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Good day! And welcome to the Molina Healthcare Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference to Jeffrey Geyer, Head of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Molina Healthcare's second quarter 2024 earnings call. Joining me today are Molina's President and CEO, Joe

Thank you, Jeff, and good morning. Today, we will provide you with updates on our reported financial results for the second quarter highlighted by $5.86 of earnings per share, which was in line with our expectations. An update on our full year 2024 guidance, which we reaffirm at $38 billion of premium revenue and at least $23.50 in earnings per share, and our growth initiatives and strategy for sustaining profitable growth. Let me start with our second quarter performance. Last night, we reported adjusted earnings per share of $5.86 a $9.4 billion of premium revenue. Our 88.6% consolidated MCR reflects disciplined medical cost management despite experiencing some modest medical cost pressure. We produced a 4.6% adjusted pre-tax margin or 3.5% after-tax, a very strong result that is in the middle of our long-term target range. Year-to-date, our consolidated MCR is also 88.6%, and our adjusted pre-tax margin is 4.5%, both within our long-term target ranges. Our well-balanced portfolio of businesses and focusing on managing medical costs continue to produce results in line with our expectations. In Medicaid, the business produced a second quarter MCR of 90.8%, above our long-term target range. This quarter included a one-time prior year retroactive premium item in our California business. Excluding this one-time item, the second quarter MCR was 90.1%, elevated by higher MCRs from our new store additions, a dynamic consistent with the first quarter. It also reflects slightly higher than expected medical costs in the legacy Medicaid portfolio, attributable to the ongoing acuity shift of redeterminations. We continue to have risk- corridor protection in many geographies and expect that this medical cost pressure will be adequately captured by known rate adjustments in the second half of 2024. We expect our Medicaid results to improve in the second half of the year. Several data points indicate we are well on track in this regard. First, the California retro rate item will not repeat. Second, our new store addition results will continue to improve as they did in the second quarter. Third, we received rates in many states for the second half of 2024 that were in line with first half developing cost trends. Approximately 35% of our Medicaid premium revenue renews in the second half. Combined with several off-cycle adjustments, these account for the expected legacy Medicaid MCR improvement through the remainder of the year. Then, with approximately 55% of our Medicaid premium revenue scheduled to renew on January 1, our rate cycle cadence is well timed for early 2025. Providing upside to our outlook for the balance of the year would be continued success with rate advocacy initiatives that could provide positive off-cycle rate adjustments. Turning to Medicare, our second quarter reported MCR was 84.9%, representing better than expected performance across all our Medicare products, primarily due to favorable risk adjustment results as well as benefit adjustments implemented for 2024. Our newly acquired Bright business in California is performing in line with expectations, and we remain confident in ultimately delivering the full one-rate accretion of $1 per share. Our strategy of leveraging our existing Medicaid footprint to serve high-acuity, low-income Medicare beneficiaries is working well. In Marketplace, the second quarter MCR was 71.6%. This business performed better than our expectations, even as we saw higher special enrollment period membership gains from redeterminations. Our mix of renewing members, prior year pricing actions, and improved risk adjustment results position us well to continue to profitably grow this book of business. Turning now to our guidance for the full year. We remain confident in delivering our full year adjusted earnings per share guidance of at least $23.50, or 13% year-over-year growth. Strong net investment income and known rates will offset the one-time retro premium item and the second quarter pressure experienced in Medicaid. Performance in our core business remains strong, and we expect second half improvements to be driven by known on and off-cycle rate increases and new store MCRs reverting to target. Our guidance also includes our Florida and Virginia contracts extending through year end. Our full year premium revenue remains unchanged at approximately $38 billion or 17% year-over-year growth. Our 2024 revenue and earnings per share guidance provide a strong foundation for profitable growth in 2025 and beyond, and the building blocks to get there remain intact. Now some comments on our growth initiatives. Our business is well positioned to capitalize on unique long-term growth opportunities in all three segments. First, a few comments on our recently announced acquisition of