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Good morning, and welcome to the Molina Healthcare First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Joe Krocheski, Senior Vice President, Investor Relations. Please go ahead, sir.

Good morning, and welcome to Molina Healthcare's first quarter 2023 earnings call. Joining me today are Molina's President and CEO, Joe

Thank you, Joe, and good morning. Today, we will provide updates on our financial results for the first quarter 2023, our full year 2023 guidance in the context of our first quarter results and our growth initiatives and our strategy for sustaining profitable growth. Let me start with the first quarter highlights. Last night, we reported adjusted earnings per diluted share for the first quarter of $5.81 or 19% year-over-year growth. Total premium revenues at $7.9 billion were as expected, representing a 5% increase over the prior year. Our 87.1% consolidated MCR in the first quarter demonstrates continued strong operating performance. We produced a 5.5% adjusted pretax margin, 4.1% after-tax, a very strong result that is above the high-end of our long-term target range. In the first quarter, we continued to generate excellent margins in our Medicaid business with a medical care ratio of 88.4%. This result was in line with our guidance and long-term target range. Our portfolio of 19 state contracts in 2023 growing to 21 states in 2024, provides earnings [balanced] (ph) and diversification related to rate setting and contract reprocurements. Actuarially sound rates prevail, as the rate-setting process continues to capture a credible medical cost baseline with forward trend and benefit changes and core medical cost trends remained stable and well-controlled. In Medicare, our reported MCR was 88%, which is at the high-end of our long-term target range as a result of driving growth into high acuity low-income consumer segment. In Marketplace, we ended the quarter with 271,000 members. Our Marketplace business is appropriately sized in the overall portfolio, given the inherent volatility of that risk pool. Our first quarter Marketplace MCR was 68.6%, significantly below full year expectations even when considering seasonal patterns. This result reflects the successful implementation of our pricing, metallic mix and membership continuity strategy to restore this business to mid-single digit target margins. In summary, 2023 is off to a very strong start. Medicaid, our flagship business representing over 80% of revenue continues to produce strong predictable operating results and cash flows. Our high acuity Medicare niche serving low income members continues to grow organically and Marketplace is now well positioned to achieve target margins in 2023. Turning now to our 2023 guidance. Based on our strong start to the year, we are increasing our full year 2023 adjusted earnings per share guidance to no less than $20.25 or 30% growth year-over-year, even after absorbing $0.75 of one-time implementation costs for new contract wins. We have deliberately reframed from increasing our guidance beyond the first quarter outperformance as we continue to apply appropriate conservatism to our forecast. We believe this conservative discipline is appropriate for several reasons. First, we would not project our significant first quarter Marketplace outperformance to be repeated for the balance of the year. Second, we are not forecasting short-term interest rates to remain at their current levels. Third, as a general matter at this early-stage in the year, it is prudent to anticipate potential medical cost variations. And fourth, and lastly, we do not believe the acuity shift due to redeterminations will have a significant net margin impact, but there is the potential for some sporadic and isolated shifts in acuity. If that were to be the case, there are significant mitigants to any potential impact. These mitigants include a commensurate mix effect premium benefit, experienced rebate and minimum MLR offsets in certain states, and of course, actuarially sound rate adjustments, both retrospective and prospective. That being said, we believe that any potential shift in Medicaid member acuity that could increase medical costs for 2023 is captured in our 88.5% Medicaid MCR guidance for the year. Turning now to an update on our strategy for sustaining profitable growth. Building on our momentum from last year, we are off to a strong start in 2023. At the end of January, the Texas Health and Human Services Commission posted its intent to award our Texas Health Plan, a contract for all our existing eight service areas in the state. Given the continuity of coverage in these service areas and strong brand loyalty, we