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Good day, and welcome to the Molina Healthcare Fourth Quarter 2025 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeff Geyer, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to Molina Healthcare's Fourth Quarter and Full Year 2025 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 fourth quarter and full year 2025. Our top line growth initiatives and our full year 2026 premium revenue and earnings guidance. Let me start with our fourth quarter performance. Last night, we reported an adjusted loss per share of $2.75 on $10.7 billion of premium revenue. Our fourth quarter results fell well below our expectations due to continued strong trend pressure in Medicare and Marketplace; and two, retroactive items in Medicaid, which totaled $2 per share. While disappointed in the performance for the quarter, we continue to remain confident in our durable and sustainable operating platform as the rate environment returns to equilibrium. In Medicaid, the MCR for the quarter was 93.5% and was impacted by unfavorable and unexpected retroactive premium rate actions taken by the State of California. Adjusting for these retroactive items, we produced a 2% pretax margin and the MCR was favorable to our prior guidance even as we continue to experience higher utilization of professional office visits, behavioral health services, LTSS and high-cost drugs. In Medicare, the MCR for the quarter was 97.5%. We continue to experience elevated utilization for LTSS and high-cost drugs and slower-than-expected margin improvement in our MAPD product. Finally, in Marketplace, the MCR was 99% which was impacted by elevated utilization and several prior period provider claim settlements. For the full year 2025, we reported premium revenue of $43 billion, (sic) [ $43.1 billion ] representing 11% year-over-year growth. Adjusted earnings per share were $11.03, and our pretax margin was 1.6%, which is below our long-term target range. 2025 was clearly a tale of 2 halves as the company earned over $11 per share in the first half, largely tracking expectations. Trend pressure work against us in each of the third and fourth quarters. Our fourth quarter performance resulted in our full year performance falling below our most recent guidance. As we compare our initial 2025 EPS guidance of $24.50 for our final result of $11.03, nearly half of the underperformance for the year was attributable to the unprecedented trend and increased acuity in our Marketplace segment. A very disproportionate outcome given that the segment is just 10% of our total premium. The rate in trended balance in Medicaid accounted for approximately 1/3 of the underperformance, while the remainder was due to persistent higher utilization in Medicare. In Medicaid, our flagship business, representing 75% of our total premium revenue, we reported an MCR of 91.8% and pretax margin of 2.8%. Rates increased from 4.5% in our initial guidance to 6% for the year, but medical cost trend continually increased from 4.5% in initial guidance to 7.5%, an unprecedented inflection in such a short period of time. 250 basis points of this 7.5% trend is attributable to the acuity shift from membership declines related to the final stages of redeterminations. While we are disappointed in our fourth quarter and full year results, many published reports indicate our Medicaid performance is industry-leading by 300 to 400 basis points in pretax margin. We believe the medical cost trend in 2025 was an aberration, an anomaly by historical standards. The important point, which I will get to in a moment, is what all of this means for 2026 and the longer-term outlook for the business. But first, turning to our growth initiatives. Despite the short-term margin challenges, 2025 was another extraordinary year for securing future growth for our flagship Medicaid business. We continued our successful track record of winning renewal and new RFPs. During the quarter, Molina secured a historic RFP win in Florida where the state awarded Molina, the sole Children's Medical Services or CMS contract. This contract is expected to yield $6 billion in annual run rate premium and is expected to go live late 2026. This award in Florida complements our previously announced contract win in Wisconsin, where we renewed our Wisconsin MyChoice LTSS contract in Regions 2 and 7. The significant win in Florida in our previously announced Georgia and Texas start ship wins represent over $9 billion of Medicaid premium and significantly contribute to our embedded earnings. Since we embarked on this growth strategy, we have achieved an RFP win rate of 90% on renewal contracts, representing $14 billion in retained revenue and 80% on new contracts representing $20 billion of new revenue. We are engaged in active RFPs in several states and have an active pipeline of $50 billion of new opportunities over the next few years. On the M&A side, our acquisition pipeline contains a number of actionable opportunities. The current challenging operating environment is a catalyst for many smaller and less diverse health plans to consider their strategic options. We remain opportunistic about deploying capital to accretive acquisitions. In this temporary period of rate and trend imbalance, we will work to acquire as much Medicaid revenue as possible, as we have done in the past, manage it to target margins. Turning now to our 2026 guidance. We project 2026 premium revenue of approximately $42 billion, which is slightly lower than 2025. The premium growth from the new Florida CMS contract in Medicaid and higher revenues in our Medicare segment are more than offset by the planned reduction in the Marketplace segment. Our 2026 adjusted earnings per share guidance is at least $5. This guidance is burdened by $1.50 of new contract performance of the Landmark Florida CMS contract and a dollar due to the underperformance of our traditional MAPD product. We have determined that the MAPD product does not align with our strategic shift to focus exclusively on dual eligible members in Medicare and we will exit the traditional MAPD product for 2027. After adjusting for these 2 items, our 2026 guidance produces underlying earnings of approximately $7.50 per share. There are 3 aspects of the business that represent significant upside to our guidance. First, our view on Medicaid cost trend could moderate from our initial estimates. Second, Medicaid rates may develop favorably due to on and off-cycle adjustments as they did in 2025. Recall that every 100 basis points on the Medicaid MCR from this current rate and trend relationship, is worth nearly $5 per share. Finally, Medicare and Marketplace are both going through transformations for very different reasons. Our guidance assumes these segments combined for a headwind of $1 per share in 2026, but both contain significant upside as we priced conservatively. Mark will take you through the detailed 2026 earnings guidance build in a few minutes, but let me highlight the major assumptions underlying our $5 per share guidance. In Medicaid, 2026 rates are expected to average approximately 4% and will not offset medical cost trend projected at 5%. This trend outlook for 2026 is comparable to the 2025 trend without the 250 basis point impact of the redetermination related acuity shift. In Medicare, members are transitioning to new integrated product designs, which we expect to produce lower margins in their first year before reaching their full margin potential. Finally, in Marketplace, we made the conscious decision to reduce our exposure and stabilize margins in this highly volatile risk pool, which we expect to yield a 50% decline in our annual marketplace premium. Early enrollment results drove a larger mix of renewal members, which we expect will improve the stability and predictability of our member acuity profile. In summary, our 2025 results did not meet our expectations, but I am pleased with our team's focus on managing through these industry headwinds and producing in the fourth quarter a normalized pretax margin in Medicaid of 2%. There is little question that Medicaid rates and medical cost trends are in balance. We believe our 2026 forecast for Medicaid is the trough for managed Medicaid margins. In this margin trough, we expect that Molina Medicaid will produce a low single-digit margin, not losses, and that the market is underfunded by 300 to 400 basis points. We are confident in the outlook for this business and that rates and trend will eventually reach equilibrium. Even at this low point in the cycle, we remain optimistic about the future earnings trajectory of the enterprise, which is a function of anticipated rate restoration and future embedded earnings. Of note, we anticipate that actuarial soundness will ultimately prevail as Medicaid rates are restored by state actuarial processes, and that will allow us to achieve target margins. This potential is significant as every 100 basis points on the Medicaid MCR is worth nearly $5 per share. Then our existing new store embedded earnings, which represent future contract revenue at average target margins, are additive to the earnings accretion implied by the rate restoration cycle. Embedded earnings are now greater than $11 per share. The intrinsic value of our businesses remains unchanged. Modest capital requirements, mid-single-digit pretax target margins, robust parent company cash flow and ample organic and inorganic growth opportunities will combine to yield significant shareholder value. The cycle will turn and these underlying valuation parameters will again become apparent. Finally, we look forward to updating you on our outlook for sustaining profitable growth at an Investor Day event on Friday, May 8. We will provide you with our long-term goals as well as the detailed playbook for achieving our growth rates and maintaining industry-leading margins. 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 full year performance, the balance sheet and our 2026 guidance. Beginning with our fourth quarter results. For the quarter, we reported approximately $10.7 billion of premium revenue with an adjusted loss of $2.75 per share. Adjusted earnings were approximately $3 below our expectations with approximately $2 driven by unexpected retroactive premium items in California Medicaid and the remainder due to continued trend pressure in Medicare and Marketplace. In Medicaid, our fourth quarter MCR was 93.5%. As Joe mentioned, this result includes both a retroactive risk corridor and a retro rate reduction in California, totaling 160 basis points. Both were driven by new and unforeseen state actions impacting the full year but introduced late in the fourth quarter. Adjusting for these retroactive items, our reported MCR restates to 92.3% and our pretax margin was 2% both better than our expectation for the quarter. For the full year, the reported Medicaid MCR was 91.8% and pretax margin was 2.8%. We take some comfort that even in this unprecedented medical cost trend environment, the stat filings continue to show our Medicaid margins remain best-in-class. Simply put, rates have not kept up with trend over the past 6 quarters. Looking at the stat filings for all MCOs in our markets, we believe Medicaid plans are underfunded by 300 to 400 basis points. In Medicare, our fourth quarter MCR was 97.5% and our full year MCR was 92.4%. Our results for the year reflected elevated utilization of LTSS and high-cost drugs among our high-acuity dual populations. Margin recovery in the MAPD product was slower than we expected. In Marketplace, our fourth quarter reported MCR was 99%, and our full year MCR was 90.6%. In the quarter, the MCR reflected elevated utilization across nearly all services, particularly behavioral health, high-cost drugs and professional outpatient visits and several prior period claim settlements with providers. The adjusted G&A ratio for the quarter was 6.9%, and our full year was 6.5%. Our cost management remains disciplined, and we continue to harvest fixed cost leverage as we grow. Recall, the full year G&A ratio reflects added expense for implementation costs in the new integrated tools products, offset by a reduction in management incentive compensation expense. Turning to the balance sheet. Our capital foundation remains strong. Positive full year earnings continue to add to our capital base and drive parent company cash via dividends. In the quarter, we harvested approximately $337 million of subsidiary dividends and our parent company cash balance was approximately $223 million at the end of the year. RBC ratios, which test the level of capital at the subsidiary level compared to regulatory requirements, are 305% in aggregate, more than 50% above state minimums. In November, we closed a bond offering of $850 million of senior notes due 2031. The proceeds were used to repay the outstanding term loans and general corporate purposes. Debt at the end of the year was 3.7x trailing 12-month EBITDA and our debt-to-cap ratio was about 49%. Based on our current guidance, we took action to address any issues with our debt covenants. We have secured an agreement with our bank syndicate to appropriately amend these metrics. Our operating cash flow for the full year 2025 was