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Good day, and welcome to the Molina Healthcare Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please note this event is being recorded. Now I'll turn the conference over to your host today, Jeffrey Geyer. Please go ahead. Good morning, and welcome to Molina Healthcare's fourth quarter and full year 2024 earnings call. Joining me today are Molina's President and CEO, Joe

and our long-term growth strategy. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC, as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe

Thank you, Jeff, and good morning. Today, I will discuss several topics.

Our reported financial results for the fourth quarter and full year 2024, our growth initiatives, and related increases to embedded earnings and our full year 2025 premium revenue and earnings guidance. Let me start with our fourth quarter performance. Last night, we reported adjusted earnings per share of $5.05 on $10 billion of premium revenue. Our fourth quarter results and performance metrics did not meet our expectations, but we did demonstrate a continued ability to maintain operating discipline while navigating industry-wide headwinds. Our 90.2% consolidated NCR was higher than expected due to medical cost pressure in our Medicaid and Medicare segments. In Medicaid, our fourth quarter 2024 guidance assumes a moderate increase in trend of an elevated cost baseline from the third quarter. However, the medical cost pressure experienced in the fourth quarter was higher than anticipated, with risk corridors providing no material benefit. Medicare continued to experience higher medical costs consistent with prior quarters, and Marketplace performed very well despite the late-in-year medical cost seasonality we typically experience. For the full year 2024, we reported adjusted earnings per share of $22.65, representing 8.5% year-over-year growth.

Our full year premium revenue of $38.6 billion

represents 19% year-over-year growth, and our pretax margin of 4.3% was well within our long-term target range. While our fourth quarter performance resulted in our full year results falling below our guidance, we have a solid earnings jump-off point heading into 2025 and continue to be very bullish on the growth opportunities within all of our businesses, as evidenced by our increased embedded earnings. In Medicaid, our flagship business representing nearly 80% of revenue, we reported a 90.3% NCR for the full year, or 89.8% when adjusting for the impact of higher MCRs on new stores and the prior year California retro item. With respect to observed medical cost trend in 2024, it was certainly a tale of two halves. In the first half of the year, medical costs trended slightly higher than our initial expectations, primarily due to the acuity shift caused by redeterminations. However, MCRs remained lower in the first half of the year because the acuity shift impact was moderated by our medical cost management, risk corridor protection,

and rate increases.

In the second half of the year, we experienced higher than expected utilization among the continuing population.

The second half rate increases

and risk corridors were not sufficient to completely offset the higher medical cost pressure that continued into the fourth quarter. In Medicare, the full year MCR was 89.1%. The business performed as well as we could have expected, given some of the dynamics the industry has experienced. In Marketplace, the MCR was 75.4% for the full year and significantly outperformed our long-term target range. This was the second consecutive year Marketplace outperformed its long-term target margins. This outperformance allowed us to reinvest excess margin into 2025 pricing to drive higher growth and sustain mid-single-digit pretax margins. Our G&A ratio performance has been excellent at 6.7% for the full year. We continue to have the discipline to harvest fixed cost leverage, manage our internal resources effectively, increase productivity, and negotiate attractive vendor contracts. Turning now to our growth initiatives, 2024 was an extraordinary year for securing future growth on top of the reported 19% premium revenue growth, starting with recent acquisitions. On February 1st, we closed our acquisition of Connecticut from EmblemHealth. In this year, we expect $1.2 billion of revenue, mostly in Marketplace. With respect to new contract wins, in Georgia, the state announced its intent to award it to Medicaid managed care services contract. This was a significant win with an estimated $2 billion in annual premium revenue based on expected market share. We also have significant new contract win

We

We successfully procured dual contracts that will expand our footprint in Ohio, Michigan, Massachusetts, and Idaho.

The incremental revenue from these new contracts

is over $3 billion, an increase from the prior estimate of $1.8 billion we had shared at our November Investor Day. 2024 was also a year in which we successfully defended RFPs in key states. We retained traditional Medicaid contracts in our Michigan, Florida, and Wisconsin businesses. These contracts represent over $2 billion of renewed premium revenue. While we are disappointed in the Virginia contract loss, this award is under protest, and the current contract will extend well into 2025. We are very pleased with the execution of our 2024, and in that context, we further note when all of the aforementioned contracts are in force, we are well on our way to meeting our target of $46 billion premium revenue in 2026, and at least $52 billion in 2027. With our current footprint contributing its average annual growth,

and now fully considering

all of our recent growth successes, the path to achieve these growth milestones is very clear. And most importantly, all of this recent activity has allowed us to increase our embedded earnings to $7.75 for 2026 and beyond, after harvesting $1.50 of embedded earnings in our 2025 guidance.

Having embedded earnings of at least 20 to 25%

of run rate EPS is an attractive benchmark to support future EPS growth. Now at approximately 30%, we are very well positioned to meet our long-term targets. In short, we are solidly on track to achieve the growth outlook we projected at our recent investor day. Turning now to our 2025 guidance. We project 2025 premium revenue of approximately $42 billion and adjusted earnings per share of at least $24.50, which is approximately 8% year-over-year growth. Highlighted by an 88.7% consolidated NCR and a 4.1% pre-tax margin. Similar to the situation we accounted in 2023, this $24.50 EPS guidance is burdened with $1 of contract implementation costs related to yet another significant future revenue growth cycle we secured this year. These are complex programs, with a new contract in Georgia, and fully integrated dual product launches in at least four states. These are not speculative investments, but investments that have near-term

and certain realizable value.

