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Good morning and welcome to Molina HealthCare's Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Geyer, Vice President Investor Relations at Molina HealthCare. Please go ahead.

Good morning and welcome to Molina HealthCare's third 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 third quarter, highlighted by $6.01 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 third quarter performance. Last night, we reported adjusted earnings per share of $6.01, a $9.7 billion of premium revenue. Our 89.2% consolidated MCR was higher than expected as we experienced some medical cost pressure in our Medicaid and Medicare segments. However, we still produced a 4.5% adjusted pre-tax margin or 3.4% after tax, a very strong result. Year to-date, our consolidated MCR is 88.8%, slightly above our long-term target range, and our adjusted pre-tax margin is 4.5%, which is within our long-term target range. Together, these results reflect a well-balanced and well-performing portfolio of businesses. In Medicaid, the business produced a third quarter MCR of 90.5%, above our long-term target range. This result included a premium rate reduction in our California business that was retroactive to the beginning of the year. We are working with the state to understand its methodology and actuarial support for this adjustment, both of which remain unclear. Excluding this retroactive item, the third quarter Medicaid MCR was 90%. The quarter reflects higher than expected medical costs, elevated by the impact of redetermination related to acuity shifts and higher utilization among our continuing population, particularly for LTSS, pharmacy, and behavioral health services. However, this higher trend continued to be partially offset by three dynamics. First, our new store additions continue to improve toward target margins. Second, on-cycle and off-cycle rate adjustments went into effect during the quarter. And finally, our risk corridors continue to act as a financial buffer against elevated medical cost trend. The short-term disparity between rates and medical cost trend may have reached its widest point in the third quarter. We expect this short-term disparity to narrow, starting with known rate updates. In the third quarter, we received five on-cycle rate updates that averaged 4.5%. We also received several positive off-cycle rate adjustments, which is an important indication that many of our states have recognized that certain aspects of their program are underfunded. For the fourth quarter, we received three on-cycle rate updates that averaged 9%. In total, the second half of 2024 now reflects these known rate increases that amount to a benefit of approximately $350 million, or 230 basis points on the Medicaid MCR. This 230 basis point benefit, along with risk corridor protection, is expected to substantially offset the elevated cost trend in the second half of 2024. Looking forward to 2025, the progression of rates and cost trend is not entirely clear. 55% of our Medicaid premium renews on January 1st, and we are encouraged by the draft rates we have seen from several of these states. These draft rates are an important starting point for 2025, and we remain cautiously optimistic while we wait to see how medical cost trend progresses in the fourth quarter and early 2025. Given the confluence of the many MCR dynamics concentrated in the quarter, we are very pleased to be operating at a 90% Medicaid MCR for the full year, nearly 100 basis points above the top end of our long-term range. With the assumption that rates may continue to improve in appropriately captured cost trend in this upcoming rate cycle, there is line of sight to be operating within our long-term MCR target range for 2025. Turning to Medicare, our third quarter MCR was 89.6%, above our long-term target range. The medical cost pressure in the quarter was consistent with the elevated LTSS and pharmacy costs we experienced through the first half of the year, while we also experienced higher outpatient utilization in the third quarter. Our bright business in California performed in line with expectations. In marketplace, the third quarter MCR was 73%. The business continued to perform better than our expectations, even with the higher special enrollment period membership gained from redeterminations this year. Our third quarter adjusted G&A ratio of 6.4% was a very strong result and reflects effective operating discipline, including labor cost management, one-time credits related to vendor contracts, and leveraging our fixed cost base as we grow. Turning now to our guidance for the full year. Our full year premium revenue remains unchanged at approximately $38 billion, or 17% year-over-year growth. We maintain our full year adjusted EPS guidance of at least $23.50, representing 13% year-over-year growth. We expect continued strong performance in our marketplace segment, G&A efficiencies, and higher net investment income to offset the higher MCRs we are experiencing in Medicaid and Medicare. Our 2024 revenue and earnings per share guidance provide a strong foundation for profitable growth in 2025 and beyond, and the building blocks to achieve our long-term growth targets remain intact. Now, some comments on our growth initiatives. Our business is well-positioned to capitalize on long-term growth opportunities in all three segments. In traditional Medicaid, as previously reported, we retained our presence in Florida with a contract to serve approximately 90,000 members in Miami-Dade County. This contract recovery is an important component of our portfolio, given the state