an outflow of $535 million due to the settlement of Medicaid risk corridors, the timing of tax payments and lower operating performance in the second half of the year. Turning to reserves. Days in claims payable at the end of the quarter was 47. We remain confident in the strength and consistency of our actuarial process and our reserve position. Even in this period, a sustaining high trend. Moving to guidance. We project 2026 premium revenue of approximately $42 billion, a 0.8% pretax margin and adjusted EPS of at least $5. Our guidance is lower than the $14 per share initial outlook we provided on the third quarter call due to a number of factors. First, in Medicaid, our full year 2026 MCR guidance is 92.9%. That's 140 basis points higher than previously expected, driving $6.50 of the shortfall. The higher MCR results from several items. The fourth quarter retro revenue items in California, which resulted in $2 per share impact will continue in 2026, yielding 40 basis points of margin pressure across the year. Our Florida CMS contract incepting in the fourth quarter will add 30 basis points of full year pressure as that initial quarter will run significantly higher before reaching target margins as new stores typically do. And expected rates for 2026 are approximately 50 basis points lower than our initial outlook. We previously projected rates exceeding expected trend to improve MCR by 50 basis points off the second half of 2025. While our initial discussions with states were encouraging, particularly in the presence of demonstrated underfunding across most of our markets, the rates we finally received fell short, now matching expected trend off second half with no benefit to the MCR. Second, in the items driving our lower EPS guidance, underlying performance in our Medicare business deterred by $1 per share, largely due to the MAPD product. And finally, G&A efficiencies only partly offset a higher effective tax rate interest expense and lower volumes, resulting in a headwind of $1.50 per share. As Joe mentioned, upside components to this guidance include moderation in Medicaid cost trends, off-cycle and late 2026 rate adjustments as we sell in 2025 and Medicare and Marketplace performance. Now some additional details on our 2026 guidance, beginning with membership. In Medicaid, we expect year-end membership of approximately 4.6 million members to be flat compared with 2025. We expect modest contraction in our current footprint as some states continue to review membership eligibility to be offset by the implementation of the new Florida CMS contract incepting October of 2026. In Medicare, we expect to begin and end 2026 with approximately 230,000 members based on open enrollment and transition to our integrated tools products. In Marketplace, we expect approximately 280,000 members at the end of the first quarter, down more than 50% from the end of 2025. Recall that we sought to stabilize margins in 2026 and reduce our exposure to the shifting risk pool caused by the expiration of enhanced subsidies and new program integrity initiatives. Our average pricing increased 30% and range from 15% to 45% across our footprint. Renewing members now represent 70% of our current book and retention through the grace periods is less certain than in prior years. We expect to end the year with 220,000 members. Our 2026 premium revenue guidance is approximately $42 billion. The small decline versus 2025 is driven by several items. Medicaid is up $1.1 billion due to the new Florida CMS contract and the modest rate cycle, partially offset by the Virginia contract loss in 2025 and slight market contraction in our current footprint. Medicare is up $300 million due to the product mix shift in our Medicare portfolio as members transition to new integrated products, which have a higher average PMPM. This is partly offset by a decline in our MAPD product. Finally, Marketplace premium declined $2.3 billion pursuant to the plan to reduce exposure to that segment. Our 2026 premium guidance does not include the Georgia Medicaid and Texas STAR CHIP contracts, which are now expected to go live in 2027. Turning to earnings guidance within our segments. In Medicaid, we expect a pretax margin of 1.2% on $33.4 billion of premium. The MCR of 92.9% includes a 30 basis point headwind due to the new Florida CMS contract. I'll remind you that our Medicaid MCR guidance assumes year-over-year rates of approximately 4% and trend of 5%. In Medicare, we expect $6.6 billion of premium revenue with the MCR at 94% and pretax margin of negative 1.7%. Excluding the MAPD product, which we will exit for 2027, the pretax margin is closer to breakeven. Within the segment, margin improvements in the legacy products in the new rate cycle are offset by MMP members transitioning to new integrated products. These integrated products are expected to achieve lower margins in their first year before reaching their full margin potential in years 2 and 3. In Marketplace, we project a 1.7% pretax margin on $2.2 billion of premium revenue. The MCR of 85.5% reflects continued conservatism given market volatility and risk pool acuity shifts resulting from the expiration of enhanced subsidies. We expect the adjusted G&A ratio at 6.4%. This is slightly lower than 2025 as the tailwind from duals contract implementation costs, cost management discipline and mix within our business is partly offset by the Florida CMS contract implementation costs and the return of management incentive compensation. Rounding out the other guidance metrics, we expect the effective tax rate at 30% and weighted average share count of 51.1 million shares. Our earnings seasonality is expected to be much more front-end loaded this year with 2/3 of earnings in the first half of the year, reflecting the Medicaid rate cycle and the implementation of Florida CMS in the second half. Our Medicare and Marketplace segments are expected to follow normal seasonal patterns. Turning to embedded earnings. At the end of 2025, we reported $8.65 of new store embedded earnings. Our 2026 guidance harvest $0.60 for Medicare tools implementation costs net of the Virginia contract loss. Updates include the addition of the new Florida CMS contract of $4.50 and a reduction for the MAPD exit. Embedded earnings now exceed $11 per share and form a compelling view of long-term future earnings power on top of our legacy business rate recovery. We will outline the components and expected realization time line at our May Investor Day. This concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions] The first question comes from Joshua Raskin with Nephron Research.