Mark will take through the detailed earnings guidance build in a few minutes. But let me offer some high-level segment commentary. First in Medicaid, Medicaid is projected to be nearly back to performing within our target ranges with an 89.9% MCR. For 2025, we project a continuing elevated medical cost trend during the year. Our 2025 Medicaid rates, most of which are known, are expected to be sufficient to capture this elevated trend. Whichever 2024 MCR you observe, Q4 at 90.2, second half at 89.9, full year at 89.8, or our 2025 guidance at 89.9, our flagship business is hovering around the 90% mark, nearly 100 basis points off our long-term NCR target. The business is expected to produce an excellent pretax margin of 4.3%. When the broader market receives the rates, it needs to bring itself back into balance, we expect to be operating well within our long-term ranges, and we believe that will be in the very near future. Next in Medicare, I would characterize 2025 as a year of transition and some early growing pains,

as the business transforms to serve

the increasingly integrated and high-growth dual eligible population. We expect our 2025 utilization pressure from the second half of 2024 is expected to continue into 2025. Second, recent rates have not kept pace with trend. And finally, while our long-term outlook for Bright's earnings accretion is unchanged, we expect that it will be slightly below breakeven in 2025. Finally, in Marketplace, we are projecting to grow premium at 60% in total, half of which is organic. Two consecutive years of exceeding target margins have allowed us to reinvest several hundred basis points of excess margin into pricing in order to grow.

Our product is competitively positioned for this year

and we are very pleased with our early enrollment results. We expect the business to produce an MCR in the middle of our target range and a solid pre-tax margin of 6% in 2025 while continuing to sustain mid-single-digit pretax margins over the long term. Our businesses are positioned to produce an earnings per share outlook of $25.50 in 2025. This is a meaningful measure of underlying performance

and represents 13% growth

on full year 2024 results. When we include the new contract implementation costs of $1, our adjusted EPS guidance for 2025 is at least $24.50 per share. This is a solid foundation off of which to grow and realize the embedded earnings power of the opportunities we have already secured. Turning now to the political and legislative landscape, the facts are Republicans control Congress with a very narrow majority, and have a White House. Two budget reconciliation bills are likely to be passed in 2025. And political parties in the state legislatures and the governor's offices did not change materially in the last cycle, the states will weigh in heavily on any policy changes.

The question, and it is a question, that has been posed

and remains is whether cuts to Medicaid funding will be part of these legislative packages.

We continue to believe that any changes to the Medicaid program as we know

be marginal. Neither side of the aisle wants to see an increase in the number of uninsured,

a reduction in benefits for those relying on government assistance,

or the related impact to providers. While our fourth quarter results fell short of our expectations, I am pleased with our team's ability to manage through the many industry-wide headwinds in all of 2024. Our revenue growth has exceeded our long-term targets,

We have produced a consolidated pre-tax margin

within our long-term target range

and

embedded earnings has reached a new high. The 2025 earnings profile is solid and perhaps industry-leading in managed Medicaid.

All of this allows us to remain very confident

in our ability to achieve the long-term targets that we shared with you at our November Investor Day.

Finally, I want to thank our eighteen thousand

five hundred dedicated associates who work tirelessly on behalf of our members and our stakeholders. Their day-to-day efforts, particularly in the face of difficulty, danger, and natural disasters, are in a word, heroic. 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 on our fourth quarter and the full year performance, the balance sheet, and our 2025 guidance. Beginning with our fourth quarter and full year 2024 results, we reported approximately $10.5 billion in total revenue and $10 billion of premium revenue, with adjusted EPS of $5.05. On a consolidated basis, our fourth quarter MCR was 90.2, and our full year MCR was 89.1, reflecting higher than expected medical costs in the second half of the year in both Medicaid and Medicare. In Medicaid, our fourth quarter MCR was 90.2. Consistent with the third quarter, the Medicaid MCR reflected higher utilization, particularly for LTSS,

pharmacy,

and behavioral health services. We previously expected 50 basis points of trend in the fourth quarter of what we considered to be an inflated baseline in the third quarter.

However, fourth quarter net

trend was approximately 1.2%, and we saw no material benefit from risk corridors. For the full year, the reported Medicaid MCR was 90.3, which restates to 89.8 when adjusting for the prior year California retro item and the impact of new store businesses. Given the unprecedented challenges of rates and trends in the year, we demonstrated strong operating performance with that MCR just 80 basis points above our long-term range. In Medicare, our fourth quarter MCR was 93.8, and our full year MCR was 89.1, both above our long-term range. Higher medical costs in the quarter reflected continued higher utilization of LTSS in pharmacy, as well as higher outpatient utilization within our DStent population. The fourth quarter also reflects the seasonal impact of CMS annual facility fee schedule increases and the revenue recognition of certain risk adjustment items. As Joe mentioned, we remain confident in our 2025 bids and believe our pricing strategy was conservative enough to protect against higher medical cost trend that occurred in the second half of 2024 and is expected to continue in 2025. In Marketplace, our fourth quarter MCR was 83.3, reflecting normal late-in-year seasonality. Our full year Marketplace MCR was 75.4 and well below our long-term target range for the second consecutive year. This allowed us to reinvest excess margin into pricing to achieve significant growth for 2025. Our adjusted G&A ratio for the quarter was 6.3, and our full year adjusted G&A ratio was 6.7. This was the second consecutive quarter we benefited from renegotiated vendor contracts and several one-time items. We're very pleased with the disciplined cost management productivity and leverage we continue to demonstrate. Turning to the balance sheet, our capital foundation remains strong. In the quarter, we harvested approximately $327 million of subsidiary dividends. Our parent company cash balance was approximately $445 million at the end of the quarter, a portion of which was used to fund the Connecticut acquisition, which just closed earlier this week. During the quarter, we repurchased 1.7 million shares at a total cost of $500 million. In November, we closed a bond offering of $750 million of senior notes due in 2033. Debt at the end of the quarter was 1.7 times trailing twelve-month EBITDA, with our debt-to-cap ratio at about 41%. We continue to have ample cash and access to capital to fuel our growth initiatives. Days in claims payable at the end of the quarter was 48, consistent with the third quarter and well within our normal range. We remain confident in the strength of our reserves. Our operating cash flow for the full year 2024 was $644 million, primarily reflecting the impact of risk corridor payments made in 2024. Recall that earlier this year, we made several large corridor settlements related to prior years. Now some additional details on our 2025 guidance. Beginning with membership, in Medicaid, we expect new membership growth from recent contract wins and growth in our current footprint to add over 100,000 members. We expect 2025 year-end membership of approximately 5 million members. In Medicare, we expect to begin 2025 with approximately 217,000 members based on strong open enrollment in our D SNP product, somewhat offset by our exit from MAPD in thirteen states for 2025. The acquisition of ConnectiCare adds 39,000 members. Combined with organic growth in our Medicare business, we expect to end 2025 with approximately 250,000 Medicare members.