of Florida's significant Medicare and marketplace profile. In Georgia, we await the announcement of statewide contract awards. We remain confident in the strength of our proposal and our ability to serve as strong state partners for these populations. We had significant wins in the quarter in our dual-eligible integrated product businesses, which are a major strategic focus for us. In Michigan, we were awarded a contract to provide benefits to the state's highly integrated dual-eligible special needs population in six service regions, including Detroit. This is an increase from our current MMP footprint of two service regions. This win facilitates the transition of our existing MMP members to a high-d product and ensures a new dual-eligible growth opportunity. We project $1 billion of incremental premium revenue by 2027 and have added $0.50 per share to our embedded earnings. The contract, which is effective January 1st, 2026 in select regions, will be implemented statewide in 2027 and continue for seven years. Given our success in this Michigan MMP transition, we are confident about our prospects in both Ohio and Illinois. In Massachusetts, the Commonwealth awarded us a new contract to operate the One Care Under 65 program and retain our position in the Senior Care Options Program for 2026. Incremental revenue is expected to reach nearly $400 million in three years' time, and for this, we have added $0.25 per share to our embedded earnings. Also in Medicare, beginning in 2025, we will no longer offer MAPD products in 13 states, totaling approximately $200 million in annual premium. This adjustment allows us to strategically focus on our dual-eligible populations, where we increased our county footprint by 23% and on our low-income MAPD population in California. Recall the new CMS final rule on integration positions us well as a major Medicaid player. In Marketplace, we are positioned to grow organically in under-penetrated markets, given the stabilized risk profile and margins we've achieved. Our rate filings for 2025 are very competitive and position us to grow in under-penetrated markets. We are confident in our strategy to grow the segment at a rate that allows us to achieve mid-single-digit pre-tax margins. Finally, we continue to expect that our announced acquisition of ConnectiCare will close in the first quarter of 2025. Our ability to grow organically, win new state contracts, and execute M&A are the pillars of our growth strategy, and we fully 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 raised to $5.75 per share, we remain on track to deliver long-term profitable growth. Mark will discuss the building blocks of our 2025 outlook in his remarks. In summary, we are pleased with the quarter's results as we continue to power through unprecedented short-term dynamics and just keep executing on the fundamentals. Our businesses remain on solid operational and financial foundations, and are positioned well for long-term profitable growth. We look forward to updating you on the next wave of long-term value creation at our Investor Day event on Friday, November 8th in New York City. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Thanks, Joe, and good morning, everyone. Today, I'll discuss some additional details in our third quarter performance, the balance sheet, our 2024 guidance, and the building blocks of our 2025 EPS and outlook, beginning with our third quarter results. For the quarter, we reported approximately $10 billion in total revenue and $9.7 billion of premium revenue, with adjusted EPS of $6.01. Our third quarter consolidated MCR of $89.2 was above our expectations, reflecting some pressure we experienced in Medicaid and Medicare during the quarter. In Medicaid, our reported MCR was $90.5. As Joe mentioned, this result includes a 50 basis point increase due to a premium rate reduction in our California business that was retroactive to the beginning of the year. With much of our California revenue in the new store first year of operations stage, corridors were not quite at the target margin levels, so much of the impact of this rate action fell through to our bottom line. We are still working with the state to understand the rationale for this rate adjustment. It's highly unusual for a state to retroactively reduce rates, and all of our other known and expected future rate actions are positive as states address recent medical cost trends. Adjusting for this retroactive item, our reported MCR of $90.5 falls to $90. This was in line with the second quarter and remained elevated versus our expectations, driven primarily by higher than expected medical costs in our legacy Medicaid portfolio. Recall the dynamics of redetermination involve joiners, leavers, and stayers. Redetermination related acuity shifts continued into the third quarter, even as the imbalance of joiners and leavers began to stabilize. We saw a higher utilization among our stayers population, particularly for LTSS, pharmacy, and behavioral health services. Several dynamics served to offset these higher trends in the third quarter and muted the overall impact. First, our new store additions, which represent approximately 20% of Medicaid premium and have a higher than average MCR in their first year, improved during the quarter and remain on track to achieving target margins. Second, we had on cycle and off cycle rate adjustments in 11 states. And finally, due to our strong medical cost management, we started the year deep into risk corridors, which acted as a buffer and created a more muted impact of this acuity shift. Medicaid membership at the end of the third quarter was 4.9 