tax margin significantly lower than the 9% to 10%. Is that how we should be thinking about this? Or do you think you bring G&A down over time to seeing something mid-single digit or better?

[Joseph M. Zubretsky:]

Our G&A loads in our product lines that aren't fully scaled are too high, and they can be scaled. If we double the size of the business, our SG&A would not double. There's fixed cost leverage there very, very clearly. The other thing, as a reminder, in the minimum MLR, there's all the add-backs, right? The number we produce for GAAP, there's all kinds of additions and subtractions to get to the number. So, if we're operating in the mid to high-60s with our G&A load of 15% to 20%, we're still floating below the minimum MLR in many of our placements (58

[Gary P. Taylor:]

One other question for you, Joe. Just thinking about your comment that there's still significant amount of the $500 million opportunity you identified that could flow through to earnings. When that takes place, if that does take place, it really seems that you're completely redefining the margin profile with still primarily Medicaid business and redefining that margin profile versus your peers and versus history. And we've always heard companies in this business talk about over caps at the state level, politics and visibility of margins, et cetera. So, in just six months here, you've redefined the profile to some degree and you suggest there's still further to go. How do we think about this historic concept that there were – these are pre-tax caps at the state level...

[Joseph M. Zubretsky:]

Sure.

[Gary P. Taylor:]

...and just sort of the visibility of the margins politically?

[Joseph M. Zubretsky:]

Oh, it's a very fair comment. And that's why every time I show a forecast or a projection, I always have what I call the rate yield decrement in the analysis because you're never sure that you're going to get fully paid for your medical cost trend. And I always say that over time profit improvement always ends up in rates somehow and somewhere. So, you're right. Over time just through the – the process of negotiating and accepting rates from states, profit improvement will end up in rates over time. That in itself puts a practical (01

[Gary P. Taylor:]

Great. Thank you.

[Operator:]

Our next question comes from Zack Sopcak of Morgan Stanley. Please go ahead.

[Zachary Sopcak:]

Hey, thank you for the call, and congrats on the quarter. I wanted to ask first about exiting the Pathways business. If you forget about the – I guess the loss you're taking on the sale of the business, was it a negative or positive earnings contributor in 2018? And should we think about that exit as a tailwind or a headwind going into 2019?

[Joseph M. Zubretsky:]

The exit is clearly a tailwind. It was running an EBITDA loss for the year. If you recall, the goodwill associated with that purchase was written off in the third quarter of 2017, which left a little bit of working capital and fixed assets in the business, and selling it for a nominal purchase price still produced a loss. Negative EBITDA contributor, and it would have required us a lot of future investment in order to fix the business, and there's always a private equity firm around who sees value in that, wants to put the hard work in, but it's just not core and was not a financial contributor.

[Zachary Sopcak:]

Got it. And just on that non-core comment, now that you've exited MMS and Pathways, is there anything else in your portfolio that you would consider non-core that you're still working on, or do you think it's where you wanted to be?

[Joseph M. Zubretsky:]

No, we like the portfolio, we like the geographic diversity, we like the product line depth and breadth. The portfolio right now is fine, and we're focused on managed care and that's what our focus is on.

[Zachary Sopcak:]

Okay, perfect. Thank you for the question.

[Operator:]

Our next question comes from Michael Newshel of Evercore ISI. Please go ahead.

[Michael Newshel:]

Thanks. Do you have a timeline in mind for retiring the remaining convertible debt and warrants? And also do you expect to have more deployable capital from subsidiary dividends next year than you talked about at the Investor Day just given the earnings outperformance this year?

[Joseph M. Zubretsky:]

I'll kick it to Tom in a minute, but bear in mind that the 2020s are due in January 2020. So, whether we buy them in the open market or they're presented to us by January of 2020, they will be totally out of our capital structure. Tom, do you want to (01

[Thomas L. Tran:]

That's right, Joe. There's a balance remaining of approximately $315 million. So, between now and January 2020, we will retire those convertible.

[Michael Newshel:]

All right. And then to retire the associated warrants as well, it's like a total of like $1 billion close to?

[Joseph M. Zubretsky:]

Exactly. And we're sitting now with close to $400 million in parent company cash. Obviously, with the outlook for next year, I have – we'll harvest more cash flow to the parent. We have the $500 million revolver. So, we have plenty of capacity. As those notes are presented to us or as we go into the market, we have the free cash flow at the parent to buy them.

[Michael Newshel:]

Do you have to (01

[Joseph M. Zubretsky:]

Absolutely.

[Michael Newshel:]

All right. Thank you.

[Operator:]

This concludes our question-and-answer session, and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.