In Marketplace,

based on very strong open enrollment, we begin 2025 with approximately 546,000 members, representing 35% growth in our legacy business. To that, we add the acquisition of ConnectiCare with approximately 66,000 members. Effectuation rates among renewing members were in line with prior years, while the effectuation rates on our new members are stronger than in recent years. We expect smaller levels of SEP growth throughout the year compared to 2024, and forecast the year to end with approximately 580,000 members, almost 50% growth year over year. Our 2025 premium revenue guidance is approximately $42 billion, representing approximately 9% growth from 2024. Our expected premium revenue growth is comprised of several items: $2.1 billion from growth in our current footprint,

two

$1.2 billion from the acquisition of ConnectiCare, and $600 million of revenue tied to recent RFP wins. Partially offsetting these growth drivers are minor headwinds due to the annualized impact of last year's Medicaid redeterminations and reduction in our Medicare MAPD footprint. Our 2025 guidance assumes the extension of our Virginia Medicaid contract well into 2025, while we expect the start of Texas Star chip contract to be delayed to 2026. Moving on to earnings guidance, we expect 2025 full-year adjusted earnings of at least $24.50 per share. Our EPS guidance reflects approximately $1.50 for the underlying organic growth in our legacy footprint, the realization of $1.50 of new store embedded earnings, and a $0.90 benefit from lower average share count in 2025. These items are partially offset by approximately $1 due to higher interest expense driven by the bond offering we completed in November, as well as lower net investment income. These components put our earnings outlook at $25.50 a share, an increase of 13% over 2024 full year. When we include the contract implementation cost of $1 for the recent Georgia and Medicare dual contract wins, our adjusted EPS guidance for 2025 is at least $24.50. I will note that these implementation costs are just 1% of the more than $5 billion in revenue we expect to see from the Georgia new contract win and the DUS wins in four states. Turning to our 2025 NCR guidance, we expect consolidated MCR of 88.7. Medicaid MCR at 89.9, 90 basis points above the high end of our long-term range, due to known and estimated rate increases just keeping pace with expected trends. This is almost in line with the 2024 normalized MCR of 89.8, which excludes the impact from new store businesses and the California retro item. So we expect full-year rate increases of 4.5% with 75% of our full-year premium already known, approximately 5%, and the remaining 25% estimated at 2.5%. Our Medicaid NCR guidance includes a trend assumption of approximately 4.5% and no impact from missed corridors as they remain constant over the two-year period. Favorable second-half rates versus our conservative estimates, any off-cycle rate adjustments, and further moderation and trend present upsides to our 2025 guidance. We expect Medicare MCR of 89%. The MCR reflects our conservative approach to 2025 bids and the expectation that utilization experienced in the second half of 2024 will continue into 2025. In Marketplace, we expect MCR of 79%, squarely within our long-term target MCR range of 78 to 80%. Moving on to select P&L guidance metrics, we expect an adjusted G&A ratio of 7%, which reflects 20 basis points of new business implementation costs and 20 basis points due to a higher mix of Marketplace membership, partially offset by leverage and increased scale of our business. Normalizing for these items, our guidance G&A ratio falls to 6.6, again demonstrating continued operating leverage year over year. In other guidance metrics, we expect an effective tax rate of 25.3%, adjusted pretax margin of 4.1%, within our long-term range, weighted average share count of 55.6 million shares, and we expect quarterly earnings to be evenly distributed throughout the year. Turning to embedded earnings, at our recent investor day, we had $6 of new store embedded earnings. To this, we add $1.25 for the Georgia Medicaid RFP win, $1 for our additional dual contract wins in four states, and the contract implementation cost of $1, leaving us with $9.25 from acquisitions and new contracts. Our 2025 guidance includes the realization of $1.50 to yield embedded earnings of approximately $7.75 going into 2026, giving us high confidence in our 13 to 15% long-term growth rate. This concludes our prepared remarks. Operator, we're now ready to take questions. Yes. Thank you. We will now begin the question and answer session. Any time you would wish to withdraw your question, you may press star then two. And we ask that in consideration of the other, you limit yourself to one question and a follow-up. So with those instructions in mind, we will pause momentarily to assemble the roster. And this morning's first question comes from Andrew Mok with Barclays.