million and in line with the second quarter. Some continuing redeterminations in a few states in July and August were largely offset by the implementation of our New Mexico contract in the quarter. We continue to see reconnects from prior period terminations and expect continuing upside to membership from reconnects in the quarters ahead. In Medicare, our third quarter reported MCR was 89.6. Higher medical costs in the quarter reflected continued higher utilization of LTSS and pharmacy. We also experienced higher outpatient utilization in the third quarter, concentrated in our decent population. Separately, I will note that the prior year risk adjustment true-ups in the second quarter drove a portion of the sequential increase in the MCR. Our bright business in California performed in line with expectations. In Marketplace, our third quarter reported MCR was 73 and better than expected. Special enrollment period membership increased during the quarter, but at a slower rate than the first half of the year. Our adjusted G&A ratio for the quarter was 6.4 and reflects effective operating discipline, including labor cost management, one-time credits related to vendor contracts and leveraging our fixed cost base as we grow. Turning to the balance sheet, our capital foundation remained strong. In the quarter, we harvested approximately $385 million of subsidiary dividends and our parent company cash balance was approximately $195 million at the end of the quarter. In the quarter, we repurchased approximately 1.5 million shares. Our full-year guidance now assumes 57.9 million shares outstanding. Debt balances and the debt-to-capital ratio increased slightly in the quarter due to our share repurchases. Debt at the end of the quarter was 1.4 times trailing 12-month EBITDA with our debt-to-cap ratio at about 35%. We continue to have ample cash and capital to fuel our growth initiatives. During the quarter, we also renewed our revolving credit facility for another five years and increased its capacity to 1.25 billion. Days in claims payable at the end of the quarter was 48. We remain confident in the strength of our reserves. Our operating cash flow in the first nine months of 2024 was $868 million. This was lower than the prior year, but consistent with our comments last quarter, reflects the timing of risk corridor payments, CMS receipts, and taxes. Recall that earlier this year we made several large corridor settlements related to prior years. Next, a few comments on our fourth quarter and 2024 guidance. As Joe mentioned, we reaffirm our full-year premium revenue guidance of approximately $38 billion and our full-year EPS guidance of at least $23.50. While full-year EPS guidance is unchanged, the performance in the second half of the year changes the components as compared to our previous guidance. EPS guidance has increased by $2.70 from the combined tailwinds of strong performance in marketplace, G&A efficiencies, and higher net investment income, but will be offset by the higher MCRs in Medicaid and Medicare for a net unchanged view of full-year guidance. We now expect full-year 2024 MCR of 88.7% and G&A ratio of 6.8%. Within Medicaid, we expect fourth quarter MCR of 89%, a decrease from 90.5% in the third quarter. The 150 basis point improvement is driven by three items. First, 50 basis points from the third quarter retroactive premium adjustment in California that will not recur. Next, 80 basis points from known on-cycle and off-cycle rate increases and some benefit of our corridor position will offset trend. Finally, continued improvement in new store additions will contribute 20 basis points. We expect full-year Medicaid MCR of approximately 90, up 70 basis points from our prior guidance, reflecting higher cost trend and approximately 10 basis points for the full-year impact of the third quarter retroactive premium adjustments in California. In Medicare, we expect fourth quarter MCR of 90, an increase from 89.6 in the third quarter. This guidance assumes the third quarter utilization persists for the remainder of the year and increases the full-year MCR to 88.3, a 30 basis point increase from our prior guidance. In Marketplace, we expect fourth quarter MCR of 78.1, compared to 73 in the third quarter. This increase reflects the normal marketplace seasonality during the year and the significant SEP growth we experienced year-to-date. We expect full-year marketplace MCR of 74, down 400 basis points from our prior guidance, reflecting strong year-to-date performance. Turning to embedded earnings and the building blocks of our 2025 EPS outlook. New store embedded earnings are now $5.75, with the addition of contract wins in Michigan and Massachusetts. Both contracts are expected to begin in 2026 and achieve target margins in 2027. We expect to harvest a little less than half of our embedded earnings in 2025. The building blocks include those embedded earnings we expect in 2025, the organic growth and margin in our current footprint, our in-flight organic and strategic initiatives, and the year-over-year benefit of share repurchases executed in the third quarter of 2024. We expect some headwinds from declining interest rates next year. We caution that rates have not yet caught up with trend, and our corridor productions are now lower until replenished by the new cycle of actuarially sound rates. While it is not yet clear how the short-term disparity between rates and trends will progress, these known building blocks are an important foundation to our sustaining long-term profitable growth. This concludes our prepared remarks. Operator, we're now ready to take questions.