expect to see continued market share gains and revenue upside in Texas. In March, we announced that our Indiana Health plan was awarded a four year contract to provide managed long-term services and supports. We believe this contract will commence in mid-2024. As one of four managed care organizations in the program, we expect to serve approximately 33,000 members, resulting in annual premium revenue of approximately $1 billion. With the addition of the Indiana LTSS win, our five recent state RFP wins driving within $5 billion in incremental revenue, with a portion included in our 2023 guidance, but most emerging in our 2024 outlook and achieving full run rate in 2025. Based on known building blocks, we now have line of sight to $36 billion of premium revenue in 2024 or 13% growth before additional strategic initiatives. Our new store embedded earnings are now $4.50 per share, providing meaningful visibility into our future earnings growth potential. We see an additional $2 per share of embedded earnings upside if and when the several remaining COVID era corridors are eliminated. Our acquisition pipeline remains replete with actionable opportunities. While the timing of transactions remains inherently difficult to predict, the strength of our pipeline and our track record of success give us confidence in our ability to drive further growth from this important element of our growth strategy. The company's performance continues to validate our long-term strategy, and its value creation potential. Our strategy is sound and it's working. We are delivering topline growth, both organically and with accretive acquisitions, while sustaining industry leading margins. Our model is clear and proven. We will grow organically in our existing footprint. We will win new state contracts and sign new acquisitions, building clear visibility to new store revenues and their related embedded earnings. We will harvest the embedded earnings and include them in our guidance as the contracts incept and the acquisitions closed, all while adding yet additional new revenue streams to our forward outlook. I look-forward to sharing more about our future growth plans and longer-term strategy at our Investor Meeting on May 15th. As is our hallmark style, we will provide you with our detailed playbook for achieving our growth targets and maintaining industry-leading margins. We will not only [declare those] (ph) but also show you with transparency and specificity, how we will achieve them. Our May 15th Investor Day session is appropriately titled, sustaining profitable growth, the next wave. With that I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning everyone. This morning I will discuss some additional details of our first quarter performance. I'll then turn to the balance sheet and some thoughts on our 2023 guidance. Beginning with some detailed commentary on our first-quarter results, our consolidated MCR for the first-quarter was 87.1%, reflecting continued strong medical cost management in each of our segments. In Medicaid, our reported MCR was 88.4%, a strong result that was in-line with our expectations and long-term target. During the quarter, flu, RSV and COVID related medical costs were minimal. The major medical cost categories were largely in-line with our expectation and normal quarter-to-quarter trend fluctuations. In the quarter, our Medicaid results were burdened with the prior-period premium adjustments. Absent those adjustments, our MCR was at the low-end of our long-term target range. In Medicare, our reported MCR was 88%, also within our long-term target range. During the quarter, we saw sharply lower flu and a continuing decline of COVID related costs, somewhat offset by the impact from continued growth in our D-SNP and MAPD products. In Marketplace, our reported MCR was 68.6%. This strong result reflects our pricing strategy to return this business to target margins, as well as seasonal patterns, which favored the first-half of the year. Recall, our pricing strategy increased our premium yield by approximately 9% this year and with approximately three quarters of our book in renewing members and two-thirds [indiscernible] metallic products, our risk scores should be optimally valued. We feel well-positioned to achieve our Mid-single digit target margins in this business for the year. Our adjusted G&A ratio for the quarter was 7.2% which includes new business implementation spending ahead of the new contract wins, incepting in July and next year. Turning now to our balance sheet. Our capital foundation remains strong. We harvested $100 million of subsidiary dividends in the quarter and our quarter-end parent company cash balance was $283 million. Debt at the end