Molina Healthcare, Inc.
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Molina Healthcare Third Quarter 2016 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded Thursday, October 27, 2016. I would now like to turn the call over to Juan José Orellana, Senior Vice President of Investors Relations. Please go ahead.

[Juan José Orellana:]

Thank you, Ash. 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, 2016. The company's earnings release reporting its results was issued today after the market closed, and it is now posted for viewing on our company website. On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you have multiple questions, we ask that you get back in the queue so that others can have an 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 at our company's website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of October 27, 2016, and we disclaim any obligation to update such statements, except as required by 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 Dr. Mario Molina.

[Joseph Mario Molina:]

Thank you, Juan José, and thanks, everyone, for joining us on the call today. We are pleased with the results we reported today. Revenue and enrollment growth remained strong and medical margins across the majority of our products are improving. Today's results provide insights into the operational improvements we have made, as well as some of the challenges that we confront. While we have shared our strategies for addressing some of these challenges in the past, it is helpful to reexamine them by separating them into two categories

[John C. Molina, JD:]

Thank you, Mario. Good afternoon, everyone. Today we reported net income per diluted share of $0.76 in the third quarter, compared to $0.58 in the second quarter of 2016. On an adjusted basis, which we believe to be a more meaningful measure of our earnings, we reported $0.85 this quarter, up from $0.67 during the previous quarter. Revenue increased to $4.5 billion for the quarter and to nearly $13.5 billion for the first nine months of this year. As Mario discussed earlier, we have worked diligently on the issues we outlined during the first quarter, and we have overcome many of those challenges. Compared to the first and second quarters of this year, the results we reported today are relatively free of out-of-period adjustments. This makes the discussion of the results we reported today relatively straightforward. Put very simply, our Medicaid and Medicare businesses are doing better, but marketplace has lagged. I think the key points to draw from in the results that we issued today are the following

[Operator:]

Thank you. And our first question comes from the line of A. J. Rice with UBS. You may proceed with your question.

[A. J. Rice:]

Thanks. Hello, everybody. I understand not wanting to speculate on what's happening at Humana and Aetna. But just from Molina's thinking about being ready to take on this if the deal were to be approved, it sounds like it would all happen very quickly in January. Do you have to make any spending investment? Is there something we should think about in terms of contingency that you're likely to need to invest either late this year or early next year as you start to consider that until you get a decision?

[Joseph Mario Molina:]

As we've previously said, we're not going to discuss the transaction.

[A. J. Rice:]

Okay. But even if the transaction doesn't go through, do you have to do any spending that we should think about for the fourth quarter or anything?

[Joseph Mario Molina:]

Well, this is Mario. We mentioned that we will see an uptick in costs related to the open enrollment period around marketing, advertising, broker commissions.

[A. J. Rice:]

Okay. All right. And then, maybe just for my follow-up then. On the commentary around the exchanges, we appreciate that. I'm just trying to understand if your hope is to get to a target margin for next year, is that based on rate increases that you can foresee in your assumptions about where enrollment would be? Or is it contingent upon getting some changes in the risk adjusters?

[John C. Molina, JD:]

This is John, A.J. No. We didn't price any changes to the risk-adjustment methodology into 2017. It's a combination of price increases and better medical management.

[A. J. Rice:]

Okay. All right. Thanks a lot.

[Operator:]

Our next question comes from the line of Matthew Borsch with Goldman Sachs. You may proceed with your question.

[Christopher Benassi:]

Congrats on the quarter. This is Chris Benassi on for Matthew Borsch. Could you elaborate on where you're seeing pressure in the marketplace? And is this consistent with prior-year trends such as member churn and the SEPs? Or is this a more accelerated development? Thank you.

[John C. Molina, JD:]

It really is along the lines of the four items that I've pointed out, which is attrition, higher cost for the SEP, people running out of their risk sharing and their out-of-pocket costs, and then increasing utilization as people become more familiar with our networks and seek care. It's not widespread. We are in the marketplace in a number of states and we have very good results in a number of those states. And for this quarter, we were hit with an adjustment to our risk adjustment liability of about $30 million that came from a catch-up, so to speak, as we get more information in from the outside actuaries. But I would say that we have a couple of markets that aren't doing well and we have a number of markets that are doing better.

[Christopher Benassi:]

Thanks. And just kind of one quick follow-up to that. Are you seeing less churn? Or have you seen any incremental improvement from the SEP measures that were implemented? Just trying to kind of dig a little deeper there. Thanks.