We will now begin the question and answer session. [Operator Instructions] The first question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. I'd like to ask my second question first. So the strength in marketplace, does that change your view on the impact of potential rebate positions in 2025, just based on what you've seen in the last two years here? And could you just remind us your views? I think you mentioned sort of that mid-single-digit margin, just sort of how you're titrating additional growth in 2025 versus offsetting rebates versus sort of maintaining that mid-single-digit margin?

Sure, Josh, this will be the second straight year of outperformance in marketplace and in '24 into '25, we did invest that excess margin in our bids and expect to grow the business. And yet here we are again with another year of outperformance and we'll continue to do the same. So yes, we're targeting mid-single-digit pre-tax margins, but the business is positioned to grow really well next year and the year after. Now, with respect to the rebate question, recall it's a three-year test and also recall that an 80% minimum is equivalent mark to what? About a 75% GAAP equivalent, correct?

Right around there. Josh, we're tracking to a 74 in our guidance this year. As Joe mentioned, the 80 nominal that everybody thinks of a minimum MLR is more like a 76-ish. And as Joe mentioned, you can either pay it in a rebate or make it up on volume through pricing and that's the direction we'll take.

Okay, so you guys are in a rebate position. Your point is you can get that 200 basis point delta for next year. And then just a quick follow-up on the Medicaid MLR. I think it's running full year. It looks like 70 basis points higher than your previous. So, maybe if you could just drill down a little bit more on LTSS, behavioral health and RX and what's running specifically worse? What are those incremental pressures coming from?

We expected in our initial guidance a trend in Medicaid of about 3% and it's landing at about six. It's split sort of equally between redetermination impact and impact of higher utilization of what I call our continuing membership. No one phenomenon is really driving it. It's a blend of GLP-1s and RX, LTSS both skilled nursing facility in patient stays and hours in home service benefits. And then of course the national phenomenon of behavioral services trending upwards as well. Really no one thing and its different in every geography, but those are the trends we're observing. Mark, anything to add?

No, I think that's right versus the initial guidance or expectations for the year. We're up about 300 basis points on trend. Joe mentioned its split between rededicuity and its split between stayers running a little bit hotter, BH, LTSS, pharmacy. We're seeing them in pockets here, pockets there but those are national trends.

Thank you.

The next question comes from J.J. Rice with UBS. Please go ahead.

Hi everybody, I think it's AJ but anyway. If your trend is running at about 6% that would imply the rate updates you need to normalize are probably in that range maybe a little bit higher over the next year. That's quite a bit different as you may know from what at least one of your large peers is saying they need, they're talking about a low-to-mid double digit rate increases. And they've also raised the question about whether state budgets can afford to update in one year what's necessary or whether we might need multiple cycles. I guess I don't know if you can comment on why there might be a difference between what you're seeing and what they're seeing, but I'll throw that out and see if I can get you to confirm the order of magnitude of the rate update you need to normalize and whether you think that's achievable over the next year.

Let me first, AJ, comment on the model of how we've been describing this since redetermination started. We knew there would be an acuity shift without question. It takes time for a state actuary to observe the acuity shift and allow rates to rate for it. There's a gap there. Being 200 basis points deep into the risk corridors would act as a buffer until rates caught up and that's exactly what's happening here. Obviously we're a bit short, but we're operating comfortably at 90% no matter how you cut it, we're operating comfortably at 90%. Now with respect to rates, what gives us encouragement and great comfort are the rate updates we saw in the second half of the year, $345 million of pre-tax benefit to the second half, 230 basis points in the MCR. Some of those rate updates were off cycle, meaning that states truly have recognized that components of their program were underfunded. The on cycle rate adjustments in the third quarter averaged 4.5%. The on cycle rate adjustments in the fourth quarter averaged nearly 9%. Now we've only seen a handful of draft rates for 1-1 when 55% of our revenue renews but we've been encouraged by what we've seen at this early stage. So how it all maps out depends on what cost trend emerges in the fourth quarter as to whether the strength of those 1-1 rates will truly get us back to our target MCR. Mark, anything to add?

Joe, I think that's really well summarized. There's no doubt that there's a little bit of a lag between trend and when states recognize it. But as Joe mentioned, five on cycle, seven off in the third quarter, three more in the fourth quarter, the timing will never be perfect but part of our equation here is those corridors make up that difference until we get to the New Year and the new rate cycle. So I think a combination of the states being fairly responsive and the corridor position, we're confident in our outlook.

Okay. That's helpful. Just on your utilization trends that you're seeing, and you called out the areas of Medicaid, it sounds like you're seeing a little bit of that in Medicare. Just trying to parse out, are these just the way the market is at this point or you need to get that in your rate updates both for Medicaid or Medicare or is there medical management opportunities for you to push back on some of what you're seeing?

Well, I think it's all relative, right? Because we all get the same rates and we're all observing the same gross trends, supply-driven, demand-driven. We have proven on a sustainable basis that we are managing medical costs effectively. Otherwise, we would not have historically been 200 basis points deep into the corridors on average for the past three or four years. So as rates renew, those corridors replenish and given our expertise in medical management, care management, driving great quality scores, risk adjustment, et cetera, we plan to, and it is our intention to always be operating below whatever state benchmark exists in a minimum MLR or a corridor to always have that financial buffer available to us.

The only thing I'd add, Joe, is when we talk about trend, we talk about net trend. So the benefit of the medical cost management that we do, UMCM, all that, is already in the numbers that we report. I think maybe when you hear higher trend numbers from other folks, they may have different views on how they do medical management. But again, we talk about net trends, net of all the things we do to manage costs.

Okay. Thanks a lot.

Thank you.