of the quarter was unchanged and just 1.7 times trailing 12 months EBITDA with debt to cap ratio at 42.3%. Net of parent company cash, these ratios fall to 1.5 times and 39.3%, respectively, reflecting our low leverage position and ample cash and capital capacity for additional growth and investments. Turning to reserves, our reserve approach remains consistent with prior quarters, and we continue to be confident in the strength of our reserve position. Days in claims payable at the end of the quarter was one day higher sequentially at 48 days of medical cost expense. Prior year development was favorable in the quarter demonstrating the integrity of our actuarial and reserving practices. I would note that the reported favorable prior year development, includes the release of margins on the prior year reserves, which is reestablished in the current quarter. And remaining P&L impact was largely absorbed by prior year minimum MLRs and experienced rebates. Finally, a few comments on guidance. We increased our 2023 adjusted earnings guidance by $0.50 to at least $20.25 per share. This increase is driven by first-quarter performance above our expectations. Partially offset by additional new store implementation costs for our recently-announced Indiana LTSS win and some general early in the year conservativism. We projected a little more than half of this year's earnings in the first two quarters. As Joe mentioned, our new-store embedded earnings in 2023 is now expected to be $4.50 per share comprised of two components: $4 per share, up from previously reported $3.50 for our recent new contract wins in California, Iowa, Nebraska and now including our new Indiana LTSS contract, plus $0.50 per share for the AgeWell and My Choice Wisconsin acquisitions achieving their full run-rate accretion. We continue to carry approximately $2 per share for COVID era risk corridors, providing additional potential upside to the $4.50 of new-store embedded earnings. Within our guidance, our outlook on the resumption of redeterminations and the impact on our business is unchanged. Through March closing, we estimate we gained approximately 800,000 members organically since the start of the pandemic. We continue to expect to retain roughly half of the members gained. We expect the premium impact to be approximately $1.6 billion and that portfolio average margins the earnings impact to be approximately $1 per share. Due to the timing of when members dis-enrolled, we are projecting one-third of the premium and earnings impact to emerge in 2023 with the remainder mostly in 2024. Given that redetermination and disenrollment have just begun on April 1st in only one of our markets, we are unable to share additional data driven insights. However, we remain comfortable with our outlook on margins as we expect numerous items to minimize any potential trend impact from redetermination. First, as discussed in past quarters, our internal membership cohort analysis indicates limited acuity shift potential from several perspectives. Second, the mix effect of impacted membership cohorts dampens the impact. To be clear, redetermination likely effects lower PMPM members. So any cost pressure would be muted by the weighted average of continuing higher premium PMPM members. Third, the gradual rate of dis enrollment over the course of 2023 into 2024 dilutes any ultimate impact ahead of normal rate cycle adjustments. Fourth, the remaining COVID era risk corridors and pre-existing experienced rebate mechanisms as minimum MLR's in many states provides a cushion to absorb potential adverse trend development should it emerge. And finally, rate adjustments, both on-cycle and off-cycle prospective or retrospective will countering emerging trends as states honor their commitments for actuarially sound rates. In summary, we are very pleased with our first-quarter performance in each of our segments and our increased full-year earnings guidance. We look forward to sharing more about our growth strategy and compelling value creation story at our May 15th Investor Day. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good morning. Appreciate the comments you just made, Mark, on the re-verification impact and that you'll keep 400,000 of the 800,000 lives that you gained since the start of the pandemic. But of the 400,000 that get redetermined, can you just update us on your views on how many you think end-up in -- of those Medicaid lives end-up choosing exchanges? And then how granular can you be in terms of assisting your specific re-verified members to find in exchanges. For example, can you target specific populations or even specific individuals in terms of trying to get them to choose exchange products? Thanks.