Hi, good morning. At the Investor Day, I think you gave us an illustration of what's needed to deliver on 89% Medicaid MLR in 2025. Can you give us a little bit more color on the components within that between rates

trend, and corridors that came in better or worse than expectations resulting in Medicaid MLR 90 basis points above that. Thanks.

Sure. I'll Andrew, I'll frame it, and then I'll turn it to Mark. The MLR guide for 2025 in Medicaid is basically flat with 2024. We have good visibility into rates. We're projecting a 4.5% rate increase and a 4.5% trend off the 2024 baseline. That rate increase, 75% of it is known at 5%, 25% of it is estimated at 2.5%, lending to 4.5. On the trend number, we fully considered the second half pressure as we trended into 2025. All the pressures we saw in the second half of the year continue into the fourth quarter we included in our outlook for medical costs in 2025. That puts us only 90 basis points above the high end of our long-term range, which we feel really good that we're maybe a rate action or two, not a rate cycle, but a rate action or two away from being at the top end of our long-term range of 89. Mark, any color? Yeah. I'll just do a quick reconciliation of where

we are now versus what we said at IR Day.

At IR Day, we were jumping off the second half of the year.

And we wound up 60 basis points higher in the second half of the year for the results of the fourth quarter. For Joe's comment, we also thought that the combination of rates, corridors, and trends would give us about 20 bps. They wound up being pretty much breakeven, so we got about zero out of that. So about 60 basis points worse on the jump-off point. And pretty much didn't get the rate versus trend of benefit of 20 bps that I was looking for at Investor Day.

Got it. And then in the prepared remarks, I think you said risk corridors didn't provide a material benefit. Can you help us understand how the geographic pressure played out such that there was no corridor benefit in the quarter? But I think you cited about 100 basis points remaining at the third quarter call. Thanks.

It's a matter of geography. As we've always said, we're almost loathed to give a number of how deep we are in corridors because while it is a hedge, it's an imperfect hedge. If you have underperformance, it depends where that underperformance happens, whether you get the benefit of the corridor. In the fourth quarter this year, while we had forecasted, I believe, 50 basis points of trend pressure absorbed by the corridors, it didn't pan out that way. Mark, anything to add? That's exactly right. We're in 21 states.

And the benefit of the corridor is not evenly distributed across 21 states. So what really matters is where does the trend pressure show up versus where is corridor protection remaining. That could either help you significantly or it can leave you no benefit,

which is more or less what happened in the fourth quarter.

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

Hi, thanks. I appreciate the color on

the full year Medicaid MLR and the components impacting it. Was hoping you could give us, you know, also the fourth quarter breakdown if there's any lingering impact from new store, any impact from retros, either positive or negative. And then to the extent maybe there was any negative development in the quarter to potentially spike out in Medicaid. Just trying to understand the jump-off point, you know, a little bit more clearly to think about the achievability of guidance. Thank you.

The Medicaid MCR in the fourth quarter, it actually was merely a case not to oversimplify it,

of

fourth quarter dates of service trending at 1.2% versus the forecast of 50 basis points. There was no one-time items. There were no retros anticipated or received. It was from an accounting perspective, very, very clean. Trend outpaced our estimate. Corridor protection provided no benefit. The typical suspects, higher utilization, among the STAIRS population, particularly for LTSS, pharmacy, and PH. BH inpatient was up. And look at on the pharmacy side, it's not only GLP ones that are causing the pressure, but other high-cost

therapies.

The trend pressure in the fourth quarter was

the same as we experienced in the third quarter and was not muted, benefited, or detrimental by any one-time items or artifacts.

K. And then just as a follow-up, would you be able to share the ID and R balance at the end of the year just to help us evaluate the reserve picture. Thank you.

Absolutely. On medical claims payable, you might have seen we're at $4.6 billion. The DCP, which is an imperfect measure, but I know why you guys use it, was 48. Just to put that in context, over the last three years, DCP averaged

49. At the low was 47 one quarter. At the high was 51 one quarter, but averaged 49. The biggest driver of volatility around DCP and IV and R is how fast cash goes out the door. Right? Because the actuaries have a very consistent process of accruing liability. Having said that, cash payments are a little bit lumpy. So we're at 48. That's the same sequentially quarter over quarter, well within the middle of our range. I think that's a good proxy for the IVNR.

Thank you.

The next question comes from Josh Raskin with Nephron Research. Hi, thanks. Good morning. Seems like the market MLR was worse in the fourth quarter. I'm not hearing much commentary around that. So maybe what the specific drivers were there relative to what you guys had put up at Investor Day

And then just back on the Medicare Advantage, maybe if you could give us a little bit more of the specifics on the Medicare Advantage pressures in 4Q, you know, especially in the acquired book from Bright and maybe what changes you made in 2025 to give you confidence in the bids.

I'll turn it to Mark for the Marketplace commentary in Q4. Mark?

Absolutely. Hey, good morning, Josh. Look, nothing more on Marketplace than normal seasonality. As you know, because of deductibles, copays, things like that, Marketplace is fairly seasonal and tends to be running hotter later in the year. Look, we were at 83.3. Maybe it's a little bit higher than we thought too. But on a full-year basis coming in at a 75, we feel pretty good about the year. Just chuck it up to a little seasonal noise.