Apologies to you, Mr. Rice, for misspeaking your name. The next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Thank you. Can you help us think about what a clean jumping off point for 3Q is? You guys mentioned a one-time vendor credit. How big was that? I think also an unusual tax item. And was any of the 80 basis points pressure on the core Medicaid MLR out of period? And then just a clarification. Is it -- should we think about it as 80 plus the 200 basis points risk corridors, so really 280 year-over-year? That'd be great. Thanks.

We'd have to parse your question into various pieces. But as I said, we are, no matter whether you pro forma the second quarter to the third, the third quarter to the fourth or the full year, we are comfortably operating Medicaid at 90% MCR. In fact, for the full year embedded in our guidance is an 89.3% MCR on the legacy book. That's only 30 basis points above the top end of the range. So we have a bridge, and Mark will give it to you here in a second, how we get from 90.5 in the third to 89 in the fourth, which would then support our guidance. Mark?

Yes, absolutely. So the jumping off point on the third quarter, we reported a 90.5, but as you know, 50 basis points was that one time I had been in California. So we're jumping off a 90 from a clean basis on a third quarter. When we look at our rates and our trend in our corridors, I'm seeing a pretty significant improvement. I'm targeting an 89 for the fourth quarter. The way I get there off of a 90 is rates. We have three states with known on-cycle rates, which give me 80 bps of good guy for the fourth quarter. I'm going to assume trends another 50 bps in the fourth quarter, and I know I have corridors roughly to offset that. You add a little bit of benefit from our new stores, which continue to give us a 20, 30 bps every quarter as they progress to their targets. That's your trajectory to get from a 90 adjusted to an 89. Now on G&A, you asked also about the jumping off point. We reported a 6.4 in the third quarter. That benefited from some vendor credits, a little bit was retro, but a little bit is sustaining. Just to cut to the chase on that, my full year guidance will be a 6.8 on G&A. I think that gives you the building blocks to model out the rest of the year.

Great, thank you.

The next question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Yes, hi, thanks for the question. I appreciate the color on the bridge to the fourth quarter. So I'm going to follow up a little bit on that. You mentioned some of your factoring and potential for some incremental trend. I guess when you think about the negative impact from acuity shifts that have been driving up, MLR sequentially, rejoiner dynamics presumably contribute into that as well. Is your expectation now given where we are in the cycle that this negative incremental pressure has largely stopped as we enter the third, enter the fourth quarter, or is that factored into your thought process as continuing at least for another quarter or two? Thank you.

So in the third quarter, we had pretty meaningful trend as did everybody, right? And I think there were two dynamics in the third quarter. One, there was a little more carryover from redetermination. One, it's just the weighted average math. Redetermination mostly stopped in the second quarter, but the weighted average math carrying into the third quarter put a little pressure in the third quarter. The other thing is I had a couple of states that continued to do determinations in the third quarter. I had two states in particular that extended into the third quarter. So we saw a little bit more of the joiners, leavers dynamic into the third quarter than I would have otherwise expected. And of course, the leavers having a little bit higher utilization. I don't think either of those are sustaining, which is why I'm suggesting more like a 50 basis point trend in the fourth quarter over the third, kind of coming back to a new normal.

Was there a follow-up, Mr. Baxter?

Yes. Well, I guess I'm going to make a follow-up, I appreciate, just a little bit of like what the states, in terms of the rate update process are really seeing here. I mean, like to follow up on a previous question, we've kind of heard from peer companies that there's often a multi-year lag to the claims base needed to reset rates. So in terms of the rate updates being so large today? Is it truing up acuity factors largely because we've seen enrollment drop off more than what had been previously projected, just trying to understand what is making its way into the rates and why, given that the claims experience obviously is still very dynamic? Thanks.

The rate process has not changed. The rate setting process starts with a credible baseline. Every state has a view of where that baseline should lie, whether it's a year prior, two years prior, pre-pandemic trend off the baseline. And acuity shifts, for any reason, are always part of the rating process. The only thing that's different now is that the acuity shift is far more dramatic, given the 92 million enrollees down to 72 million in a short period of time. So nothing's really changed in the rating model process. It works exactly the way it's worked historically. The only thing that's different is the acuity shift is more prominent. And by the way, it's not a secret. I mean, its high profile. Every state knows it, and there's laser focus on it. So the fact that we're getting updates that seem to be capturing it should be no surprise.

The next question comes from Justin Lake with Wolfe Research. Please go ahead.

Thanks. Good morning. I wanted to focus on your 2025 comments. First, are you confirming that you believe you could do 13% to 15% next year? And specifically, Mark, you gave just about $3 of that embedded earnings kind of comes in next year, which is a great tailwind. On the other hand, you talked about a bunch of help from investment income and G&A and marketplace that might not reoccur. That is almost a similar number. I think you said it was like $2.70. So just trying to think about those moving parts and whether you still see that when combined with core growth, getting you to that 13 to 15 target or where you expect to be in there?