Great, thanks for the questions, Josh. I'll take the second one first. The states have a lot of different protocols and policies about how we can interact with members ahead of redetermination. The good news is, they're giving us the list of at risk members months ahead of time, which is very helpful to reach-out to them, interact with them, see if we can re-verify them or in many cases, put them into our Marketplace product if appropriate. Now in the cases where members are being redetermined, they lose their eligibility, which we're estimating is about 50%. I don't know that I had great insights on specifically where they'll go. And Josh, it's complicated, because what we see is some will get re-verified, lose eligibility and move right into another product, others may go uninsured for a few months and then eventually wind-up in one of those products. So I don't have good estimates on that. The only other thing I'll remind you of is, we didn't put any upside on retaining redetermined members in our Marketplace outlook. So anything that we pick up through redetermination is upside to our Marketplace outlook.

Perfect, thanks.

You bet.

Thank you. And our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead.

Yes. Hi, thanks for the question. I appreciate that you're thinking on redeterminations hasn't really changed. Over the past few months, though, we have seen a lot of states come out with their own projections on membership losses. It does seem like these estimates would generally skew towards lower levels of retention and 50%. You're assuming -- I assume you spend time talking to the states about their expectations. I'm curious what you think is the key difference between what they're assuming and what you think will play out? Thanks.

Stephen, our analysis is bottoms up state-by-state. And of course, we are in active discussions with our state-based customers and helping them manage the 90 million people nationwide and we're going to go through the redetermination process. As Mark had mentioned, many of the states have various protocols and different protocols on how interactive we can be. But we are in very active discussions with our state-based customers. They have given us a list of what they consider at risk members, meaning, members that will likely have to go through a reverification process. And from everything we've learned since this all started months ago and now has only started in one state actually in the month of April, we stand pretty firm that our 800,000 member increase during the pandemic will decrease by 50% and end up at 400,000.

And just to put a point on what Joe said, Stephen, maybe what you're reacting to is some of the at-risk member data points. The states are putting those out specifically so that managed care organizations can reach out to those members and whether its eligibility issues or verification issues, interact with those members to minimize it. So the list of at-risk is certainly bigger than the list of folks that will actually lose eligibility.

Thank you. And ladies and gentlemen, our next question today comes from Justin Lake of Wolfe Research. Please go ahead.

Thanks, good morning. A couple of things. One, Medicare Advantage, you talked about mix pushing you to the higher end of the MLR range there. What is the long-term MLR range you expect for Medicare Advantage? And can you give us a little color on the mix of business and why it's pushing it towards the higher end? And then lastly, just a number question on investment income, what is assumed in your guidance for investment income this year? Thanks.

Justin, on the MLRs for Medicare, we continue to hold firm on our long-term forecast of between 87% and 88%. And I would just summarize it by saying, the faster we grow, it would push you towards the higher end of that range because the members we yet -- are not yet risk-scored, they're not yet into care management programs. And it takes a while for that a year or two for that MLR to settle back into our target range. So if we're growing nicely, which we are today at greater than 10% a year, it will push the MLR up into the higher end of that range, and we're very comfortable with that. On investment income, sure, short-term interest rates are very high currently. As our guidance suggested, we do not forecast them to remain at this level. I will remind you that half of our investable base is locked in at two to three year duration in short-term bonds. But the other half is entirely floating, it's cash and it's floating at short-term rates. And Mark and his team were, I think, appropriately cautious in projecting those rates to decline for the balance of the year.

Yes, that's exactly right, Joe. The things to think about there is the investable balance will decline over the year from where it is and about $8.2 billion right now. It will decline as we pay down previous year corridors, minimum MLRs, things like that. Second, we're mostly in cash, which means we're instantly responsive to any cuts in rates. And when I look at the Fed funds outlook, most folks are baking in maybe another raise in the second quarter, but likely two cuts in the back half of the year. So we are cautious in our outlook.

Thank you. And ladies and gentlemen, our next question today from comes from Nathan Rich with Goldman Sachs. Please go ahead.

Great, thanks for the question. I wanted to ask on the Marketplace business. How much of the outperformance, do you see as sustainable? It sounded like it was mainly driven by pricing and I guess, helped by strong retention. I guess, do you have an updated view of where MCR will land for the year? And then enrollment was a little bit lower than we had expected. I just wanted to get your updated thoughts on if 230,000 members by year-end is still the right target.

Nathan, it's Joe. Our strategy is working. The strategy to reallocate capital to businesses that add less inherent volatility like Medicare and Medicaid and to keep this at about 5% of the portfolio keeping it small, 5% of the portfolio, keeping its silver with two-thirds of our members in silver products and keeping it stable, 75% of the members renewing. Not only as is projected toward our target mid-single digit pretax target margins, but probably with less inherent volatility. So we're really pleased with that. The first quarter MCR had some seasonality aspects to it, and we did outperform. I would say that our guidance includes something closer to the bottom end of our long term range of 78% to 80%, perhaps a little lower than that. But particularly that more of the business was bronze than we had projected and bronze has higher deductibles. The seasonality tilt is a little steeper than we originally projected. We're on target for the bottom end of our 78% to 80% long-term target range for the full year.