ConnectiCare from EmblemHealth. ConnectiCare currently serves approximately 140,000 members with $1.4 billion in annual premium revenue. This is a well-diversified government sponsored healthcare play, which serves primarily Marketplace and Medicare membership in Connecticut. Historically, our strategy has been to establish these core product lines only in our pre-existing Medicaid footprint to leverage our Medicaid infrastructure. While that option is not available to us in Connecticut, a Medicaid fee-for-service state, we believe this is a great opportunity to execute the time-tested Molina M&A playbook. Acquire a stable revenue stream in our core products, deploy capital efficiently, and improve the assets' performance in the proven and reliable Molina way. We expect this acquisition to provide earnings accretion of $1 in earnings per share, which is now added to our embedded earnings. Our M&A pipeline remains full of many actionable opportunities. In Medicaid, we remain confident in winning new and renewal business contracts. Some comments on recent developments. In Florida, we were recently awarded a contract that successfully retains our foothold in the state. We will retain our 52,000 Medicaid members in the Miami-Dade region. In addition, by agreement, we will grow to approximately 90,000 members through preferential auto assignment. We estimate the annual premium revenue of $500 million. In Wisconsin, we successfully defended our LTSS position as the state announced its intent to award Molina a contract to provide services in Region 5, the first of a series of regional reprocurements. Additionally, we were just re-awarded our sole contract position in the IRIS Self Directed Personal Care program. In Georgia, while we await the award announcement, we remain confident as to our prospects and believe that we are well positioned to serve that state's Medicaid population. Finally, there was significant market opportunity out for bid over the next three years. This includes the Texas STAR Kids RFP, which represents a meaningful opportunity in a state where we have demonstrated recent success. In Medicare, we remain sharply focused on further penetration of low-income, high-acuity dual-eligible populations and on our high-acuity MAPD population in California. The new CMS rules on Medicare and Medicaid integration position us well to attract dual-eligible members over the coming years, as our footprint combines both products in most of our states, enabling a fully integrated member experience. We are in the process of further developing our suite of integrated duals products, and we will soon be establishing a new dedicated organization to lead this effort. In Marketplace, we are positioned to grow organically in underpenetrated markets, given the stabilized risk profile and margins we've achieved. We believe our rate filings for 2025 make us very competitive in underpenetrated geographies and position us well to grow. As a reminder, our growth outlook in this business can be simply stated as grow at a rate that allows us to sustain mid-single digit pre-tax margins. We are confident in our ability to grow organically, win new state contracts, and execute our M&A strategy. These remain consistent pillars of our growth strategy, and we expect to meet our target of $46 billion of premium revenue in 2026. With our 2024 earnings per share guidance of at least $23.50 reaffirmed, and with our embedded earnings outlook of $5, we remain committed to delivering on our long-term earnings per share growth targets. As Mark will describe shortly, the building blocks to get there are intact. In summary, we are pleased with our second quarter 2024 financial performance. The Medicare and Marketplace businesses significantly outperformed, while Medicaid is on track to improve in the second half of the year through known rate increases and continuing new store MCR improvements. In the meantime, we continue to focus on executing on the fundamentals, which has been the hallmark of our financial performance. The unprecedented redetermination process, which will be a 24-month journey from beginning to end, has presented some challenges that we have successfully navigated. But nothing has occurred during this period that changes our view that these are attractive businesses for the near and long-term, and profitable growth can and will be sustained. In fact, our results demonstrate that the principle of rate soundness works in that Molina's unique rate corridor position protects against transient quarter-to-quarter fluctuations of rates and medical costs. Finally, we look forward to updating you on our outlook for sustaining profitable growth at an Investor Day event on Friday, November 8th in New York City. As in past years, we will provide you with our detailed playbook for achieving our growth targets and maintaining industry-leading margins. We will outline our long-term goals and how we will achieve them with the transparency and specificity that you have come to expect from us. With that, I will turn the call over to Mark for some additional color on the financials.