And the only thing I'll add to that is the, you know, when you're coming in at 75 for full year. Now have two consecutive years of being able to invest what we call excess margins, margins that came in at 10% pretax, into the growth of the product. We're now one or two priced silver in 50% of our geographies. As Mark said, we ended the year with 400. We're gonna start the year with 600, end the year with 580,000 members. It's a great story. And we believe that given the dampening effect of special enrollment during the year, unlike last year, that it's a very stable book of business, and we have high confidence in the 6% pretax margin and the 79% MCR we're projecting for next year. For 2025. Medicare question mark? Yeah. Absolutely.

We reported a 93.8 on Medicare. Part of that is just the industry-wide trend that everybody's seeing. Joe mentioned the drivers of trend in Medicare. LTSS, both skilled nursing facility and in-home. Variety of pharmaceuticals. And then the inpatient and outpatient both have a number of drivers in them. Again, that's not unique to Molina. I think we're seeing that just about everywhere. Part of the story too, which compounds the MLR is on the revenue side. We wound up adjusting some of our risk adjustment ultimates. The way risk adjustment works is, obviously, you do a lot of provider in-office risk adjustment. We also do a lot of in-home assessments, the combination of those. We adjusted our ultimate and took down some of the revenue a little bit. That's kind of a one-time item. You know, the knock-on question, Josh, which I would expect you to ask is how does that tee you up for next year? And I think look. Rates aren't great for next year. We're pretty conservative on trend based on what we saw in Q3, Q4. So what you're seeing is not a strong move in MR year over year. Just reflecting a lot of that. You'll see us pretty much a little bit over the top end of our range for guidance, but nevertheless, we feel we're pretty conservative on trend just given what we saw in Q3, Q4.

The only other comment I'd add on Medicare is the Bright business. While we have full confidence in the 1300 basis point turnaround, to get to the full dollar of accretion, we're not gonna be quite at breakeven this year. It'll be slightly lower, which is putting a little bit of pressure on the margins

But at 89% MCR for next year,

a 2.2% pretax margin on nearly $6 billion of revenue, keys us up nicely to take advantage of the growth aspects of the duals and the integrated products. So we're quite bullish on our prospects here in Medicare. And with the early 2026 rate notice, I think, we're teed up for margin expansion in 2026 and beyond.

Thank you.

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

Thank you. It sounds like you're assuming 4.5%

cost trends in 25% down from the 6% you were experiencing in 3Q. What was 4Q cost trend and what's driving your assumptions of cost trend lowering in 25?

Let me do full year over year, and then I'll kick it to Mark. Because it can get quite complicated depending on which period you're comparing. In 2024, in Medicaid, our full our cost trend was 6.5%, half of which was the acuity shift to redetermination and half of which is what we call core utilization, high utilization of the continuing population. Comparing that to the 4.5% trend in 2025, the acuity shift doesn't recur. So we're actually projecting a 4.5% core utilization trend in 2025. Compared to a 3.25% core utilization trend in 2023, is 125 basis points higher. Now depending what period you compare, but we think that is a very clean and clear way of looking at it. We considered every nuance of utilization trend in the third and fourth quarters to inform that trend. Property by property, DRG by DRG, and we're very confident in that projection. Mark, anything to add? I would just repeat that, Joe, because it's a big point.

Last year was 6.5% trend, half of it was directly because of mix of redetermination, so the other half was just hot users, the stairs. So three and a quarter, three I call it, this year, we're projecting 4.5% trend, which is directly comparable to that three and a quarter number last year, so you can see we've got a pretty strong trend baked into our 2025 outlook. Now I think that's prudent based on where we are, but if the second half of last year was the new normal, that's assuming a pretty strong trend above what we've seen in other kinda normal quote, unquote, years. So pretty strong trend at four and a half. And as we've also mentioned, offsetting that trend of four and a half in 2025 is roughly four and a half percent of rates. When we think about rates, we parse known versus estimated. Seventy-five percent of our rates are known for 2025, at five percent. Twenty-five percent, we're still estimating, but we feel conservative at those rates at two and a half percent. So they waited average to four and a half. I know most of them. And I'm pretty conservative of what I'm estimating. But the high-level news for 2025 is four and a half percent trend assumption. Four and a half percent rate mostly known, some assumed.

That's helpful. Maybe just one more clarification. Since you know seventy-five percent of the rate and you have a pretty good view of where margins play, does that mean that you could get into your long-term goals for Medicaid margins for the whole of 2025, or would it be more exiting 2025?

We would need

We conservatively estimated

the twenty-five percent of rates we don't know at two and a half. And the seventy-five percent we do know came in at five. Is it conservative? Perhaps. So there could be some upside if we get rate increases north of the two and a half that we estimated. By the way, we never forecast retros, and we're our rate advocacy process, which is really robust, advocating for actually sound rates and all of our contracts, could provide some retroactivity in twenty-five on twenty-four, but we never forecast that. That would be additional upside if we achieve that.

Thank you. And the next question comes from Justin Lake for free search.

Thanks. Good morning.

I'll ask another question on trend just because you guys have done so a good job of kinda laying it out for us at the investor day and today. If I look at the investor day deck, you're saying in the third quarter, sequentially, you had a 2.6% increase in trends. Fourth quarter, now you're saying 1.2. Right? So just annualizing that back half into the first half of next year. But if I'm doing the math in my head correctly, it should be, like, two percent trend, you know, kinda just catch up. As you annualize. So I'm just trying to think, Joe, like, maybe you could talk to us in a similar way that you did as you did at the investor day. And today, like, just like, what are you really expecting for quarterly trend? If you think about those little, you know, kind of green bars, you put at the investor day deck, for trend. What would you, like, I would think they might only be fifty basis points a quarter. To get the four and a half percent because you still gotta annualize the back half of this year. Am I thinking about that incorrectly? Oh, you as I said, once you're answering a question,

it gets really complicated depending on what period you wanna use. Obviously, if you use just the second half, the four and a half percent trend number is a lower number for 2025 than it is for 2024. To oversimplify the case. I'll turn it to Mark. Right. But we do have a lot of analysis on the quarterly progression of this. Mark? Hey, Justin.