Thank you. And our next question today comes from Scott Fidel at Stephens. Please go ahead.

Hi, thanks. Good morning. I was hoping to get some of your analysis on the final 2024 MA rates and then on the risk model as well in terms of what your estimated -- your MA rate impact will be? And then maybe give us some insights just into how you're thinking about the impact of the risk model to your particular membership base, which is heavily weighted, obviously, towards D-SNPs? Thanks.

Scott, it's Joe. Yes, there are a variety of factors, regulatory factors that have been introduced in the past number of months that have caused folks in the Medicare Advantage business to think differently about the earnings trajectory. First, let me remind everyone that Medicare is only 15% of our total book. Also remind you that of that Medicare book, half of it are the MMP demonstrations. Now while MMP demonstrations aren't totally insulated from these industry dynamics, they do not have STARS scores. They're not subject to the rate notice, although rates come in a different way, 40% of that revenue is actually Medicaid driven and not Medicare-driven. So I wouldn't say we're insulated from it, but with half the book being in MMP, which is not responsive to those various rate type actions. We're pretty well insulated. But it does relate to our D-SNP book. We believe that our product is competitive. It is replete with value-added benefits. Many of these factors affected the entire market. So, if we have to pull back on value-added benefits to keep the product at zero premium and competitive, we think we can do so. I think we're well positioned for a couple of other good years in Medicare.

Thank you. And our next question today comes from Michael Hall with Morgan Stanley. Please go ahead.

Thank you. Just quickly first on Medicaid revenue PMPM looks like it was roughly flat year-to-year, which may have driven your Medicaid revenue to be slightly below the street this quarter. I am having a tough time just thinking of what could have driven this, especially given higher LTSS mix, which presumably would have increased the blended PMPM. So any color you could provide there? And then on your comments about redeterminations, not expecting the acuity shift to have net margin impact, but could see some strategic cases. And I know you mentioned, Joe, that the shift in acuity captured in your current 88.5% guide. But comments today do sound a bit more optimistic. Is it fair to say what you've learned since fourth quarter about the acuity of your at-risk redetermined lives might be more incrementally positive?

I'm going to take the second part of the question first and kick it to Mark for the analysis of Medicaid revenue. No, we know very little more than we knew at the fourth quarter. Only one state has actually started the redetermination process, and it's a very small state for us. Now we believe that our cohort analysis, which analyzes various aspects of durational acuity, how many members do you have greater than a year or less than a year. How many members do you have that have zero 25% MCR. What's your lapse rate. Didn't go to zero, it decreased, but members were terminating during the pandemic. What's your coordination of benefits rates. It's up slightly, but not a lot. So the data does not suggest that there's a huge shift of members, durational acuity members, and we start there. Second, all we did was mention the mitigants that if something should occur somewhere in one of our markets. There's premium adjustments, premium mix will help us if we're deep into a rebate mechanism or a minimum MLR in that market, that will be the first cushion for a potential effect. And then, of course, you're into the rate cycle. And we believe -- not we believe, we know that the state and CMS have been in active discussions about what could potentially happen and they are not only amenable, but they're very supportive of potential retrospective or prospective rate actions. So that's our point of view. It really hasn't changed from the fourth quarter because we know very little more today than we do at that point.

And Michael, it's Mark. Let me just take the first question on Medicaid, not sure what your model was, but the Medicaid revenue for me came in right about on expectation. But there's things that can move it a little up, a little down quarter-to-quarter, which might be driving some of what you're seeing. Certainly, mix changes quarter-to-quarter, year-to-year. Retro premiums, which are driven by a number of different items, retro membership updates, things like that certainly drive variations in revenues. And don't forget when we book corridors, minimum MLRs or any form of experience rebates, those run through the revenue line as well. So you put those things together, my hunch is, that's what explains what you're seeing. But overall, I think we're pretty close to just out everybody's model on first quarter.

And our next question today comes from George Hill at Deutsche Bank. Please go ahead.