Thanks, Joe. And good morning, everyone. Today I'll discuss some additional details on our second quarter performance, the balance sheet, our 2024 guidance, and the building blocks of our 2025 EPS outlook. Beginning with our second quarter results. For the quarter, we reported approximately $10 billion in total revenue and $9.4 billion of premium revenue, with adjusted EPS of $5.86. Our second quarter consolidated MCR of 88.6%, was slightly above our expectations, but still on track to support our full year guidance. In Medicaid, our reported MCR was 90.8%. As Joe mentioned, this result includes a 70 basis point increase from a one-time retroactive premium adjustment in California related to the prior year. It is highly unusual for a state to retroactively reduce rates, and all of our known and expected future rate actions are positive as states address recent trends. Adjusting for this one-time prior year item, our reported MCR of 90.8% falls to 90.1%. Within that result, new store additions continue to run at a higher MCR, but lower than the first quarter and in line with our expectations. Recall, new store additions comprise almost 20% of our Medicaid segment this year. Adjusting for new store impact, our reported MCR falls another 80 basis points. We expect the MCR on this component to continue to decline over the coming quarters as these plans progress towards portfolio target margins. Excluding the one-time prior year item and the new store additions, our legacy Medicaid MCR was 89.3%, approximately 30 basis points above the top end of our long-term target range. We continue to experience the impact of redetermination related acuity shifts, a little more pronounced in the second quarter. Of course, Molina's strong performance in medical cost management means that in many states in recent years, we have typically been paying into minimum MLRs and corridors, an expense averaging 200 basis points within our reported MCR. As medical cost trend has modestly outpaced rates in the first and second quarters of the year, corridor expenses declined, largely shielding us from the temporary difference between rates and observed trend. We expect these corridor positions to be restored in coming quarters with our continuing medical cost discipline and the known and expected rate cycles. Looking ahead to the remainder of the year, as Joe mentioned, we expect a number of items to drive the second half Medicaid MCR lower. For the first half of 2024, our reported Medicaid MCR was 90.2%. Our guidance includes the second half Medicaid MCR of 88.4%, a 180 basis point improvement driven by a few items. First, we reduced the second half expected MCR for the impact of this quarter's retro rate item, a benefit of 30 basis points to the second half Medicaid MCR compared to the first half. Second, new store additions, initially running higher than the legacy book, will continue to improve as they did in the second quarter as they approach portfolio target margins. New stores, a combination of new RFP wins and acquisitions, benefit from the execution of the Molina playbook quarter-over-quarter, and we expect 80 basis points of improvement to the second half Medicaid MCR compared to the first half. Third, the rate cycle of our state mix is well timed to return rates in line with the trend for the remainder of 2024 and into 2025. States are required to fund Medicaid MCOs with actuarially sound rates. Most states determine those rates based on demonstrated market trends and completed data rather than working hypotheses or speculation. As such, the higher trends most plans are seeing in the first and second quarters provides hard data for the rate setting process in coming months. We now have full visibility on higher final rates that offset observed trend representing approximately 35% of our revenue renewing in the second half of the year. In addition to the normal rate cycle, our rate advocacy efforts have already yielded positive off-cycle adjustments in four states that benefit the second half of the year. We are encouraged that several other states will follow this approach, although we do not include those in our guidance. Together, these known rate adjustments drive an expected benefit of 70 basis points to the second half Medicaid MCR when compared to the first half. Combining the first half reported MCR in our expectations for 180 basis point improvement in the second half as detailed results in full-year Medicaid guidance of 89.3% up from our previous guidance of 89%. This small increase in full-year Medicaid MCR guidance is almost entirely explained by this quarter's retro rate item. Also in Medicaid, a few comments on membership. While two of our states are continuing with redetermination in the third quarter, we are largely through the process. In the second quarter, we estimate a net loss of 100,000 Medicaid members through redetermination, taking the cumulative total to 650,000. Due to the timing of reconnects that will continue into the third and fourth quarters, our outlook for the ultimate total net loss of approximately 600,000 or 40% of the members gained is unchanged. Our full-year membership guidance remains at 5.1 million members. Conversions to marketplace remain strong as Medicaid members losing eligibility move to Molina marketplace products. In Medicare, our second quarter reported MCR with 84.9%. All Medicare products perform better than expected, driven by favorable risk adjustments and the benefit adjustments we implemented for 2024. Utilization in the quarter reflected consistent pressure from LTSS costs and pharmacy utilization. As Joe mentioned, the integration of the Bright business is on track to provide the projected ultimate $1 of earning accretion. In Marketplace, our second quarter reported MCR with 71.6%, better than expected. Despite higher special enrollment period membership year-to-date, we remain focused on growing this business while producing mid-single digit pre-tax margins. Our adjusted G&A ratio for the quarter was 6.9%, as expected, and reflects operating discipline and the continued benefit of fixed-cause leverage as we grow our business. Turning to the balance sheet, our capital foundation remains strong. In the quarter, we harvested approximately $175 million of subsidiary dividends, and our parent company cash balance was approximately $235 million at the end of the quarter. Debt at the end of the quarter was unchanged and 1.4 times trailing 12-month EBITDA, with our debt-to-cap ratio at about 33%. These ratios reflect our low-leverage position and ample cash and capital capacity for additional growth and investment. Days in claims payable at the end of the quarter was 50 and consistent with prior quarters. We remained confident in the strength of our reserves. Our operating cash flow for the first six months of 2024 was lower than prior year due to the timing of corridor payments, CMS receipts, as well as taxes. This year, we made several large corridor settlement payments related to prior periods. Next, a few comments on our 2024 guidance. As Joe mentioned, we reaffirm our full-year guidance with premium revenue of approximately $38 billion. We continued to expect full-year EPS of at least $23.50. Our EPS guidance now includes $0.65 of higher expected investment income as short-term rates are expected to hold up through the year, higher for longer, and $0.30 from the extension of the current Florida and Virginia contracts through 2024 year end. These items are offset by approximately $0.65 from the one-time retro premium adjustment and $0.30 due to Medicaid performance in the second quarter. Within our guidance, the full-year consolidated MCR increases slightly to 88.4% driven by the second quarter performance in Medicaid. As detailed, the full year Medicaid MCR is now expected to be approximately 89.3% up 30 basis points, primarily due to the second quarter one time item. Our MCR guidance on Medicare remains unchanged at 88% with strong, consistent year to date performance in our duals membership and the Bright acquisition. In Marketplace, we continue to expect the full year MCR to be 78% and at the low end of its long term target range while producing mid single digit pre-tax margins. Conversions to Marketplace due to Medicaid redeterminations are expected to continue into the second half of the year, while SEP growth typically comes with a higher MCR, we considered this in our 2024 guidance and the pricing of our 2025 bids. Turning to embedded earnings and the building blocks of our 2025 EPS outlook, our guidance on new store embedded earnings is now $5 per share, an increase from our prior outlook of $4. This increase reflects $1 from the ConnectiCare acquisition. We expect a little more than half of the new store embedded earnings to emerge in 2025 with the remainder in 2026. Finally, we see a clear path to achieve our EPS growth target heading into 2025. The building blocks include the embedded earnings we expect in 2025, the continuing organic growth and margin in our current footprint, and our in-flight organic and inorganic strategic initiatives. With 55% of our revenue renewing on January 1st of next year, our rate cycle is well timed for 2025. Even allowing for some headwinds from likely declining interest rates next year, the path is clear and compelling. This concludes our prepared remarks. Operator, we are now ready to take questions.