Sort of a 2-parter on the Medicaid side. Is there a large variance that remains across your states with regard to Medicaid margins? And are you at the point in any state where you're contemplating a potential exit? And sort of part b would be, what were the drivers of the negative retro adjustments in California that seems incongruous with what you were seeing in terms of rate increases and margins? Is California just a market that happen to be running higher than average margins?

Josh, on part A of your question, no. Rates are generally underfunded across the universe of our portfolio and there's no state where the regulatory environment is so unfriendly to managed care in the rating environment that we are contemplating an exit. We believe, as we've said in our prepared remarks, that these will come back into equilibrium over time for many, many reasons, which I'll cover in a moment. To your second question, the 2 issues in California were very situational. They were event-driven. The undocumented population, which we serve, I think, 180,000 members for a lot of reasons, which are pretty obvious, did not use services during the year that we're priced to. And therefore, the state decided to, I'll call it, claw back due to the introduction of a retroactive corridor. And in L.A. County -- separately in L.A. County, there was a dramatic shift of churn in the membership roles during the year, which caused a disequilibrium and risk profile amongst the various carriers. They did a risk adjustment update at the end of the year, moved money around, and we had to pay it back. Mark, anything to add on those 2 items?

No, Joe, I think that's well summarized. Josh, it's about $135 million between those 2 items. That's the $2 per share. And they're both pretty unusual in nature. On the corridor from the undocumented immigration status normally, CMS has a rule that they can't put retro corridors in place. That rule went back in place during the pandemic. However, since this undocumented program in California is state funded, it doesn't -- the CMS restriction doesn't apply. So they were able to put that restriction in place on the corridor on that population. So I don't know of another state where that could happen. On the risk adjustment, risk adjustment data refreshes are common. We have them all the time. Normally, they're de minimis up or down. In this case, there was enough change in the population in LA, as Joe mentioned, that it was material to us.

And one final point, Josh, you didn't ask, but inherent in the movement from our $14 per share outlook and $5 per share guidance, we pulled through that California effect to 2026 because we believe those same situations will apply to the 2026 operation. So we pulled it through a lot of conservatism.

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

Just want to think a little bit more about what you're seeing in the Medicaid book. We've heard some of the other companies talk about states working with them to allow them to make adjustments to benefit design in addition to just absolutely hoping for a better rate update. Are you seeing any of that play out? And you're saying you're going to bottom in Medicaid in 2026 and recover. Obviously, some of the Big Beautiful Bill, work rules, et cetera, kicking in '27. Does that -- you're confident you can overcome that and still show margin improvement in '27 and beyond?

A.J., let me answer the second question first, and I'll come back to benefit design. But the context is even in what we consider to be a trough environment in Medicaid, we are operating at low single-digit margins, 2% in the fourth quarter, 1.6% adjusted for Florida Kids in 2026. By analysis of the regulatory filings and other public company reports, the market appears to be 300 to 400 basis points underfunded. If we get even partially way there, we're back flirting with our target margins in Medicaid, number one. Number two, don't forget that last year, we got 150 basis points of mid-cycle updates. Now it wasn't enough to offset a 300 basis point increase in trend during the year, but states are recognizing that aspects of this program are underfunded. Next point on rates. Generally speaking, the states are using a 2024 cost baseline. That baseline does not include the full impact of what we're calling the great inflection here over the last 2 years. When the 2025 cost baseline fully developed begins to be used as the baseline off of which the trend rates will become stronger. Next point, discrete rating factors. LTSS benefits, pharmacy benefits and behavioral, all trending up, and those are very discrete rating components, very transparent. Actuaries can debate and have clinical and actuarial debates over how those costs are being burned into rates in a very transparent way. And lastly, in 2025, we are experiencing the tail end of the redetermination acuity shift, 250 basis points to our estimation that will not recur in 2026. But to your point, in '27, '28 and '29, we will begin to see the emergence of perhaps a small acuity shift related to OB3. Mark, do you want to take that part?

I think that's well covered. Across the next 3 years, we see any place between 2% and 4% annual impact on One Big Beautiful Bill. But that's also before any influx of new members, as you've typically had in the past, or even a recessionary impact as jobs are lost to AI and who knows what else. So the outlook, I think, if there's membership decline over the next 3 years is rather small. And as Joe always says, the small changes in membership or cohorts don't really get you because they sort of even out with everything else going on and rates do adequately reflect them. It's the big jumps in population that are problematic like the 20% decline we had in the pandemic with redetermination. So I don't really see a meaningful impact on membership here going forward, either in magnitude or impact on acuity.

A.J., the first part, part of your question was about benefit design. We're seeing some of that. During the pandemic, states really loosened the utilization control requirements on things like behavioral health. They were paying for -- they required us to pay for GLP-1s for weight loss and not accompanied by diabetes diagnosis. Those things are starting to close up. States are reintroducing our ability to have tighter utilization control global behavioral. And most of our states, I think, 12 out of 15, now have a diagnosis requirement, diabetes diagnosis requirement for GLP-1s. There's things like that. But I wouldn't say there's a wholesale shift to benefit design. It's on the margin, and it's sporadic from geography to geography.

The next question comes from Justin Lake with Wolfe Research.

I wanted to ask Joe about your attrition assumption in 2026. Looks like you're assuming down about 2% membership attrition, and that's offset by, I think, 100,000 members in Florida coming on. Let me know if I'm wrong on that. But 2% versus what it appears some of your peers are talking about mid- to high single digits, it looks like you had some pretty significant attrition just in the last quarter. Why are you assuming that attrition is going to be so modest next year relative to what you're seeing just in the last quarter or 2 and what some of your peers are talking about? And then maybe you could talk about if you do see attrition hire, would we assume that, that would impact risk pool and cost trend?