So last year, we mentioned six and a half percent trend across the year. Full year. But at investor day, to your point, we also jumped off a second half of the year view. Just because we said, gee, maybe the second half is the new normal. So let's baseline off that. If you look at our guidance, full year over year, we said four and a half of rates, four and a half percent of trend. If you jump off of second half in the framework like we did at investor day, it would be more like two percent rates, two percent trend. And now that two percent, you can start to think more like in quarterly increments. You're probably closer to your fifty bps a quarter that you're thinking about.

Perfect. Thanks. And then just a couple of quick numbers questions here. You talked about some one-time benefit in SG and A. Can you give us some more color on that? And then Joe, you said you're not, you know, rates away. You said you're rate action away. In one or two places. Can you tell us, like, can you give us any specificity of, like, is that it sounds like it's a couple of states. That you need some rate updates up from? Is that are those larger states? Or are they are smaller states where you need big rates or larger states where you're just waiting? For some true-ups there?

First thing I would say is the two and a half percent

that we projected on rates that we don't know about is perhaps conservative. But let me frame it this way. The rate action versus cycle comment was merely to reflect we're operating no matter which way you cut this. Second half Q4, full year or 2025 guidance, we're operating a hundred basis points above the high end of our long-term range. A hundred. Based on analysis that we've done, external reports, regulatory filings, we believe that many market participants are operating at two, three, maybe even four hundred basis points above an acceptable NCR range. That might take a rate cycle. But when you're a hundred basis points above the long-term energy range, maybe a rate action too will get you there. That's my point. I don't think this has to cycle through one or two times in order to get there. Ninety basis points is, yeah, it's four bucks a share on thirty-two billion dollars of revenue. So if we can get back to the top end of our range when the market gets the rates it needs to get back into balance, we will comfortably be operating in the high eighties paying into the quarters like we were before all this happened, that's exactly where we wanna be. High eighties and paying into the corridors to provide that two hundred basis points of protection.

Thank you. The next question comes from A. J. Rice with UBS.

Hi, everybody.

First, just wanted to ask about

quarterly progression across twenty-five, if there's anything you can do to help us

think about that. Obviously, you got the dollar of startup cost. I assume that's more back-end loaded.

You've got the rate updates, which we've been talking about on Medicaid and

maybe you would have a positive progression there contributing to EPS.

And then you've got more public exchange business, which is going to exacerbate the fourth quarter, it sounds like. Any way you can give us a little bit of flavor for how you think quarterly? Earnings layout over the course of the year?

Sure. I'll turn it to Mark. When you have the items appropriately captured that factor into the seasonality projection of the business. Mark, caller. Hey, AJ. Good morning. Yeah. So normally, we're

little bit front-end loaded, with EPS. And what I'm saying this year is we'll be fifty-fifty, very evenly distributed quarter to quarter. So what's different? The first big driver is you've got a specific accounting of where we are on rates within the year quarter to quarter. We talked about how we know seventy-five percent of them, but we also know specifically when they come in. We also have a specific view on that trend number four and a half, how it seasonalizes. So you've got that as one of the bigger drivers.

Next, you've got just a little bit of carryover from new stores.

Last year. It's not it's not as big a phenomenon as it was last year. We're not gonna call significant attention to it, but you still got a little bit of that going on. So that more or less levels MRR quarter to quarter in the year. Now the other thing that's going on is G&A. I heard your statement, but believe it or not, we're front-end loaded on G&A this year with a lot of the initiatives we have. We have a bunch of go-readies January first of twenty twenty-six. And a lot of the IT spend, a lot of the upfront investment comes in early. Which front ends our G&A. So those things are a little bit different this year. I take your point on more Marketplace, which is typically a little bit back-end loaded on MR, yes. That's true. Like you put our three businesses together, we've got a pretty even outlook on our margins and therefore our EPS.

Okay. Alright. That's helpful. Then I just wanted to ask, I know

you guys mentioned in the prepared remarks about

keeping an eye on what's going on in Washington. Obviously, there's a lot of chatter about potential Medicaid reform. Is it a situation where at this point you're having some discussions with the states about how they might respond to some of these scenarios? And maybe relying on history, does it tend to push the states to put more of the people that they have

put in managed Medicaid into managed Medicaid? Does it

is there enough flexibility in the benefit design that if there's pressure on

Medicaid funding that they tweak benefits and how this

how does that impact your business? Any thoughts you can give us along those lines?

I can't. I can't give you any answers, but I can give you our thinking.

And you're absolutely right about the way you're focused on it. Look, the market really focuses on the how. You know, if you come up with a per capita cap scheme, FMA match for reduction FMAP match reduction on expansion, block match, whatever the mechanism is the CBO can score. That's not the issue. The issue is what are you going to reduce in terms of where the money goes? You've got twenty-five million people in Marketplace, ninety-two percent sub twenty million people in expansion, hundred percent subsidized at ninety percent,

In twenty-five million uninsured population, nine and a half percent of the eligible

Tell me which number you wanna see changed. Neither side of the aisle wants to see more uninsured. It's below ten percent of eligibles for the first time in decades. Reduction in benefits. Reduction in enrollment, reduction in payments to providers, or none of the above. And I either have to, as a state, decrease my education budget or raise taxes. None of those solutions is politically tenable. That's what the focus on. The way to cut a cost is actually actuarially and financially determinable. Where that would go is where the political tension exists. It's either gotta be membership benefits to existing members, membership, reductions of payments to providers, or higher taxes for the citizens of the state. Neither of those approaches is politically tenable. That's why we conclude that any changes to manage Medicaid as we know it today would be marginal.