Yes. Good morning, guys. And thanks for taking the question. Joe, one of your competitors talked about kind of getting enhanced from the states as they start to go through the redetermination process. Would just be interested to hear kind of like what kind of data that you guys are having access to as this process begins to kick off and kind of how that impacts your early thoughts about 2024?

Sure. I'll send to Mark. But for the most part, what we're getting from states is what we're calling members at risk, members that will have to go through some form of process, either specifically or on an [indiscernible] basis to be redetermined. Mark, you're closer to the situation.

Absolutely. So we started one state in April, but the vast majority of my states won't actually go through eligibility and redetermination until June and July. So, we're fairly back-end loaded here, which is why we're a little limited on data just at the moment. We've got one state. But as Joe mentioned, the way this works is long before a member would actually get redetermined or lose eligibility, they go on in at-risk list. And the states define at-risk in two ways. One, places where they have some data that suggests the member will lose eligibility, some data point that suggests that or just verification failures where they can't reach that number. They're giving us those lists months in advance. So I’m mostly back ended for June and July. But in many cases, I have a list of those members already. We can start reaching out to them, contacting them through all of our different channels long in advance. Now that data is not particularly helpful on what will happen because the whole point of that data is to preempt some of the people that shouldn't lose coverage. So, it's very helpful on us retaining members, but it's not helpful in saying from a data perspective, how many will we lose or what would the economic impact be, if any? Now the real data points on real stairs and levers don't happen until redetermination actually occurs. And again, for us, that's just one state so far. The states published files 834s, 820s, which let us know specifically who's coming and going, who the stairs and levers are. And we're way too early to have real insights on that given one state so far.

Okay. So maybe just a quick follow-up to simplify this is, what you guys largely have now is kind of the medical data and the claims data on all these members. You guys don't have the economic and eligibility data, and it's kind of the eligibility. Like, I'm trying to figure out what is the data like, what changes from a data access perspective that kind of better informs what you guys see? And it sounds like it's really kind of like the eligibility data and the at-risk list.

Yes. Just because the member has been identified as someone who will have to go through the reeligibility process. And by the way, that data is very immature. It's not in hundreds of thousands of members. It's tens of thousands of members. We can extrapolate very little from that. And so, it's way too early to make -- draw any conclusions from the early at-risk member data that we've seen. It will build over time. And as we have insights and we report quarters, we'll fill you in on where we are.

Appreciate it. Thank you.

And our next question today comes from A.J. Rice of Credit Suisse. Please go ahead.

Hi, everybody. Thanks for the question. Two, I guess, really. One, when you think about the flow of information as it comes in both on the -- your enrollment assumptions and whether they're correct and then also on the risk pool itself and what's happening there when you think about claims experience, et cetera. How do you see incremental information developing? When -- at what point over the next 12 months do you think you'll have a pretty good sense that, hey, our estimates are pretty accurate on enrollment, our estimates about the risk pool are pretty accurate. I guess I'm trying to figure out, was that a fourth quarter of this year? Is it a first half of next year? Any thoughts on that? And then you've mentioned a couple of times some protection from being in a Medicaid corridor payable position. I guess, I'd love to get a little bit more color, if there is any, on how extensive that is across your Medicaid book rather and how much protection you think that provides on kind of deterioration in the risk pools?

A.J., I'll answer the second first. We talked about risk-sharing corridors during the pandemic that were introduced in a dozen of our states as a direct result of the pandemic. Reminding everyone that pre-pandemic, dating all the way back to earlier in the decade, various types of mechanisms existed in 17 of our states, MLR floors experience rebates. Those have always been in place. And because of our performance, we routinely pay into them. The better you perform, the more you'll pay into them. And the more you pay into them, the greater the cushion should your fortunes reverse later in the year. So we're not going to go through the actual numbers because it actually matters where you're in the money, in what state and it's way too difficult to project anything other than we have routinely paid into these mechanisms, the experience rebates, we did last year in 2022 because we were very profitable. Reminding you, we still have best-in-class industry margins even after having paid into them. And yes, should an inflection occur later in the year for whatever reason, redetermination for any other reason, these payables act as the first cushion to financial performance. Mark, do you want to take the question about what quarter we'll have visibility? We've talked about that a lot. And it’s might be third, more likely fourth.