[John C. Molina, JD:]

No. We're not seeing anything significant in terms of changes between 2015 and 2016 in the SEP.

[Christopher Benassi:]

Perfect. Thank you.

[Operator:]

Our next question comes from the line of Dave Windley with Jefferies. You may proceed with your question.

[David Howard Windley:]

Hi. Good afternoon. Appreciate you taking the questions. So, in light of your comments about the marketplace, how do you view your expansion of territory, expansion of offerings and coverage in the marketplace for 2017

[Joseph Mario Molina:]

Hi. This is Mario. We are expanding in a number of counties but staying within our existing states. So we're expanding in Washington, we're expanding in Florida, and we're expanding in California.

[David Howard Windley:]

And do those states overlap with the limited areas where you're seeing some challenges that John just alluded to?

[Joseph Mario Molina:]

No, I wouldn't say that.

[David Howard Windley:]

Okay.

[John C. Molina, JD:]

I wouldn't either, Dave. This is John.

[David Howard Windley:]

Okay. And then I guess, on Florida, you had listed in the press release a decent price or a decent rate increase there. MLR ticked up pretty significantly. I guess I was intuiting that that might have been marketplace-driven, but it sounds like from that answer that's not the case. So, maybe what is driving Florida cost performance up?

[Joseph W. White:]

It's Joe speaking, Dave. No, I think what's happening in Florida is tied to the marketplace, but I would associate it more with risk adjustment than I would factors that we were anticipating that played out that John listed.

[David Howard Windley:]

Okay. Okay. Thank you for that. I'll drop out. Thank you.

[Operator:]

Our next question comes from the line of Chris Rigg with Susquehanna Financial Group. You may proceed with your question.

[Chris Rigg:]

Thanks. Just wanted to clarify a comment you made a minute ago, John, on the out-of-period risk adjustments of $30 million. Is that related to service dates in 2015 or is it all in-year?

[John C. Molina, JD:]

It's all in-year, Chris, but out of quarter.

[Chris Rigg:]

Okay. Okay. And then I guess I'm just trying to – it's still not 100% clear to me whether you're saying that sort of the morbidity of your marketplace membership is trending worse than you thought, or it's simply a function of the risk-adjustment methodology that's – and that is the primary source of the problem right now.

[John C. Molina, JD:]

That is correct. It is primarily the risk-adjustment methodology. About 20% of that relates to non-medical costs. So you exclude that, and the marketplace for us is great. It's pretty good now, but it gets great at that point. But it's not the morbidity is worse than we thought.

[Chris Rigg:]

Okay. And then last thing, I'm not sure what you're going to be able to say about this, but obviously the EPS range for the fourth quarter is $0.45 wide. Is there any color you can give us around that?

[John C. Molina, JD:]

You're right, we can't say anything about that.

[Chris Rigg:]

Figured. All right. Thanks a lot.

[Operator:]

Our next question comes from the line of Ana Gupte with Leerink. You may proceed with your question.

[Joseph Mario Molina:]

Ana?

[Ana A. Gupte:]

Hi. Can you hear me?

[John C. Molina, JD:]

We can hear you now.

[Ana A. Gupte:]

Okay. Great.

[Joseph Mario Molina:]

Yes. We hear you.

[Ana A. Gupte:]

Yes. I wanted to – is it better?

[Joseph Mario Molina:]

Yes. Go ahead, Ana.

[Ana A. Gupte:]

Yeah. All right. Okay. So, on the risk adjusters, the first question I had was you talk about this cost versus non-medical cost issue. Is this something that is specific to the managed Medicaid MCOs? And as a sub-lobby, if you will, have you all compared notes and are you seeing similar issues on the risk adjusters at all?

[Joseph Mario Molina:]

So this is Mario. This really we believe is the flaw in the methodology. It's not consistent with the stated intention of risk adjustment, as published in the Federal Register. I'm not sure what the other plans are seeing, but I think that this is a generalized phenomenon regardless of the plans. And we made our comments to CMS in a comment letter that was submitted October 6.

[Ana A. Gupte:]

And is this got anything to do with the level of quoting one plan is doing relative to the others? I've heard that anecdotally, in the marketplace, there are certain plans that have had to write large checks with big balance sheet coffered names like Empire and Anthem and all kind of think that it's a coding issue.

[Joseph Mario Molina:]

No. We think this is a flaw in the methodology.