Thank you. And the next question comes from Adam Ron with Bank of America.

Hey. Thanks. If I could ask two cleaner questions.

First, I think you mentioned in 4Q, you didn't get a lot of benefit from the risk corridors that you talked about in 2024. So if you could

update your thinking around that and how

if you have any cushion for 2025 on risk corridor still and what it would take to realize them. And then second, if I could just squeeze the second question now,

On Medicare, I think you mentioned MLR would be flat year over year versus 2024, but you grew membership and Q4 was

a little hot in terms of utilization.

Then you have United guiding up MLR on

presumably Medicare. So curious what gives you comfort there. Thanks.

Touch the first question first, and I'll take it to Mark. On risk corridor, what we're saying is the amount of corridor liability we have year over year is unchanged. Therefore, it's not providing a benefit or a detriment to the P&L. And when we're operating a hundred basis points above our target range, we're not gonna be deep into them, but we are into them in certain places. Now bear in mind, during a year, if you don't have a lot of corridor protection because you're not deep into them, there actually is at least potential for upside. If you outperform your forecast, you'll get to keep a lot of it or some of it. And so if we're projecting if we're looking at upside during the year, and we're not deep into the corridors in many places, and we're in the middle of them, then at least you get some of it to drop through to your bottom line. That's where we are on risk corridors year over year. Mark, you wanna take the Medicare question? Yeah. Absolutely.

So on Medicare, we reported an 89.1 for 2024. Let me walk you through a couple things to help the thinking on that. The first is, recall, we exited MAPD, traditional Medicare Advantage prescription drug, in thirteen states for 2025. While the revenue impact was not meaningful, the MR impact was. So take 40 bps off the 89.1, and normalize the jumping off point to 88.7. Okay. To that, we've got rates like everybody not that great for 2025. Call it two and a half percent for us. And I've got trend a little warmer than that. Now part of that's mitigated by our bid strategy, part of it's mitigated by our medical cost management. But two point seven ish on trend. Which nets you back to 89. So it's a lot about low rates. It's a lot about us, I think, being conservative on trends. And that 40 basis points benefit of jumping off helps us. But I think, no matter who you talk to, next year is a tough year in Medicare.

Thank you. And the next question comes from Ryan Langston with TD Cowen. Hi. Good morning. This is Christian.

Could you remind us what your assumptions are on Marketplace membership attrition? Should APT

see?

But please not be extended? And then following that, is there any reason to expect that the Marketplace members picked up through this year's open enrollment could be perhaps any more or less sensitive to change in ATC.

Thanks.

We took all the factors into consideration in our Marketplace member projection, whether that's SEP membership during the year, the natural attrition rate, the FTR, all those assumptions factor into a four percent reduction on a monthly basis, four percent reduction in membership throughout the year. Marketing together,

Yeah. I think that's fair. When people talk about the impacts of program integrity changes, the agent of record lock is largely behind us. FTR, everyone's debating that. But we really believe the quality of our membership because we have a lot of renewals. Seventy percent retention rate this year in spite of a huge growth rate on the top line of membership. We have seventy percent retention in our new renewal book. That and the enhanced integrity around agent of record we feel very good about the integrity of our membership. So what we see a little impact of FTR, maybe. But I don't think it's dramatic. And Joe summarized it best. You've got FTR. You've got effectuation. You've got normal attrition. And don't forget, SEP good guys keep coming. You roll all that together. We're modeling about four percent attrition a month. We feel pretty good about it.

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

With your MA, MLR, and back half pressure, I want to ask about the risk adjustment screw up first. Like, how much did they actually impact your MLR? And then just trying to understand

the more in mark you provided, great color on the trends. Onto next year. Just what how much with cotton and the bids since you're pairing down your MATV exposure, in thirteen states, conversely increasing your D SNP, it almost feels like you know, your book is now more shifted toward that elevated LTSS application utilization. So I'm just trying to gain overall better comfort in your pricing, your bids, and your margins for next year. Thank you.

Absolutely. So on DSNP, yes, we're increasing our exposure there a little bit. That's offset by the Bright book and now some of the Connecticut book. But remember, these trends in DSNPs that we saw rear up largely in Q3 and Q4, we've been conservative on our outlook for DSNP pricing, and I think a lot of competitors in the market have. Because our competitive positioning among many brokers has not changed. So I think a lot of people are dialing back in that way. We believe our benefit design anticipated a lot of this. Again, we've got guidance going to 89% next year. We think we picked up a lot of this trend. And more importantly, that same book of business has yielded a little bit over two percent pretax. So we think in spite of these headwinds, these are still attractive. And maybe the bigger point, Michael, is these DSNPs will get by, I believe, with 89% MOR, two percent pretax are such a big segue, though, into 2026 we move into the Feidie and Heidi environment, which just becomes a growth engine for us. With significantly more revenue, significantly bigger footprint. So we like 2025 as a jumping-off year into a lot of transition. I think bodes very well for the future.

