Centene Corp (CNC) 2019 Q4 法說會逐字稿

Good morning, and welcome to the Centene Corporation 2019 Fourth Quarter and Year-end Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now turn the conference over to Ed Kroll, Senior Vice President, Finance and Investor Relations.

Please go ahead.

Thank you, Brandon, and good morning, everyone.

Thank you for joining us on our fourth quarter and full year 2019 earnings results conference call.

Michael Neidorff, Chairman, President and Chief Executive Officer; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com.

A replay will be available shortly after the call's completion, also at centene.com, or by dialing (877) 344-7529 in the U.S. and Canada, or in other countries by dialing (412) 317-0088.

The playback code for both dial-ins is 10138090.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recent Form 10-Q and Form 10-K and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

The call will also refer to certain non-GAAP measures.

A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter and full year 2019 press release, which is available on the company's website at centene.com under the Investors section.

A reminder that Centene will host its First Quarter 2020 Earnings Call on Tuesday, April 28, 2020.

And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's Fourth Quarter and Full Year 2019 Earnings Call.

I'd like to apologize now for any residual cough you may hear as a result of some bronchitis I had a week or so ago.

Before I go through our 2019 results, let me say how pleased we are to have closed the WellCare transaction on January 23.

We were cautiously optimistic that the transaction would close early in the first half of 2020, and we are happy that this was the case.

We are now a $100 billion plus enterprise, providing health care services to more than 24 million members across all 50 states or 1 in 15 individuals across the nation.

Having achieved this, we still have a long runway ahead of us, with enhanced scale, further diversification of products and capabilities and greater opportunities for growth across portfolio.

As we have previously disclosed, our planning assumption was to be ready to begin the integration by January 1. I am pleased to report that the integration process is well underway, and teams are managing their various work streams.

For example, we have begun to align 2021 bids for our Medicare business.

In addition, we have activated integration plans in markets where WellCare and Centene overlap, such as New York, Georgia and Florida.

We remain on track to achieve our previously committed and communicated accretion and synergy targets.

Most importantly, we are happy to welcome the WellCare team and colleagues to Centene.

Let me now turn to a recap of Centene's 2019 highlights.

2019 was another robust year for Centene.

We delivered strong top and bottom line growth, enabled by operational and commercial successes across our enterprise.

We remain focused sticking to our business-as-usual approach.

We were not distracted by the significant headline noise during the year.

We continue to execute against our strategic priorities and invest in capabilities that have positioned Centene for long-term success.

In 2019, we added 1.1 million members, representing growth of more than 8%, surpassing the 15 million-member mark.

This growth was achieved in the face of state eligibility redeterminations, which continued to moderate.

We continue to grow our market-leading position in both Medicaid and the ACA marketplace.

We grew revenues by 24% to $74.6 billion and adjusted earnings per diluted share by 25% to $4.42.

The HBR increased 140 basis points to 87.3, driven by normalized margins in the exchange business relative to favorable performance in 2018 in the health insurer fee moratory.

The adjusted net income margin increased 10 basis points to 2.6%.

We continue to execute a smooth and seamless integration of Fidelis.

The only remaining task in this process is to finalize the incorporation of Fidelis onto our claims systems platform.

We also continue to invest in strengthening our products and capabilities, with a focus on areas that will complement our core business and works to continually enhance how we impact patient outcomes while delivering long-term care.

A few highlights.

We achieved meaningful progress with Centene Forward, an important initiative that we expect will better position Centene for long-term growth, increase margins and profitability.

In 2019, we executed a more than $500 million in initiatives.

And the program has now evolved into a permanent part of Centene's and the company's organization and culture.

We continue to migrate our membership to RxAdvance, the technology-based pharmacy platform, which enhances quality and transparency while lowering costs.

We continue to focus on proof-of-concept, and we'll expand as appropriate.

We increased our stake in Ribera Salud from 50% to 90%.

This demonstrates our commitment to continue developing Centene's international portfolio.

We are also proud of the initiatives we announced in 2019 to enhance the health of the communities we serve.

I would like to highlight just a few.

In February, we formed the Social Health Bridge trust to help organizations more effectively address the social determinants of health.

In April, we launched the OpiEnd Youth Challenge to raise awareness among adolescents about opioid misuse and prevention of dependence.

And in September, we launched the Food For Today and Food for Tomorrow development initiative.

We're feeding America to help those experiencing food insecurity.

These initiatives are all in line with our whole health focus, an integrated and holistic approach to how we work with our community.

We will focus on addressing the broad range of social determinants of health.

For example, Medicaid have always -- are particularly likely to struggle with nonmedical barriers to health, including nutrition, education, transportation and proper housing.

As a leading multinational managed care enterprise, we will continue to lead initiatives and partner with organizations to transform the health of communities across the globe.

Moving on to the market and product updates.