Sure. Going back a little bit historical here is clinical data. The industry and Molina on a same-store basis, not counting our new store growth, lost 20% membership organically over the past number of years. It is 13% in 2024, 4% in 2025. And now we're projecting it to be 2%. We believe that the redetermination effects are largely over. We're feeling the tail end of that. And now it's just about program integrity. It's about tightening up on -- before OB3 kicks in, that will kick in for '27 to '28. So we're talking about '26. Due to just more rigor around the enrollment process, the redetermination process, we believe that 4% we experienced in 2025, which is exact -- that's the exact number will fall to 2% next year. Now if we're wrong, it ends up being a little higher, Mark -- I'll kick it to Mark here in a minute. We've done an exhaustive analysis of low users. And it depends on what your definition is over what period of time what's a lower-than-average loss ratio. Everybody doesn't use services at 90% of premium. Some use a lot more, some use a lot less. And so your question you're asking is, if we won about it, is there an acute shift coming and we don't think so. Mark, do you want to take that?

Joe, that's well summarized across the board. So Justin, to your framing question, yes, we're 4.6% roughly flat across the beginning of the year to the end of the year. That's a 2% decline organically offset by Florida. So you got that exactly right. And then to Joe's point, the market is down about 20% since the start of redetermination. We've done exhaustive cohort analysis of who were the joiners, who were the levers. And it's really interesting. Of the people that left since the start-up redetermination we estimate about 5% fewer people in our population are low users or no users. So if you look at any given quarter, how many folks didn't use it all, or used very low, say, $200 PMPM, something like that, that population is now 5% smaller within our current population than it was 2 years ago. That's not the only impact. Many of the cohorts changed around, but that's the one that kind of grab your attention. So that's a lot of what's driving trend over the last 2 years as that mix shift happens, I think Joe referred to it in his prepared remarks. So going forward, most of those people are out now as a result of that. The low users and no users that were on there when redetermination was suspended mostly are gone now. So on a go-forward basis, we're estimating 2% attrition across the year organically, which is a relatively small number. Even if it's a little bit bigger -- the big driver of acuity shift or trend is those low users and no users, and those are mostly out of the system now.

The next question comes from Stephen Baxter with Wells Fargo.

I was hoping if you could update us on the size of your Medicaid expansion enrollment both, I guess, enrollment and premiums would be great. And as we think about dimensioning the attrition that you saw throughout the course of 2025, how much of that came from Medicaid expansion versus other sources, other program types?

Just sizing Medicaid expansion, Mark will correct me, but I'll go from memory here. Medicaid expansion population is about 1.3 million members and about $8 billion of the $32 billion of premium. Now when we're talking about OB3 work requirements, semiannual determination -- semiannual redeterminations, et cetera, we still predict losing about 15% to 20% at the high end of that population, which is only 25% of the total Medicaid book. And as Mark said, when you're trying to calculate or estimate whether that causes a huge acuity shift, the fact that, that cohort is operating closer to the mean of portfolio average is a meaningful statistic. Mark, do you want to talk about the attrition in that population?

Sure. We definitely see more people coming out of expansion due to the OBB, just because that's where the policies are aimed, but that's also where you have more volatility in the population. As Joe mentioned, if you lose 15% to 20% of the folks in expansion, one, it's a quarter of our overall Medicaid population; and two, if it happens over 3 years, it's even smaller as an impact on the overall book. . So could be an impact there over time. But annually, I don't think it's meaningful. And again, if all folks are more gathered around the average MLR, the impact shouldn't be meaningful.

The next question comes from Kevin Fischbeck with Bank of America.

Great. Just trying to understand a couple of things. First, I guess, in your commentary around 2026 guidance, you listed a number of positive potential levers to upside. There were no negative dynamics that you're thinking of. Obviously, things have been difficult the last couple of years to predict. I was wondering if there's anything that you would highlight as something you were watching? And then just -- if you could just follow-up on the commentary around risk pool shifts. Obviously, you said last year was 250 basis points of pressure on 4% membership, and now you're saying 2% membership is 0. So if you could just kind of square that a little bit better?

On the last point, yes, we've been asked that before. It's not linear, and it's not proportional. And the reason is, as Mark just described, it matters how many low and no users you actually have in your population. So if your supposition is it 4% created 250 basis points of pressure, why does it 2% create 125 basis points of pressure because largely speaking -- not largely speaking, the low and no user population as we define it, is down 5%. So people are operating closer to the mean and [ MOR ] rather than the SKUs. On the 2026 guide, I mean, suffice it to say, anything that is potentially upside is potentially downside. But we believe the rates at 4% of our floor -- we got 150 basis points of release last year and midyear. So we don't think there's downside to rates. We think it's all upside. Now medical costs trended 5%, medical costs is up 20% over the last 3-year period, baseline medical costs. And now we're trending in 2026 comparable to 2025 without the acuity shift. Same trend number, 5%. Is there downside? Sure, you could be wrong about it. But we believe that we have a reasonable -- a reasonably conservative trend assumption. The 4% rate or a floor, it's all upside from there on midyear on and off-cycle rate increases. And the reason we say there's upside to Marketplace and Medicare is because we were priced more conservatively than we're guiding to. Our pricing targets are low single-digit margins. As Mark said, we're expecting a 1.7% negative margin in Medicaid, and I think a positive 1.7% margin in Marketplace. Those could end up being higher. But could they be lower? Sure. Mark, anything to add there?