Absolutely. I mentioned that the majority of our states don't actually redetermine members. That is, take members off the roles until June and July. So we, across our 18 Medicaid states are very back-end loaded. That means the true data development won't really start to accrue until Q3 and Q4. Now remember, these states have a year to go through this process. Some will move a little faster, some will move a little bit slower. But picture on a weighted average going down over time, this data will start to develop, and I think we'll have a meaningful discussion in Q3 and Q4 on real data-driven insights.

Thank you. And our next question today comes from Calvin Sternick with JPMorgan.

Yes. Thank for the question. Sort of a follow-up to A.J's . In terms of the potential mitigants. As you go through the discussions of the states as they finalize their implementation plans for determinations, do you have a sense for how they're thinking about making the rate adjustments are most looking at it doing it on a retrospective basis? Or is it mostly perspective? And then do you have a sense for what level of margin degradation needs to occur before the state sort of look to step in there? And any color on whether like how many we could look to do it off-cycle versus how many would look to do on-cycle adjustments? Thanks. A - Joe

Hi, Calvin, it's Mark. Joe got it exactly right. The majority of our states, the calendar year is the same as the fiscal year. Which means, if data is developing in the third and fourth quarters it positions you very well for an on-cycle rate review. Now at least two of our states have already committed to a mid-cycle rate review as well, anticipating that at least we should look at the data together. So we feel good about that. Overall, I think on the topic of retrospective and prospective, states have been really open to both. And in many cases, I think they're waiting for the initial gimps of data to decide on-cycle, off-cycle, retrospective, prospective, how they might do that. But the general signal from the states is very much of a partnership here to work through this rate cycle.

And our next question today comes from Sarah James of Cantor. Please go ahead. Sarah, your line is muted perhaps.

Yes. Sorry about that. So I wanted to follow-up on the timings. As far as your discussions with state goes, they have 12 months to get through the redetermination, but some of the states have been vocal about staffing issues on teams that would be evaluating that. So as you talk to them, what kind of color are they giving you on how ratable or front-end loaded their process might be? And then just to follow-up on your earlier bronze mix shift in the exchanges. Has that influenced how you accrue for risk adjusters versus past years, given the shift in metal tier? Thanks.

Sarah, I'll answer the last question first, and Mark and I will tag team the question on timing. With respect to bronze, we've limited bronze to four markets, three markets require us to sell it. In Florida, we actually want to sell it because it's a bronze market, and it's very profitable. We sold more in Florida this year, which accounts for most of the -- the shift to bronze wasn't significant, but it was entirely accounted for our Florida sales efforts, and it's very profitable in Florida. It does add to the seasonality tilt since Bronze has higher deductibles. But we're very comfortable on the profitability of the bronze book because most of the states where we actually want to sell and try to sell. Mark, on the other question?

Yes. Hi, Sarah. On your about timing, don't forget the states have 12 months from the end of the PHE to complete redetermination, the PHE ends in May. So even though some states began redetermination in April, the clock starts ticking as of May. So 12 months from May, I think there may be a difference between states intentions of how fast they move versus how fast they actually move. And we're seeing a little bit of that in some of our partnership discussions with them. So we'll obviously be accommodative of any schedule they want to roll out. But staffing issues, resource issues, it will be interesting to see how the next 13 months here play out.

I'll give you the editorial comment. We have not projected it to take longer than we said originally. But I expect that it would. And states are going to be -- most states will be very careful to make sure they don't strain members without coverage if they're in fact eligible. We're not projecting it to take longer, but it could be more back-end loaded than we have projected.

Great. Thank you.

And our next question today comes from Steven Valiquette with Barclays. Please go ahead.