Well, I think, Justin, it's Joe, I think the items that are easy to get your arms around are the embedded earnings because we have visibility into them. As Mark said, would there be a headwind from that investment income? That's pretty obvious. The unknown is when we talk about growth off the footprint, that's usually pretty easy to predict. But we need to see how medical cost trend emerges in the fourth quarter into the first to then conclude that the 1-1 rates, 55% of our revenue are appropriately capturing it. So normally, we'd be able to give you a really good point estimate in a normal environment that our footprint should produce a buck, a buck 50, two bucks a share. Right now, we're hesitating to do that until we see more in the fourth quarter. Mark, anything to add?

Yes, a couple things. Justin, just to set the table, you mentioned $2.70. That was part of my bridging on 2024 guidance. How versus prior guidance, I'm up now $2.70 on a bunch of good guys and down $2.70 on the trend in Medicaid and Medicare. So that's current year. Let's put that aside. For 2025 guidance, Joe hit it exactly right. With some of the vagaries we have right now on trend and rate, we're optimistic, but we're not ready to lay out specific numbers on that. Now, the biggest component of next year is the embedded earnings. As you know, we're now up to $5.75 on embedded earnings. And I said in my prepared remarks, we expect a little less than half of that to emerge next year. Pressures on net investment income, you got that one absolutely. And you're aware we did a small stock repurchase in the third quarter, which you'd want to factor into your numbers as well.

Okay, great. And then just to follow up on the rates, it sounded like you got some pretty good retro rates in the quarter. You mentioned that headwind from California, retro cut. Was there any tailwind from some of these rates in the third quarter, especially the off cycle rates being also retroactive that we need to consider in that jump off point or were none of those retro?

The rates that we got in the third quarter are obviously a good jumping off point going forward. The retro rates are not only retro, but also imply a new go forward basis. So you can jump off third quarter with confidence. And then Joe mentioned we had three new rates in the fourth quarter, which are factored into my fourth quarter outlook.

Right Mark. But to the extent they are retro, you would have dollars in the quarter that don't belong in the quarter. Just like California doesn't belong in the cut, right? Was there any of that, like any offset to that 50 bps?

Just a little bit, just a little bit. But when I give you my bridge from third quarter to fourth quarter, that's in my net rating increase.

Okay. Thank you.

You bet.

The next question comes from Andrew Mok with Barclays. Please go ahead.

Hi. Good morning. I wanted to follow up on the exchanges. Can you help us understand the drivers of the outperformance in the quarter and how would you compare this year's SEP membership to performance of prior years? Thanks.

The SEP membership this year in marketplace has been extraordinary. I think in the second quarter it was 90,000 plus, it leveled off to 60,000 and then 50,000 each of the last three quarters. A normal SEP membership gain in that business is 20,000 to 25,000. So you can see that it benefited by the Medicaid redetermination process without question. Normally that SEP membership comes in with higher acuity and runs higher MCRs. This year the SEP membership came in running higher than the traditional book, but not as high. It's due to a younger demographic, a more healthy demographic, and it didn't put as much pressure on the MCR as it had done historically, likely due to the fact that many of those members came in for Medicaid. So the business is performing well, and I'd rather have excess margin than not, because I can always invest excess margin in growth, which is exactly what we plan to do.

Got it. And if I could just follow up, can you help us understand how the revenue recognition works for off-cycle rate adjustments? Do you wait for those payments to be received or are you able to recognize those when you have a certain level of assurance and visibility into those payments? Thanks.

Yes, we have a really tight accounting standard on that. We need documented evidence, not just suggestion or conversation. We book on documented evidence.

Great, thank you.

The next question comes from Adam Ron with Bank of America. Please go ahead.

Hey, thanks so much. I have a question about core trend and the difference between what you're seeing on that versus the rate and acuity mismatch. First, has that core trend accelerated throughout the year, such that, 2Q is higher than 1Q, 3Q is higher than 2Q, and you expect 4Q to be higher, and if not, what gives you confidence that it will flow? And then second, if you could just break out the magnitude of how you're seeing core trend versus the acuity rate mismatch and overall how that stacks up? I think one of your competitors said it was roughly a third core trend and two-thirds acuity versus rate. Thanks.

As I said previously, and I'll kick it to Mark, I'll just take Medicaid to keep the conversation simple. We had anticipated a net trend of 3% in our initial guidance. That has increased to 6%, and I guess you could say, yes, it had built during the year. We still have a trend increase going into the fourth. Even off this incredibly high cost baseline, we still, in our forecast, had a slight trend increase into the fourth quarter. The combination of rates, trend, and corridors are the reason we're operating at 90 and not 89. So, it worked exactly the way we had predicted with corridors acting as a buffer until rates caught up. And that is happening. Now, we're still cautious on the 1-1 rates, as I said before, but the model is working exactly as we have predicted. The corridors act as a financial buffer, giving rates time to catch up with trend. Yes, trend did build over the year.