Yes, thank you. [Operator Instructions]. The first question comes from A.J. Rice with UBS.

Hi, everybody. Thanks for the question. Just maybe as a point of clarification. You're calling out risk adjustment true-up that's helped you both in public exchanges and in Medicare Advantage. Any way to size that and talk about how much of a positive variance it was relative to guidance? And then my other follow-up would be on the Medicaid side. Some of your peers, not all of them, but some are calling out that the legacy population they are left with seems to be having a little bit higher utilization than they had previously seen. It's not just deterioration on the risk pool related to redetermination. Have you seen any of that or is this what you are seeing in Medicaid, 100% related to just what's happening as a result of redetermination?

Great. Hey, good morning, A.J. I'll take the first one and Joe will pick up the second one. On risk adjustment, let's touch on Marketplace and Medicare. On Marketplace, some of you have seen from the CMS files, we recognize about $20 million of additional risk adjustment benefit from the prior year between first and second quarter. Remember, we have insights on the development of that through the weekly service and other things, but across the first half, about $20 million from the prior year. So, first half revenue is about $1.2 billion. You do the math, a little bit less than 20 basis points in our first half, first and second quarter MLRs for Marketplace. Just for reference, it was about the same a year ago. So the year-over-year as compared, it's about the same, about 20 basis points of benefit.

A.J. on your second question related to – I'm sorry. Please, go ahead.

Just on the...

Say it again A.J. A.J., I think we lost you, but let me take your second question related to medical cost trends in the business. In Medicaid, as always, you see pockets of utilization increases in various geographies and in various healthcare categories. We see some pockets of skilled nursing facility cost increases, hours in home-based care. BH is spiking in a couple of geographies, but nothing we've never seen before. Pharmacy trend to high-cost drugs in the GLP-1s, certainly putting some cost pressure on the system. But again, nothing out of the ordinary and nothing that can't be dealt with, particularly as our corridor position absorbs these trends and then rates kick in to pick up the slack.

Okay, thanks a lot.

Thank you. And the next question comes from Andrew Mok with Barclays.

Hi, good morning. Just a question on the underlying Medicaid pressure in the same-store portfolio. I don't remember you calling out pressure in Q1, but it sounds like that may have developed slightly worse. Is that correct? And can you clarify when core Medicaid pressure started to materialize this year? Thanks.

Sure, you are right. We saw a little bit more pressure in the legacy book in the second quarter versus the first quarter, and one of the drivers is just simply membership. You might recall, in the first quarter we noticed that we lost about 50,000 members due to redetermination. We were a little more than that in the second quarter at about 100,000. Just to round that out, we're currently at 650,000 total cumulative, and we expect to get back about 50,000 in the rest of the year through reconnects. So the volume, the membership up a little bit in the second quarter. I don't doubt that drove a lot of the higher legacy impacts we saw.

Got it. But did Q1 also come in worse than what you had expected when you actually saw the claims?

It was a little bit higher than normal, but not worse than we expected in the first quarter.

Okay. And then secondly, it sounds like you are describing a more modest pressure relative to peers. So I just wanted to better understand that experience. How much pressure was offset by the risk corridor buffer? And do you see modest pressure across most states or concentrated pressure in a few states? Thanks.

The pressure is isolated. It's various healthcare cost categories in various of our individual health plans. And Mark covered this in his prepared remarks. Sometimes it's overlooked. We've been routinely over the past four years, paying into the risk corridors at minimum MLRs to the extent of about 200 basis points inside our NCR, which basically means if you are reporting an 88, you are performing at an 86, which gives you 200 basis points of cushion if a medical cost should inflect for any reason, whether it's an acuity shift or whether it's normal trend. So we see pockets of utilization increases as I described, in various categories, in various plans, but largely picked up by the corridors and mid-cycle rate increases and on-cycle rate increases, particularly in the second half of the year where 35% of our revenue renews in the second half.