And just to begin, the 1.7% was Medicare, not Medicaid.

Medicare, sorry. Medicare.

The only other thing, Kevin, which might have been obvious to you, but the impact of -- on the cohorts of the low users and no users coming out isn't when they come out. It's the subsequent period, right? So if they come out in '24, you'll feel that in your trends in '25 because it's the year-over-year impact. It's not the day they come out. So if you're putting that all together, Joe mentioned it was 4% membership decline in '25 but the much bigger decline in '24 of 13% is would put the pressure on '25. So now that only 4% came out in '25, the implied rollover to '26 is much lower. More to the point, a lot of the low users, no users are already out of the system. So it's really a declining impact.

The next question comes from Ann Hynes with Mizuho.

I just want to follow-up on your trend assumptions. Obviously, trend has been very difficult, up 7.5% this year. But why do you have confident trend only increasing 5%? Is it a large number? Is there a sort of an area that you already see decreasing? Is it more utilization management? Just from our seats, this industry has underwritten all businesses run for 3 years. So when I just see a 5% trend going forward, for me personally, I would like more than just saying like trend has to come down at some point. That doesn't make sense to me. So if I could -- if we could have some more detail on specific state actions that utilization management, anything more than -- I personally just like more detail on why you think the rates -- the trend will only grow 5%?

Well, thanks for the question. And of course, it is a key assumption in our outlook through 2026. Context, we had a 7.5% trend in '25 off of '24. With perfect hindsight, 2.5 percentage points of that was related to the redetermination related acuity shift as we've just been describing in a couple of questions that were asked. So core trend is 5%. Core trend includes every impact. Supply -- it's a supply and demand economy. It includes the higher acuity of the American population that we serve. It includes any "upcoding" or aggressive billing from providers. 5% is what we experienced in 2025. And again, it's off a cost base that's increased 20% over the past 3 years. It's 50% higher than historical averages. Medicaid trend over the last 10, 15 years has been 2% to 3%. We're seeing BH behavioral health services now nearly 20% prevalence of BH diagnosis is now 20% prevalent in our population, up from 17% to 18% 3 years ago. Why is that important? It's trending at 9%, and the BH services themselves are trending at 18%. Our pharmacy trend, 13%. Top 10 therapeutic classes trending at 36%. These are in the 5% number. LTSS hours, SNF admits, professional office visits up 16% and the number of services, the number of procedures per office is dramatically higher this year than it was in the last 2. So we believe that the 2025 5% number includes a lot of the phenomenon that industry pundits and commentators talk about, and we believe that's a good number off of which to project. Are we seeing signs of, I call it, aggressive billing, but upcoding? Level 3 is becoming Level 4, Level 5 service intensity, psychiatric hours going from 30-minute visits to 60-minute visits sure. But that's in the 2025 trend. And that's why we think the 2026 number is fully loaded for all the supply and demand dynamics that are being experienced in the market.

The next question comes from Andrew Mok with Barclays.

I'll shift focus to the ACA. I wanted to ask how January open enrollment tracked relative to expectations and what's embedded in your membership assumption for non-effectuations and attrition this year? And if possible, it would be great to share how year-to-date effectuations are tracking now versus this time last year?

Sure. We're in real time. I'll give you a global answer and I'll give it to Mark because we're right in the middle of that process now. But as you recall, we ended the year with 650,000 members. We priced up 30% on average, ranging from 15% to 45%, consciously reduced our #1 and #2 position from 50% of our counties to 15% and reduced our footprint by 20%, conscious effort as we will not allocate capital to an unstable risk pool. . Our speculation or forecast at the time was we would come down into the 200,000 zone, 200,000 to 300,000 and reduce our revenue to $2.2 billion. As we're right in the middle of that story right now, I'll hand it to Mark to give you the latest tail and tape what we're forecasting and what's likely to happen with retention and effectuation. Mark?

Andrew, this year, forecasting marketplace members is a little more difficult than in past years. Big picture to get right to the answer to your question. I'm looking for about 280 at the -- 280,000 at the end of the first quarter, which will decline down to 220,000 at the end. The reason it's a little harder this year is new members are real obvious and clear. It's the renewals that are the wildcard. Now there's some confusion, I think, in the media, they're saying, gee, marketplace members are still quite high. Everyone thought they were going to come down. And what I think some of the media misses is that they're assuming the renewals all stick. Now as partly or fully subsidized people see what their new premium is in January and February, a lot of passive renewals will not renew. They'll go into grace period, not pay and they'll eventually fall off. That will be much bigger in past years, just given the price dynamics in the market. So right now, I think I'm at 280,000 in the first quarter. As Joe mentioned, we're about 70% renewal, about 30% new members. And I think the stats you're looking for is on the new members, the effectuation rate, I think it's 60%. Everything is telling me it's about 60%. Historically, I would have thought 70% to 80%. So effectuation is much lower. But remember, that's new members. On renewal, I think my renewal tension is more like 30%, whereas in the past, I would have expected more like 60% and that goes right to the dynamic of people possibly renewing seeing their new premium if they're not fully subsidized, which almost no one has and probably not going through the grace period of making the payments and falling off at some point in the first quarter, which is why I give you a March estimate, not a current estimate.