Yes, and I think, Adam, the easiest way for me to think about it, because you get into timing issues quarter to quarter, what came in when, was something retro, on a full-year basis, as we said before, trend is 3% higher than I initially thought in the outlook, just for all the reasons we all know. Rates are 1.5% better than I initially thought. I'm using 1% of my corridors on a full-year basis to offset some of that mismatch, which is largely why full-year guidance went from 89 to 90. The difference in all that math is obviously you've got a couple of California retro items in there, but those are the big items, and on that trend, what we've been very clear about is part of it is the ongoing imbalance of joiners and leavers, and part of it is those stayers running just a little bit hotter than most of us expected.

Yes, and I keep coming back to the legacy book, because the California retro and the new stores create a little bit of obfuscation, but the third quarter legacy book is going to produce an 88.8, the second half is an 89.3 in the full year, legacy book is 89.3. In this incredibly difficult time of a huge shift in the risk pool, we're operating on our legacy book only 30 basis points above the high end of our range, combination of corridor protection, rates catching up to an accelerated trend.

Appreciate it.

The next question comes from Ryan Langston with TD Cowen. Please go ahead.

Hi, thank you. You called out higher utilization pharmacy, behavioral LTC. I'm curious if any other service lines might have come in maybe better than you had expected in the 3Q? And then just on the behavioral side, you called out Kentucky last quarter specifically. Is that higher utilization still isolated to that state, or are you now seeing that more maybe broad based on other geographies? Thanks.

I'll answer the second question first and kick the first question to Mark. On behavioral, the reason we cited Kentucky, it was a program change that caused it. There is a suspension of utilization management in Kentucky during the pandemic, which of course caused behavioral costs to go up. We are seeing pockets of trend inflection on behavioral services broad based across the country. In Kentucky, it was more pronounced because of the program change. But the stigma over receiving behavioral services is removed. Providers are open for business. They really suffered in terms of service revenue during the pandemic. And of course, the pandemic created all kinds of behavioral issues in the population. So it is a national trend. The reason we called out Kentucky, it was because of a program change.

And back on the utilization management side, we certainly called attention to some of the challenges. I wouldn't call any specific good guys out. State by state, we're in 21 states. Every state has its own story with some unique items going on here and here. But as a national trend, I wouldn't cite any specific good guys within trend.

Okay. Thank you.

You bet.

The next question comes from Michael Hall with Baird. Please go ahead.

All right. Thank you. Something I've been thinking about more and questioning is, I understand D-SNP lives have, I think, a six-month grace period in terms of redetermination. So granted, I think most duly eligible lives aren't actually in the job market. But just give how high revenue PMPMs are, even just a few percent change to drive compressor on MLR. So I'm curious to hear what you've seen on D-SNP redeterminations. Is there potential, excuse me, unexpected tail risk on these lives due to the grace period? And just trying to figure out if there's another potential shoe to drop here.

I'm only pausing, Michael, because I'm having difficulty understanding the question. D-SNP lives in our Medicare book and pressure on what aspect of these D-SNP lives are you referring to?

Yes. I guess if there's a six-month grace period on D-SNP lives and redetermination, and could that impact your visibility now? Could you see that come through later on? Or maybe am I not thinking about it correctly, if you give visibility onto it and clarity?

I can only comment on our D-SNP business. As you know, our Medicare business is performing well. A 4.5% pre-tax margin, we targeted six, 5.5% to six, but in this environment, we're pretty pleased with it. Demonstrations are doing well, D-SNP book is doing well, and as I said, we expanded our county footprint by 23%. We're really focusing on the dual eligible D-SNP population, and of course the Michigan win was huge. We have an MMP book that's going to convert to a fully integrated product here in 2026. So I can only comment that we're very bullish on the D-SNP population, we're focusing intensely on it. The final rule passed by CMS gives players with a substantial Medicaid footprint a huge advantage to take advantage of this great growth opportunity, and it's a profitable book to business for us. We have a proven track record of managing high-acuity lives effectively.

Got it. Thank you. If I could follow up, in terms of favorable PYD, it seems like it's been pretty outsized, I think around 700 million this year, if that goes back to normal next year, I think it's about close to 100 bps of just MLR potential headwind into '25. So wondering if you have any color on how or where that could shake out next year, at least directionally, should we be thinking about this as returning to sort of more normal levels in '25?