Great. Thanks for the color.

Thank you. And the next question comes from Ryan Langston with TD Cowen.

Hey, good morning. Following up on Medicaid, we've heard some commentary just from some peers that there's this pull-through effect when folks are receiving their enrollment loss information and then they might be utilizing more services before they actually use it. I guess, are you seeing that same kind of experience? And then maybe further, do you have any sense of what the utilization profile actually looks like for folks who actually are able to re-enroll once being redetermined off? Is that any different than sort of the normal population? Thanks.

We've heard the discussion about over-utilizing in advance of losing coverage. We have not experienced that. Our leavers are leaving at the same MCR from the beginning of the redetermination process to the end. No change and no indication that they are using services in advance particularly, because in the termination process, many of them don't know that they've been redetermined. So they don't have any advance notice. They are just off the Medicaid rolls. They weren't using services and now they are off through the redetermination process. So we haven't seen that.

Ryan, I’ll just build on that. What we've been citing and what many others are seeing, is that of the folks that get redetermined, they lose their eligibility, 70% are for procedural reasons. That means they just didn't fill out the paperwork or weren't aware. So that certainly argues against any kind of last minute usage, when in fact they weren't aware they were losing coverage. I think you also asked about the reconnects, when they come back in. Yes, very often for the first month we'll see a little bit of higher utilization. And think about it, somebody lost their eligibility. They might not know they lost it until two or three months later when they go to the drug store to fill out a script. At that point they are utilizing and that first month might be a little bit higher. But typically they are going to quickly resolve to the portfolio average. So we're not seeing any meaningful impact there.

Thank you.

Thank you. The next question comes from Josh Raskin with Nephron Research.

Hi! Thanks. Just a clarification on the margin side of the Medicaid book. So could you just tell us what your Medicaid margins were in 1Q versus 2Q and what's embedded in guidance for the second half? And then my bigger question is just, the commercial MLR last year, exchanges were 75%. I think you said 78% MLR this year. It looks like you are tracking probably favorable to that. So how are you thinking about the potential for rebates next year? And should we be thinking about a strategy of reducing price to get higher membership for 2025?

I'll take the last part of that first Josh on marketplace. Clearly running at 72 for the first half and predicting 78 for the back half seems to be a push. But be mindful of the fact that SEP membership is quite high and those members are coming in at higher utilization rates than the existing membership. And then of course you have the natural seasonality of the business. Now, you are absolutely right. Last year, we actually invested margin in growth and we grew at $1 billion to $1.2 billion of revenue this year. Where we're running this year, we think we're at par. We think we're right in the single-digit land, but we could. You could see us be a little more aggressive on growth next year and try to grow this business as we did in 2024 over ‘23. So the margin position is solid. And again, our growth rate is going to be determined by our ability to produce mid-single-digit margins, just given the inherent volatility that exists in the business itself.

Great, and I'll go ahead and take the second one. Josh, per our reported results, as you know, the MCR in the first quarter on Medicaid was an 89.7. We reported a 90.8. Across the first half of the year, that's an average of a 90.2. We're tracking to an 89.3 for the full year, and I gave you the walk in my prepared remarks of how the second half supports that. We have great confidence in those three building blocks that support that. Now the 89.3 for the full year guidance is up from 89. The last time we were together, so we've raised the full year guidance by 30 bips. Two-thirds of that was just recognizing that one-time California item we had to jump over in the second quarter. So the rest is just a little bit of pressure from the second quarter legacy business, otherwise very much on track for an 89.3 full year.

Okay, so target margin, but this year not terribly off from target margins, right? Sort of towards the lower end maybe of the turn. Okay, perfect.

Correct, and I think there'll be enough strength that we pointed out otherwise in the business to more than overcome that 30-bip increase. So I think we're in good shape.

Thank you.

Thank you. And the next question comes from Kevin Fischbeck with Bank of America.

Great, thanks. I guess we're having a hard time kind of reconciling your view about where MLR is in Medicaid versus what a lot of your peers are doing. So I guess, your comment seems to be that your risk corridors are allowing you to kind of offset a lot of this pressure. Can you give us a sense of on a gross basis then what’s the MLR pressure? Are you saying you had 200 basis points of risk corridor and now it's only 100? And then there's another 10 or 20 in the core net because of payables not completely matching everything. Like just kind of size it for us. It seems like everybody else seems to be saying somewhere between 100 and 150 basis points of MLR pressure and just to hear 10 or 20 in the core, it’s hard to reconcile. And then, I guess you mentioned you expect people to be coming back as the year goes on. Shouldn't that be a pressure on MLR in the back half of the year? It didn't seem like you were building anything in for rejoiners putting up a pressure on MLR in your bridge from one half to two half. Thanks.