First, we'll discuss recent Medicaid activity.

During the year, we maintained our industry-leading Medicaid RFP win rate of 80%, with success across new contracts as well as renewals and contract expansions.

Medicaid membership grew approximately 3% to year-over-year to 8.6 million recipients.

Texas.

In November, Centene successfully re-procured the expanded -- and expanded its STAR+

PLUS contract in Texas.

We will be providing health care services to recipients in 2 new service areas, El Paso and Travis, while continuing to operate in our 7 existing service areas.

Centene currently serves 140,000 beneficiaries under our existing contract.

The new expanded contract is scheduled to commence September 1, 2020.

On a separate note, the state of Texas has now indicated that the STAR and CHIP re-procurement announcement will be sometime in February.

We remain confident in the value we bring to the state.

Pennsylvania.

On January 1, 2020, Centene successfully launched the third and final phase of the Pennsylvania long-term care contract, adding approximately 38,000 beneficiaries.

As a reminder, we launched the Southwest zone in January 2018 and the Southeast zone in January 2019.

We are the leading long-term provider in the state, currently serving approximately 90,000 recipients.

The addition of the third zone will bring our total annual revenue in Pennsylvania to over $2 billion.

Centene's participation in this important program reinforces our national leadership position in long-term care.

Louisiana.

I'm pleased to announce that on January 17, 2020, the Louisiana procurement officer found the state's procurement to be the most -- for the most recent RFP, and I quote, was fatally flawed.

After months of reviewing our protest, the procurement officer agreed the state failed to comply with the requirements set forth in the RFP MLR.

Consequently, the procurement was rescinded and the awards were canceled.

The state and awardees have appealed the decision to the Commissioner of Administration, and we are currently waiting for a resolution.

We remain confident the Commissioner will uphold the procurement officer's decision.

Centene's plan continues to operate under the previously mentioned emergency contract with the state.

North Carolina.

As we have noted, Centene, as a provider of entity, has been awarded 3 regions in North Carolina.

North Carolina's Medicaid managed care program has been delayed from its previously announced February 1, 2020, start date, pending approval in the state budget.

At this point, no official time line has been announced.

We continue to maintain sufficient operations for all required implementation activities during this period.

In addition, we are defending our awards against ongoing protest and expect that we'll retain all awards once the process is complete.

Illinois.

In February, we commenced operations on the state's foster care program, serving approximately 15,000 beneficiaries.

We expect additional enrollment of approximately 17,000 later this year.

Health insurance marketplaces.

We remain pleased with the strength of our marketplace business, which has continued to be very popular and an attractive option for many consumers.

In 2019, we retained our market-leading national position.

At year-end, we served approximately 1.8 million exchange members in 20 states.

This represented growth of approximately 20% year-over-year.

For 2020, we expanded our footprint in 10 of our existing Ambetter states and 106 new towns.

Our continued focus on providing high-quality affordable health care led to a very successful open enrollment.

In January, we had almost 2.2 million members across 20 states.

This represents a year-over-year increase of approximately 200,000 beneficiaries.

In addition, the key demographics of these members remains relatively consistent with prior years.

The average age declined by 1 year to 42.

Our retention rate increased 2% to 82%, and our effectuation rate increased by 3% to 96%.

We expect to have another strong year of operations in our industry-leading marketplace business.

On to Medicare.

At year-end, we served approximately 405,000 Medicare and MMP beneficiaries, a decrease of approximately 3% year-over-year.

We did not achieve our growth expectations in Medicare, and overall performance has not kept pace with the rest of our products.

We have been focused on addressing the underlying drivers of this underperformance.

The addition of WellCare's high-performing Medicare portfolio will serve as an important catalyst to accelerate our growth and performance in this business.

As I mentioned last month at an investor conference, we plan to operate our Medicare business under the WellCare brand name.

Looking ahead, I'm comfortable that we will be able to reset the trajectory of this business.

A couple of quick comments.

Our medical cost today remains stable and in line with our expectations in the low single digits.

On the rate outlook for 2019, our composite Medicaid rate increase was 2%.

We are expecting a composite Medicaid rate increase of approximately 1.5% for 2020.

Now let me provide commentary on health care legislation and regulatory environment.

We believe that there is little desire in Washington, D.C. to revisit comprehensive health care reform.

However, Congress and the Administration continue to explore ways to improve the health care delivery system.

We are pleased with the end-of-year legislation, which included a provision fully eliminating the health insurer fee beginning in 2021.

This tax not only increased the cost for seniors and those who purchase commercial coverage, but requires states to pay hundreds of millions of dollars for a tax that place significant strain under Medicaid programs.

In addition, the marketplace revisions aimed at stabilized individual market further indicate bipartisan support for exchanges.

Last week, the Administration announced a block grant proposal, aimed at giving states more flexibility with their expansion population.