Well, Michael, thanks for the question, I'd start with what is normal, right? We are a bigger business in '24 than we were in '23, and yes, my PYD is bigger this year than it was last year, but we're a bigger business, we're getting better and better at things like payment integrity. And as you know, when we acquire businesses that also helps us when we look at prior year and prior period development, so I wouldn't say we're necessarily outsized this year, we're a growing business. Now, on a go-forward business, I'm not expecting any headwind from that area, it's part of the way we run our business. Remember, on medical cost management, there are many components to it, CM, UM, network contracting, payment integrity, and making sure that in retrospect, everything's got settled appropriately, avoiding fraud, waste, and abuse, that's a big part of our business. So I see the PYD item as a very continuing part of a business, and I wouldn't factor in anything meaningfully different next year.

The next question comes from Scott Fidel with Stephens. Please go ahead.

Hi, thanks. Good morning. First question, just thought it might be helpful if you can maybe just sort of sequence us or walk us through on the corridors, where you stood at the beginning of the quarter, and then at the end of the quarter, and then where you're expecting to be, I guess, in terms of remaining cushion at the end of the year. Just trying to understand particularly how much potential, I guess, sort of cushion you'll still have from corridors heading into 2025?

Sure, Scott, it's Joe. I'm going to make a framing comment and kick it to Mark for some color on the numbers, but the first thing, one of the reasons we usually hesitate to talk about corridors either in dollars or in basis points of cushion is you never know that you're going to be using it in a place where you have it. If you have negative trend experience, if it happens in a place where there's no corridor protection, there's zero protection, and if it happens everywhere we do have protection, it's 100% protected. So averages actually can be misleading, but I will tell you in each of the past four years we've been operating with about 200 basis points of protection at every point in time. Mark?

Yes, and let me just run through the usual example that we give just to everyone's level set. If business reports an 88 MLR, in our case an analogy might be we were really running an 86. Again, this is just an example, and we were booking 200 basis points of corridor expense. Now, if during that example year the true underlying medical costs went from an 86 to an 87, you might still report the 88, you just would have used more corridor expense, just booked less corridor expense. When the new rate cycle comes around, if rates are actuarially sound, the rates will have to jump enough to essentially put that corridor position back to where it was, all things being equal. So the 86 underlying medical cost goes to an 87, the new rate trend knocks it back to an 86. Right now that is somewhat analogous to the overall enterprise. I started off the year thinking I had about 200 basis points of corridor expense in my MLR. As you know, over the quarters we've started to use that, and I've shown you that in my bridges, such that I'm thinking full year ultimate, that 200 that I normally have is down to more like 100 basis points within my MLR. Now, Joe talked about how 55% of our revenue reprices on January 1. We're optimistic on what that looks like, as well as the rate increases we got in Q3, Q4. So I'm expecting some extent to replenish that corridor. Now, that's all about the rate cycles, and we're not really ready to get into what's what on that. And the last thing, what Joe made, the points Joe made, is even with that 100 basis points of remaining corridor, it's an imperfect hedge, because it depends on where the medical costs come up and where you have the remaining corridors. So there's only so much comfort you can take in that, but it is a very big part of our equation. And again, just to round it out, 200 originally in my guidance, and I've probably used half of it during the course of the year.

And the last questioner today will be George Hill with Deutsche Bank. Please go ahead.

Yes, thanks for squeezing me in, guys. Mark, you might have just gotten us, but I guess, so the expectation is you have 100 basis points of the risk corridor to use in the back half of the year. I guess, can you talk about how much you expect to have by the end? And can you talk about how much was used front half versus back half?

Okay. So it's best to think about these on a full year basis, because quarter-to-quarter, it gets a little bit more complicated. On a full year basis, I started off the year expecting 200. Across the year, a little bit in Q2, more in Q3, more in Q4, I expect to have used half of it, which means on a full year basis within my reported MLR, I'm expecting about 100 basis points of corridor expense. And again, for the New Year, it's all about the new rate cycle on what happens on resetting that.

Okay, that's helpful. And if I could have a quick follow up, could you just comment on how many states do you guys still have a corridor position in? And what percent of lives are on a multi-year repricing basis? Like, we've spoken to some states where they just say, like, our rate cycle's two years or more than two years. So I know we talk about, like, the annual rate cycle, but there are just some states who don't do this annually. Maybe on a percentage of lives, can you talk about what states are on a multi-year cycle versus a single year cycle?

Sure. Just about every one of our states has some form of a corridor, a minimum MLR, or a profit sharing. And that's not news. Many of these things have been around for quite some time. What is important is what the numbers are and how that acts. But you have some form of that in just about every state. And if I understood your question right on the pricing cycle, every state that we have reprices on an annual basis, and some of them commit to on a twice-a-year basis to look at the rates. Most years, that's not necessary, but obviously these days, that's an important fact.

Okay. That's helpful. Thank you.