Got it. Thank you. And just one more

Exchange Marketplace. Yeah. It sounds like you're very confident on still

achieving mid to mid to mid to high tax margins. Forty-four percent does feel pretty strong. And I know you're investing or reinvesting your excess margin. But was that the level of growth you had been expecting heading in

And it sounds like you're starting the year like, six hundred and twelve thousand

tracking down to five eighty, and I think he mentioned four percent reduction monthly. But specifically related to the FTR recheck how much in the ineffectuation rate have you identified and you know, embedded in your guide specifically from, like, now through April or May when those recheck checks finish. Thank you.

So whenever we give you numbers, we give it net of our effectuation and other forms of attrition. So that you don't have to do additional math and hedge it. We believe we've hedged it with our best judgments on all those items. Now I heard you mentioned the forty-four percent statistic. A lot of people are throwing that around. I believe that quarter one versus quarter one a year ago, and that's a little bit of a dangerous growth number. Because what happened last year is SEP was so strong through the year that the Q1 number naturally grew dramatically across the year. So if you really look at jumping off of Q4, because we grew during the year, with all the SEP gains from redetermination, it's a significantly lower growth number Q4 to Q1. It's still a very nice growth number, but it's not forty-four. It's more like half that. Now the good thing is, once again, that's still a lot of growth. But with seventy percent renewal retention, it's a lot of growth, but it's also a lot of continuity with many of the same members. Which as you know from so many perspectives gives us more confidence in our margins. So, yes, a lot of growth, but if you look at all the growth we put on Q2, Q3, Q4, not such a big statement. And a lot of continuity coming into it with a really good renewal rate. Now we have, right now, probably a fluctuation rate in the mid-eighties. We feel really good about that. That's much higher than normal. And I think for two reasons. One, we've got much more renewal retention which means the fluctuation is gonna be higher. But the other thing is, I believe the agent of record luck really created a lot more quality of new membership or not churn membership so that members knew they were being signed up, were very active in the process, you're less likely to have lapses, non-payments, things like that. So I think boding well for this year, both on great effectuation rates but also great renewal retention rates.

Thank you. And the next question comes from Scott Fidel with Stephens.

Hi. Thanks. Good morning. Wanted to just actually just follow back up on the last question. Just still on the exchange margin expectations and I'm not sure if I'm missing something, but maybe you could help us with the bridge of you know, you guys talked about around seventy percent of the enrollment being from retention and what we saw know, your rates, you know, in terms of your same-store rates, I think they were sort of flat to down in terms of yield. For twenty-four to twenty-five. So just trying to get to sort of the comfort with the six percent margin. You know, around sort of the I guess the view on trend that you may have on those retained members or you know, anything else around the product design, that would sort of bridge, you know, given pretty minimal, you know, yield,

year over year on those members.

I'll take it to market in a minute, but we consciously when you're producing ten percent to eleven percent pretax margins two years in a row, one, you gotta remain competitive. And two, if you keep it there, you're gonna run into the three-year minimum MLR. So it makes perfect sense to invest the excess margin and growth. It's a calibration. You try to set your product to be competitively positioned. As I said, we are number one or two silver priced in fifty percent of our geographies. We netted a hundred and thirty thousand members in open enrollment. Had, I think, two hundred fifty thousand ads and a hundred and thirty terms, which gave us a nice jumping-off point. So

we have high confidence in the mid-single-digit margin.

The membership, as Mark said, being more stable, a higher percentage of it being renewal, means that you know the member, you know their clinical history, which gives you higher confidence in obtaining an appropriate risk score. So the fact that we have more stability in the book, less special enrollment during the year, and consciously invested a double-digit margin into growth makes all the sense in the world, and we believe the strategy is gonna work for 2025. Mark, is there anything to add? Yeah. Hey, Scott. So we're coming off

seventy-five in 2024. M o r. I've got us targeting a seventy-nine for 2025. Which means by definition, we're putting less rate into the market than Trent. That's exactly what's happening. I've got trend a couple hundred basis points above rate. Quite purposeful because as Joe mentioned, there's a minimum MOR out there, and I'd rather invest back into pricing and drive growth than do rebates. So we're seeing nice growth. We're seeing really good price positioning. And it's quite purposeful putting less rate into the market than we anticipate trends.

Okay. And then

in the follow-up, I was hoping to get just two numbers on your picks on twenty-five. For I don't think we saw investment income in the guys unless I'm mistaken. So I would love to give you the investment income expectation. And then also, how you're thinking about operating cash flow.

For twenty-five as well. Thanks.

Absolutely. So call it about four hundred million would be my implied investment income number. Within guidance, which, you know, is a little bit lower than we saw in 2024, but I'm sure you'll understand the drivers of that given the Fed's actions in this interest rate environment. So a little bit conservative there on investment income. And on operating cash flow, yeah. You know, I get this question a lot. On a full-year 2024 basis, operating cash flow is down. Versus 2023. That is true. But if you think about it, the vast majority of the explanation is simply the corridors. In 2023, I accrued significant corridors and didn't pay much down in cash. In 2024, we accrued significantly lower corridors. You're all familiar with that story. Yet paid down significant prior year corridors with cash. Therefore, explains the vast majority of my operating cash flow. Now for us, growing company, operating cash flow should always be higher than net income. In which you saw in 2023, it was the ratio was one point four. Last year, operating cash flow was below for the reasons I mentioned. And I think you'll see a swing in that back in 2025. What's more important though

is cash flow at the parent

And we have a really good history of moving cash from the subsidiaries up to the parent where which is where you can really use it. To be clear, operating cash flow isn't usable when it's in the subs. Our track record of divviting to the parent is very efficient. So I feel very good about the cash flow to the parents that I give you. And our ability to deploy capital.