Well, Mark gave you the numbers in the prepared remarks that are actual in the last four years. We have been paying in to the corridors to the extent of 200 basis points, contributing to the Medicaid MCR, 200 basis points. We said at the beginning of the redetermination process, we said this repeatedly, that the corridors were going to act as a financial buffer until such times rates pick up the slack, which is exactly what's happening. So yes, suffice it to say, this year our corridor liability isn't 200 basis points. We've used some of it to cushion the results, but some of it does remain in various geographies in a meaningful way. Now, the other point to make on the corridors is they don't just disappear forever. They replenish at the next rate cycle, whatever the state fiscal year is. And so if you could actually sound rates at the next rate cycle and you continue to relatively outperform that benchmark, you are back into the corridors and you are recreating that 200 basis points of cushion.

And Kevin, just a couple more thoughts. Since our last guidance in the first quarter, we probably see trend across our business for the year, up 150 basis points, 1.5% higher trend than we thought before. That's capturing what we saw in the second quarter and what we're expecting for the third and fourth. And of course, to your point, that includes the dynamic for the rejoiners and just as importantly what we're actually jumping off in the second quarter. So we're seeing a higher trend than we previously thought of 1.5%. Now, as we detailed, we've got known rate adjustments in the second half, both on cycle and off cycle, which defray about 1% across the full year of that trend. The other 50 bips is picked up by corridors. So we feel pretty insulated from a higher trend here, both on known rates and as Joe mentioned, this very important corridor dynamic we bring to the table. So yeah, we've been carrying 200 bips over the last couple of years within our reported MCR. It'll be lower this year, but that'll be a function of actual rates and the ultimate trend.

Okay, thanks.

Thank you. And the next question comes from Justin Lake with Wolfe Research.

Thanks. Good morning. First, it looked like your PYD benefit to MLR was almost 200 basis points in the quarter. I'm curious if you could share with us whether that was evenly spread among the three segments or was balanced in one or two specifically. And then Joe, can you talk to us a little bit about exchanges, a lot of focus going into the elections. What's your early view on, if the subsidies aren't extended, the enhanced subsidies I should say. If they aren't extended at the end of 2025, what do you think happens to the exchange population in general?

On the PYD point -- I'll kick it to Mark, but the first point to make before which lines of business did it affect. Most of it, if not nearly all of it, was picked up by prior year corridors. Mark, do you want to take it?

Right. So Justin, your question is, yes, it's a little bit bigger than we've seen in the past, but we're a bigger business than we've been in the past. A lot of this stems from our payment integrity business, which reaches back into prior years to make sure that fraud, waste and abuse, things like that are addressed. So it's a little bit bigger. Of course, Medicaid and Medicare is where you expect to see it mostly, and that's what you'll see in the Q when it comes out. A little bit in marketplace, but most of it was in Medicaid and Medicare. As Joe mentioned, it really isn't a good guy this year, because we were big time corridor payers last year, and of course the prior year development goes to last year's corridors, so most of that got caught up in prior year corridors.

And your question related to the exchanges, everybody's got models. We see models in the industry. We have our own models in terms of what would happen if the enhanced subsidies are in fact, do expire. And there's industry estimates we have our own. You look at the level of subsidies, you look at your FPL cohorts, and you can argue that 10%, 20% of membership could be affected and priced out of your silver product, but then again, you have a lower priced bronze product, perhaps sitting right next to it. So how many of those are going to recapture into one of your bronze products, a little priced hard to say. But we've seen industry estimates of 10% to 20%, and then the wild card is if you have a bronze product sitting alongside your silver product in a certain geography, will you recapture some of that in bronze?

Thank you. And the next question comes from Stephen Baxter with Wells Fargo.

Hi, thanks. Just a couple of follow-ups on the Medicaid discussion. I guess, can you provide us specifically the first half number that's comparable to the 200 basis points of the typical corridor expense that you cite? And then can you also update us on what percentage of your premiums have some level of protection here versus your more directly exposed to whatever the underlying performance in the Medicaid book is? And then just trying to understand the rate update process. I think you suggested, obviously the states want to operate on hard data and not theories. But it does seem like a lot of this deterioration is happening in the second quarter, which is not fully developed at this point. So is this largely because maybe the acuity adjustment compensated the lower level of disenrollment [inaudible] your conversation? I'm just trying to understand why the states would be compelled to act, kind of on a more recently developing trend. Thanks.

Hey Stephen, it's Mark. There's a lot to unpack there. Can you start with the first one? I want to make sure I understand it.