The next question comes from Sarah James with Cantor Fitzgerald.

Sticking on the ACA, MCR. Can you help clarify went on in fourth quarter? Was there a pull forward of utilization or any category that was running high? And then how do you think about the slope of the MCR curve for 2026, given the attrition and effectuation that you're assuming? Should we think that the peak to trough swing widens maybe by a few hundred basis points on what you've experienced historically?

Mark?

Sarah, it's Mark. A couple of things there. What you're calling pull forward, we don't see it. And I've gotten that question a lot. And just for everyone's benefit, the concept of pull forward might be if subsidies are declining and people might drop or lose their coverage in January, would they increase utilization in the fourth quarter in anticipation of that. And we're just not seeing it. If you look at my MORs, I'm only slightly up Q4 versus Q3 part of which is normal seasonality and a little bit of which is we talked about the out-of-period provider settlements. So you're just not seeing it in the MCR and I'm not seeing it in the utilization. Now on next year's seasonality, we're going to have to see exactly what the membership content looks like when it all settles in March. But I would expect a fairly normal seasonality as we've seen in the past. The only thing that might be a little bit different there is metallic mixes are shifting. In past years, we were more 70% silver. This year, we're more 50% silver. So with deductibles, co-pays, things like that, you might see some changes based on metallic mix. But I wouldn't think you'll see something much different seasonality than we normally have.

The only other point I would make is in 2026, we're projecting a much lower special enrollment period addition for the 3 quarters. And as you know, special enrollment is an invitation to buy insurance when you need it. They usually come in with very high MLRs until they settle down, and the SEP enrollment during the 2026 is forecasted to be much lower than it was in 2025 and prior.

The next question comes from Scott Fidel with Goldman Sachs.

Just so I'm interested in how you're thinking about, let's call it, maybe sort of underwriting around new business development? And I'm putting it that way because that would maybe include both sort of new contracts organically and then also M&A. And just around the downturn and sort of the pressures we're seen that -- just maybe curious around. I'm thinking about Florida, for example, your thoughts on pursuing that contract. And then maybe also just talk about how the overall book of M&A that you've built up over the last couple of years, how has that performed, would you say within the overall enterprise relative to, let's say, more of the ongoing operations?

Scott, first on the new business, we are still actively pursuing new contracts. Our win rate is 80%. $20 billion of run rate revenue over the past number of years, including the Florida Kids contract, which we believe is a very valuable contract. We have proven over time that we expertly handle high acuity, low-income lines, and these are very high acuity situations for young adult, young children in the state of Florida. . So we've worked hard for this contract. We believe it's accretive. We wouldn't have put $3 of ultimate run rate into our embedded earnings if that wasn't the case. And I want to clarify the start-up here. The fact that there is a $1.50 drag on 2026. The reason is you have to spend money before any revenue ever shows up. You got to hire people, number one. Number two, new programs, whether it's Nebraska, Iowa, or Florida Kids, a new program or a new entrant always runs higher as people get used to systems and business processes, et cetera. And third, as Mark would like to talk about, there is a financial implication of building reserves in the early years. So that $1.50 drag is not symptomatic or emblematic of the power, the earnings power of that business. We added a $3 run rate to our embedded earnings for the ultimate attainment of a target margin. Mark, anything to add on Florida?

Joe, I think there's some important distinctions there that you point out. One, the MOR always runs hot on a new property. And typically, we say it's a 2-year path to target margins. We have one quarter of performance of Florida which means these margins we put on top of our normal picks, which are onetime items, really exaggerate the performance in the first quarter. . So Florida will run a hot MLR in its first quarter, but a lot of it is new property getting everything settled and these margins we put on day one, which are part of our normal actuarial policy. The other part of the $1.50 is the business doesn't just start on the fourth quarter. We've got 2, 3 quarters here of prep, where we're hiring people in advance of revenue, incurring expenses. Obviously, that's not part of the run rate. So the $1.50 isn't meant to be -- this is an extrapolation of how it is. It's kind of an anomaly of one quarter of new business and a lot of G&A prep.

Yes, $6 billion of revenue, which to us is, you're adding 15% of revenue with one contract. And we never measure our acquisitions or contracts on contribution margin. But in this case, it's entirely appropriate. The contribution margin of this contract is going to be significant. To your question on M&A. This is the perfect environment to be exploring M&A and we have. Our pipeline is as actionable opportunities in it. Many of them are what I'll call challenging situations for single state, single geography payers who are in the same rate environment that everybody else is in and they're eroding capital. Without naming names or states, we've tried to action 2 or 3 of these in the past 6 months. And they were so troubled. They had to kind of seek other alternatives rather than to be acquired. But this is a great time to acquire revenue. At the heyday of [ margin ] attainment, we are still acquiring things at just over 20% of revenue which means very little goodwill value, you're mostly exchanging cash for regulatory capital. Now in this environment, Mark and I say, give me a property at book value, and I'm good to go, and we'll get it to target margins in our 2- to 3-year period. So this is the perfect time. We believe long term in the veracity of this business and its margin potential, and this is the perfect time to responsibly purchase long-dated revenue streams with stable membership in states where we want to do business, either states that we're already in and are underrepresented in market share or states that we're not in and want to create a foothold.

The next question comes from Ryan Langston with TD Cowen.