Hi. Thanks. Good morning. For the first quarter itself, Mark, you mentioned that the major medical cost categories were largely in line with your expectations. So I guess just trying to reconcile this with some of the strong inpatient and surgical volume growth trends coming out of the public hospital companies this quarter. Just curious if you can just remind us what magnitude you may have anticipated this and factor that into the guidance across the different books of business as far as any sort of extraordinary growth in inpatient? Medicaid and Medicare MLRs were still both up year-over-year in 1Q 2023 versus 1Q 2022 despite the MLR beat versus the street. But again, just curious how much elevated inpatient costs maybe not have been a factor in the MLR dynamics in the first quarter? Thanks.

Steven, our medical cost trends were completely in line with expectations, flat in Medicaid, 2% in Medicare, 3% in Marketplace year-over-year. We saw an increase in utilization, but it's important to note when we say that to make the companion statement that expensive inpatient stays were down but less expensive. Our outpatient services, ambulatory services were up. So [indiscernible] were up, but the intensity of service and the types of services really reduce unit costs. Our trends were completely in line. We saw nothing in the quarter that wasn't expected or anticipated, trends are completely in line with what we assumed in pricing.

Right. On inpatient, I hear you on the data points, but we're seeing just something just a little bit different. Lower surgical and obviously, lower COVID as the effects of the pandemic are diminishing, but also increasingly outpatient type of care for COVID cases. So as Joe mentioned, a fairly light trend for the first quarter.

COVID has gone from almost being completely and inpatient phenomenon to almost completely a laboratory phenomenon. You trade one inpatient -- the cost of one inpatient stay for one lab test all the time. So it has changed dramatically year-over-year, some pandemic-related and some just trend-related.

Okay. That’s helpful. Thanks.

Ladies and gentlemen, our last question today comes from Gary Taylor at Cowen. Please go ahead.

Hi, good morning. Two quick ones for me. Just one, I think I missed just a little bit of the opening comment on exchange. So I just want to go back to that for a second. I know that trended better than you thought, but I didn't hear if that change where you thought you would land on your original 78% to 80% for the year. And then I just also wondered if anything you've seen so far makes you change your outlook on whether you have a receivable or a payable accrual in exchange for 2023?

Gary, our fast start to the year and the exchanges at 68.6% gives us great comfort that we'll operate at or below the low end of our long-term target range of 78% to 80% on the MCR. A little bit more seasonality due to the heavier than expected bronze mix, but completely in line with expectations. We are on target to hit our mid-single digit margin target for the year. With respect to the risk pool, the risk pool has really stabilized. A lot of the irresponsible pricing is out of the market. We have our arms around special enrollment. It's coming in at much lower levels due to the cutoff at 150% of FPL. So we have our arms around that. The risk pool has somewhat stabilized, which gives us really good visibility, not only into the acuity of our members, given that 75% of them are renewed members, but also two-thirds of them are in a silver product, which gives us the opportunity to optimize the value of a risk floor. We're in good shape on the marketplace so far, and we expect to operate at the low end of our long-term target range for the full year.

The only thing I'd add to that is, with risk adjustment, the correlation between medical cost experience and risk adjustment at this point is pretty tight. So if the risk pool changes a little bit, I'm expecting effectively a hedge from our performance on risk adjustment.

And then just last quick one, if I could. You mentioned the prior period premium adjustments in Medicaid having impact on Medicaid MLR. I mean, presumably, there is a pretax earnings headwind that you bore in the quarter for that as well?

Yes. Given where we performed -- I'm sorry, we couldn't hear the first part of your, you're referring to Medicaid, correct?

Medicaid, yes.

Thank you. Yes. As I said, 17 of our states have always for a long period of time had mechanisms, experienced rebate mechanisms and minimum MLR mechanisms, which are set at pretty low levels, which allow you to actually earn excellent margins as we have been even though we still have been paying into these mechanisms. So yes, as I mentioned, last year, we had a good year and paid into them. And in the first quarter, again, good first quarter. We also paid into them in the first quarter. We don't disclose how much, but it's a routine part of the business. It's part of the overall earnings trajectory of how we think about the business and the first quarter was business as usual, excellent margins in Medicaid and still paid into these corridors and rabates.

Thank you