Yes. The 200 basis points of typical corridor expense that you cite, I would just like to know specifically in the first half of the year if you could give us a comparable metric there. And then when we think about the percentage of your Medicaid premiums that have some level of protection from those corridors versus are more directly exposed to the underlying performance of the business, like is it 50%, is it 75%? How should we think about that?

Sure. Now, the way to think about corridors, in prior years, roughly 200 was usually embedded in our reported MCR. Corridors track to an ultimate across the full year. So you don't really know until the year is over where you come out, and again, that's going to be a function of rate and trend. But what I can tell you is in the first half, I think about half of that normal rate was within our number if we look at what's happened and our expected ultimates. So we're definitely using some of it year-to-date. And as we mentioned in our remarks here, we're expecting to use some of it in the rest of the year. So think across the full year, roughly half of that normal run rate number.

And Stephen, we have very detailed models. We have an entire accounting system on NIM and MLR and corridor tracking. And one of the reasons we don't give specific numbers generally is if 50% or 75% of your premium has a corridor, you say, well, it's protected. Well, it's only protected if that's where the medical cost deterioration happens. And so looking at the gross number can just be very, very misleading. We have our arms around it. We know where we're protected. We know where we have upside opportunity and some geographies there's upside opportunity depending on where you are in the corridor. So we generally don't like to give specific numbers on how much premium is protected, because I think it gives a false positive.

Thank you. The next question comes from Sarah James with Cantor Fitzgerald.

Thank you. I appreciate you reiterating the 2026 premium guidance. I was hoping that you could refresh the bridge a little bit. When you laid it out at I-Day [ph] off of the 23 base, you were talking about $4.5 billion of M&A and $2.5 billion of strategic initiatives. Is that still the mix that you see? And then when you think about M&A, how do you think about the mix between Medicaid and exchange that could play out through 2026 or that exists in your pipeline?

It is possible that if we're redoing that projection right now, it would have to be a little more influenced by M&A, just given where we are in the reprocurement cycle, but we're very active in the M&A space as we just demonstrated. Yeah, comments have been made that the last two transactions that we executed were Medicare and marketplace, which some people are calling non-core. They are core. They are as core as Medicaid. And our pipeline is still very active with Medicaid opportunities, and you'll hopefully see Medicaid transactions here over the next 12 to 18 months. We're still very active in that space. The last two we did were non-Medicaid, but that doesn't mean we're not actively pursuing them and working them.

Thank you.

Thank you. And the next question comes from Michael Hall with Baird.

All right, thank you. So a quick clarification and then my real question. I was surprised to see no cash flow from Ops so far, first half of the year. I know you called out special timing, corridor payments, CMS receipts, etc. I was wondering if you could break out some of the amounts of the larger pieces to help bridge us back to what maybe normalized cash flow from Ops would look like. And then the real question on MA risk adjustment benefit. Wondering if you could just – how much specifically did you benefit from it for your 2Q MA MLR? And generally, isn’t it true that, yes, the risk adjustment fleets tend to result in some slight favorability, but also from my understanding, plans generally don't see a huge benefit, because they simply accrue to whatever the risk adjustment was in their early 1Q payments. So my question is, how did you recognize such a large benefit? Was there something unique going on with BrightHealth's MA assets where maybe you took a more conservative approach on the risk adjustment accrual? So more color on that would be great. Thank you.

Hey, Michael. Good morning. It's Mark. Let me take OCF. As we mentioned, and for everybody's benefit, Michael's asking about a large difference in this year's first six months operating cash flow versus prior years. Just a note on that, I think some people forget that government services MCOs have a lot lumpier cash flow than maybe some of our diversified competitors. Commercial businesses tend to have much more stable quarter-to-quarter OCF as do services businesses. Government businesses, because of the timing of large payments, risk adjustment and corridors will be a little bit lumpier. The only other comment I'll make, and I'll get into the details Michael, is we are a growing business, and a growing business should always have OCF ahead of net investment income, because a growing business, that's the way the working capital cycle works, and we do. If you look at any broader time frame, you will see that. So the first half is really about a couple of unique items, unique items that benefited us last year and are now just sort of catching up. So there's three that we'll talk about and you'll see these on my operating cash flow in the earnings release. The largest one is the timing of risk corridor payments. Here's how to think about this. We're accruing less this year on risk corridors than we were last year for all the reasons Joe and I just discussed. But separately, I'm paying down last year's balances. So that's a big swing in OCF, call it a little more than $0.5 billion. Next one is CMS payments. You know it's funny, CMS payments usually come in a couple of days before the end of the quarter or a couple of days after the end of the quarter, and that makes a big difference on the reported cash flow. About 400 of our OCF swing is exactly that, and you'll see that on the operating cash flow statement. And the last one's a little bit unique. We had about $200 million of cash flow benefit year-over-year from California taxes. You might recall that California federal taxpayers got a little bit of a delay on their tax due dates back in 2023. So both, the 2022 final tax payments, as well as the estimated 2023 tax payments were delayed into the second half of the year. This year, we're right back on target. So year-over-year, that's a bad guy. This year, it was a good guy last year. That's $200 million right there. So I probably just walked you through the vast majority of that operating cash flow deficit you are talking about. We're very comfortable in the cash flow characteristics of the business. And again, look over any broader period of time, you'll see a great normalization in that relationship between OCF and net income. On the Medicare risk adjustment, a couple of comments there. Unlike Marketplace, most of that Medicare was a benefit from this year's operations, and gosh, we're just getting a little bit better at it. We've got a bigger business. We've got the bright business, and sure, there's always some prior year benefit. But a lot of this is, we're just getting better at the risk adjustment equation across each of our individual Medicare businesses.