Maybe within the cost trend assumption of 5%, maybe give us a little sense on some of the components within that assumption, maybe cost categories, you assumed higher, lower and maybe any sort of swing factors with the widest range is positive or negative?

Sure. Sure, Ryan. I covered a few of these before. Behavioral health services are the cohort of Medicaid patients with a behavioral condition trends at 9%. We did reduce that at all, and the behavioral services themselves are trending at 18%, not only due to the prevalence of behavioral conditions, but let's face it, providers are using their judgment on diagnosis and treatment protocols. The pharmacy trend globally is 13%, the top 10 therapeutic classes are trending at 35% antiretrovirals, antipsoriatics, GLP-1s, all the things you read about. The cancer diagnosis are prevalent. We did not soften any of the current trends that we're experiencing in 2025. As I said, now that the baseline, the cost base line is 20% higher today than it was 3 years ago. LTSS, skilled nursing facility admits are up. LTSS hours, home service hours are creeping up, didn't reduce any of our trend assumptions there. And professional office visits is the one that doesn't get a lot of airtime, but that's trending at -- it trended at 16% in 2025 off '24. And one of the reasons it's not that the number of office visits is necessarily up per 1,000. But the number of procedures per diagnosis per visit is up significantly. One diagnosis code, 3 CPT codes in the past, maybe there's now 4 CPT codes. So we didn't soften any of what we experienced in '25 and '25 was, again, a year of medical cost inflection off '24, and we kept all those trends rolling through the 2026 numbers. There's probably others that are missing, but those are the big ones. Mark, did I miss anything?

No. I think that's good. So once the acuity shift is behind us, the 7.5% is now 5% in our projections. Joe, you hit the big ones, pharmacy, professional office visits and BH continued to be high considered within our 5% outlook.

The next question comes from Michael Ha with Baird.

I appreciate your exhaustive cohort analysis commentary. But what assumption is currently embedded in your '26 guide relating to hospital risk, if more and more states are facing these mounting budgetary pressures and that more stringent eligibility requirements. And if this prompt spike in sort of procedure this enrollment, is there a range of outcomes embedded in your guide? And because there are states we actively track, where we're seeing pretty alarming procedural disenrollment rates, some up to 90%. And a lot of those trends are beginning to spike in more recent months, which is -- its impact is felt typically next year, it concerns us. I know they might not be 0% utilizers, but I know these lives are typically healthier overall. So stepping back, I know you're very confident given the much lower prevalence overall lower utilizers in your book. But I just wanted to ask again how should we think about the achievability of your guide if more states were to tighten eligibility?

We have confidence in it. And I will tell you this, Michael. We don't -- I mean we do top down. Everybody uses global assumptions to testing theories. This is all bottoms up. This is about [indiscernible] actuaries and our local resources, talking to our state customer on what they're up to and what they're all about and what they're going to do. . And it's with every state customers, it's in all their best interest to tell us exactly what to expect, so we can resource appropriately. So this is all bottoms up. We forecast in some states to retreat higher than others, but this all bottoms up based on what the state is telling us they intend to do, either with just more strict enrollment, eligibility requirements, et cetera, before the OB3 impacts of work requirements, we need a semiannual redeterminations and all that kicks in for 2027. So we're pretty confident in the 2%. And as we said, if we are wrong, we're very confident that a lot of the -- what we call low and no users have left the portfolio during the redetermination shift. And therefore, if we won by a percent they're closer to the portfolio average likely and therefore, a volume impact, for sure, but not a margin shift impact. Important point.

The last question today comes from Erin Wright with Morgan Stanley.

Great. So I understand it's early, but what are some of those items that we should be thinking about in terms of the earnings growth profile into 2027? Do you get back to growth algo? Do you add back some of those burdens? I think you were talking about that earlier in terms of what's an anomaly, what's not or what's recurring in nature. And then is that the right way to think about it? And the $11 in earnings, embedded earnings power, the trajectory to get there, I guess, we'll hear more about it at Investor Day, but just higher level conceptually how we should be thinking about that as well in terms of the time frame from here?

Sure. On the embedded earnings, yes, thank you for that because we will give a more specific accounting of it at an Investor Day and obviously, not just the accounting of it, what's in it, whether it ends up being slightly higher or slightly lower or different, we'll update that at Investor Day. But to the point, how it rolls out into '27, '28 and '29, will be a key determinant, and we will update that at our Investor Day. Look, as far as '27 to '28 goes, we're not yet predicting because we can't exactly how rate versus trend is going to improve over the next 3 years. It's a valid question. I don't have an answer for you. But again, 100 basis points of MCR improvement in Medicaid is $5 a share. Now imagine a environment where the entire platform across all geographies, improves by 50, 75, 100 basis points a year for the next 2 or 3. But where we're starting from in the trough, what people are calling the trough of -- and some people think the trough is 2027, we believe it's '26. We're earning a 1.6% pretax margin, not a loss. Many of our competitors have said they're losing 1.5% to 2%. So if the market gets to 300 to 400 basis points, it needs to get back to, I'll call it, respectability, we're again at target margins. I can't give you an exact projection now. We'll update you at Investor Day, but imagine an environment that improves trend rates versus trend is positive by 50, 75 or 100 basis points a year for the next 2 or 3, recalling that given the leverage effect of $32 billion of revenue -- on $32 billion of revenue, 100 basis points to the MCR in Medicaid for Molina is $5 a share.