[Ana A. Gupte:]

Okay. Then, finally, the same question on the risk methodology, you had put out a press release, and this was right after CMS talked about the prescription drugs being included in the risk adjuster and a more, I guess, fair or something of that nature spread on the risk adjusters across various plans. So what prompted you to put that press release out? And were you viewing this as a positive thing? Or just any change is better than status quo, or something else?

[Joseph Mario Molina:]

This is Mario. No. We believe that was a positive change. Again, getting back to our comments today, the risk adjustment should be a reflection of the health status of the members. And we think that including pharmacy data is definitely a step in the right direction. Nevertheless, we think the underlying methodology is still flawed and needs to be corrected. This needs to really reflect health risk assessment and not total premium cost.

[Ana A. Gupte:]

Okay. I'll queue up again. I had other questions. Thanks.

[John C. Molina, JD:]

Thank you, Ana.

[Operator:]

And our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch. You may proceed with your question.

[Kevin Mark Fischbeck:]

Great. Thanks. Just I'd ask a question, I guess, kind of about the Humana deal but I think it's to me you can't answer it because it's more about strategy. Because I guess when other Medicaid companies have said that they didn't really bid on the Humana assets because they wanted to maintain a target to the low-income population. And since you've had a lot of success on the exchanges because you stuck to that low-income threshold, how do you think about targeting Medicare Advantage in the higher income brackets? Is that something that you think is portable? Or is it really still the low-income side that you really want to be targeting?

[Joseph Mario Molina:]

Hi. This is Mario. I think that if you look at Medicare and managed care, it is where Medicaid was a number of years ago. And we think the experience that we've had with Medicaid and with marketplace and with growing our brand and building out our networks will help us compete for Medicare Advantage patients and to grow our Medicare business.

[Kevin Mark Fischbeck:]

Okay. So it's not necessarily a low-income target. So, I guess, if for whatever reason Aetna-Humana falls apart, we should expect you to continue to be investing money in the Medicare business. That's a business that you want to grow kind of whether or not this deal happens.

[Joseph Mario Molina:]

That's correct.

[Kevin Mark Fischbeck:]

Okay. All right. Thanks.

[Operator:]

Our last question comes as a follow-up from the line of Ana Gupte with Leerink. You may proceed with your question.

[Ana A. Gupte:]

Okay. So, on the Ohio and Texas again, what should we think about as the normalized loss ratio for 2017? And in Texas, I thought you had a sequential deterioration. Is that fair? I don't know whether I saw that correctly since the release came pretty recently.

[Joseph W. White:]

Hey, Ana. It's Joe speaking. Yes, there was a deterioration in Texas sequentially, but remember we had that big out-of-period quality pickup revenue...

[Ana A. Gupte:]

Okay.

[Joseph W. White:]

...last quarter. So, that's a little bit – more than a little bit distorted. Again, as John said, we feel real good about Texas and Ohio. We feel real good about a lot of our health plans right now. But I think the Texas and Ohio numbers for the third quarter of this year are pretty representative.

[Ana A. Gupte:]

Okay. That's helpful. Thanks, Joe.

[Operator:]

Apologies. We do have another question from the line of Dave Windley with Jefferies. You may proceed with your question.

[David Howard Windley:]

Thanks for taking the follow-up. So your release talks about the institution of an MLR floor in South Carolina. Your first – and I think effective date of July 1, your first half is below that level. The third quarter jumped significantly above that level. I wondered if the third quarter performance was simply kind of a true-up of that MLR floor? Or if there was deterioration in kind of underlying performance there and how might that floor affect you going forward? Thanks.

[Joseph W. White:]

It's Joe speaking. There's a little bit more disclosure about South Carolina in our 10-Q, but I'll save you the trouble of looking that up. South Carolina has had some pretty hefty rate increases over the last 12 months, but there have been benefit expansions that went to that. So we expected to see some tightening of margins in South Carolina that would probably take us above the MLR floor of 86% under normal circumstances. And that's okay. That health plan ran at a very low MCR for quite a while and it was running at MCRs that we don't expect to maintain long-term. But, in summary, it's more of a benefit premium issue than it is an MLR floor issue.

[David Howard Windley:]

Okay. Thank you.

[Operator:]

here are no further questions at this time. I will now turn the call back to Dr. Molina.

[Joseph Mario Molina:]

Well, thank you, everyone, for joining us. We look forward to talking to you in 2017.

[Operator:]

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.