Thank you. The next question comes from Scott Fidel with Stephens.

Hi, thanks. Actually, just to follow-up, I guess to sort of complete out the operating cash flow discussion. Mark, can you give us what you are expecting for the back half of 2024 or for the full year for CFFO? And then second, I guess main question would be, definitely thought it would be helpful maybe if you just want to segment or bucket the dollar of embedded earnings that you're expecting from Connecticare in terms of what sort of the key drivers of that accretion to get to the dollar bill. Thanks.

Sure. On the second half of OCF, a normal relationship is a little bit ahead of net income. So, think a relationship of 1.1, 1.2, 1.3, something like that. I would expect a more normalized relationship in the second half of the year. Again, looking over the two years in total, so much of that year-over-year comparison was about things unique to last year or unique to this year. Looking at ‘23, ‘24 combined, you'll get a very normal relationship between OCF and net income that'll certainly normalize in the second half of this year.

And Scott, on the Connecticare acquisition, the business performs okay. It does not perform to Molina target margins. As typical in these situations, we intend to improve the MCRs in both, the marketplace business and the Medicare business, and rationalize the G&A spend. It is not a huge undertaking. As I said, they are underperforming our targets, but not woefully underperforming. We will improve the performance by moving these simply from where they are to Molina targets. Pay per membership, good brand recognition. We bought it at 25% of revenue, half of which is hard capital. And then we unleashed the Molina playbook to get it to our target margins, the dollar of accretion. Great deal for us.

Okay. Thank you.

Thank you. And the last question this morning comes from George Hill with Deutsche Bank.

Hey, good morning guys. And thanks for sneaking me in. I hope I have two quick ones here. I guess you talked about the example where you have acuity getting worse and states are cutting rates. Well I guess, talk to us about how confident you'll be that you'll kind of get rate in that percentage of the book going forward. Just increasingly as we're hearing like, we hear about actuarial soundness, but when we talk to some state regulators, we hear actual soundness is kind of with the phrase, ‘subject to budget.’ So kind of worried about the timing and the mismatch there. And then on the 200 basis points in the risk quarter that we discussed, I guess, can you talk about your confidence in the risk quarter, like the contributions. It'll suck up some utilization in the back half of this year, but I guess, can you talk about like how much was sucked up in Q2 and like how should we think about like the risk quarter – the decrease in risk quarter contributions in Q2 and kind of how that varies through the back half of the year? Thank you.

Sure. A couple of things there. So you are mentioning the California negative retro rate adjustment. Look, I haven't personally seen one. That's the only one. I don't expect another one, but for the rest of the year, there's not speculation. Those rate increases that Joe and I talked about in the second half of the year, both the normal rate cycle and the off cycle rates, all of those are known and committed, so not a lot of speculation there. On the 200 basis points that you are talking about of historical, you can't really think about corridors on a quarterly basis, because they are an annual fiscal year concept. So you are always accruing to an ultimate, which means you are spreading out any impact across all four quarters, not quarter specific. So when I think about the full year and our fiscal year accounting, we said somewhere around half of the historical 200 is about what we think we're using. That's again a guess, and it will ultimately come down to the full year development of rates, trends, and our medical management.

And George, maybe it's best to give a couple of examples. So we have Texas is a September 1 renewal. Things were running a little hot in Texas. Acuity shift, etc. We had a high – the market got a high single digit rate increase. That will have impact to the second year, it's known. We have it in draft form. Draft rates never decline. They can go up, but we're very confident in it. Another example is a really interesting one. It actually explains some of the trend inflection we talked about that's very localized, and the rate actions that are taken in Kentucky. Due to the pandemic, the regulators asked the market to suspend UM on outpatient behavioral. We did, as did the market. What happens? Cost goes up. The market then approaches the state, presents the actual data, mid cycle rate increase because the behavioral program was underfunded. So the conversations with our state regulators, our customer are very productive. They are databased, and they are taking very reasonable positions, whether something is program related or whether it's an acuity shift that can be actually supported.

Helpful. Thank you.