We are currently reviewing this proposal and look forward to working with the Administration to help promote Medicaid fiscal integrity, while making sure the program remains available to those who need it.

Centene welcomes the federal government's efforts to promote state innovation across all programs to make coverage more affordable and sustainable.

It represents another opportunity to be an innovative partner with the states, and Centene, with its local approach, is well positioned to do so.

In conclusion, 2019 was another very successful year for Centene.

We delivered solid financial performance and made significant progress against our strategic priorities.

We look forward to 2020 and beyond with confidence, as we continue to build on this positive momentum, with a focus on driving significant growth across the portfolio, with an enterprise on organic growth -- an emphasis on organic growth, continuing our focus on operational excellence and margin expansion, and investing in the strength, scale and quality of our enterprise and portfolio to position us to continue to deliver value over the long term.

Thank you for your interest in Centene.

Jeff will now provide you with further details on fourth quarter and full year 2019 financial results.

Jeff?

Thank you, Michael, and good morning.

This morning, we reported strong fourth quarter and full year 2019 results.

Fourth quarter revenues were $18.9 billion, an increase of 14% over the fourth quarter of 2018.

And adjusted diluted earnings per share were $0.73 this quarter compared to $0.69 last year.

Now let me provide additional details for the fourth quarter.

Total revenues grew by approximately $2.3 billion over the fourth quarter of 2018 primarily as a result of growth in the health insurance marketplace business, expansion in new programs in many of our states in 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania, and our recent acquisitions in Spain, this growth was partially offset by the health insurer fee moratorium in 2019.

Moving on to HBR.

Our health benefits ratio was 88.4% in the fourth quarter this year compared to 86.8% in last year's fourth quarter and 88.2% in the third quarter of 2019.

The year-over-year increase was attributable to the health insurance marketplace business, where margins have normalized as expected, from favorable performance in 2018.

The increase was also due to the health insurer fee moratorium.

Sequentially, the 20 basis point increase in HBR from the third quarter of 2019 is primarily due to the normal seasonality in the health insurance marketplace business and a moderate increase in flu-related costs.

The HBR for the fourth quarter was higher than our expectations, driven by higher-than-projected medical costs in our marketplace business and slightly higher-than-projected flu costs.

The marketplace business continues to perform well and finished the year with pretax margins well within our targeted 5% to 10% range.

Marketplace membership remains strong as we ended the year with approximately 1.8 million members.

For 2020, we expect our peak enrollment to be approximately 2.2 million members, representing growth of over 10% from last year's peak enrollment.

This is in line with the range that we provided at our December Investor Day.

Now on to SG&A.

Our adjusted selling, general and administrative expense ratio was 9.5% in the fourth quarter this year compared to 9.9% last year and 8.8% in the third quarter of 2019.

The year-over-year decrease reflects the leveraging of expenses over higher revenues and lower variable compensation cost in 2019.

The sequential increase is primarily due to an increase in selling costs in the fourth quarter of 2019 and the impact of approximately $440 million of at-risk state directed payments in California recorded in premium revenue in the third quarter of 2019.

Additionally, we spent $0.05 per diluted share on business expansion costs during the fourth quarter.

During the fourth quarter, we recorded $30 million or $0.05 per diluted share of debt extinguishment costs related to the redemption of our $1.4 billion, 5.625% senior notes due February 15, 2021.

This includes the call premium, the write-off of unamortized debt issuance costs and a loss on the termination of the $600 million interest rate swap associated with the notes.

Investment income was $126 million during the fourth quarter compared to $67 million last year and $98 million last quarter.

The year-over-year increase reflects increased investment balances over 2018, including the proceeds of our $7 billion senior note issuance related to the planned financing for the cash consideration of the WellCare acquisition, improved performance associated with our deferred compensation portfolio and the impact of higher investment balances.

Sequentially, investment income increased in the fourth quarter due to the higher investment balances associated to WellCare financing and improved performance associated with our deferred compensation investment portfolio, which fluctuates with its underlying investments.

The earnings from our deferred compensation portfolio were substantially offset by increases in deferred compensation expense recorded in SG&A.

Interest expense was $113 million for the fourth quarter of 2019 compared to $98 million last year and $99 million last quarter.

Both the year-over-year and sequential increase reflects a net increase in borrowings related to the issuance of an additional $7 billion in senior notes in December 9, 2019, used primarily to finance the cash consideration of the WellCare transaction.

Our effective tax rate for the fourth quarter was 22.3% compared to 32.5% in the fourth quarter of 2018.

The decrease is driven by the impact of the health insurer fee moratorium.

Sequentially, the fourth quarter tax rate was in line with our expectations and lower than the third quarter tax rate, driven by the vesting of our employee stock awards, which occurred every December.

Now on to the balance sheet.

Cash and investments totaled $21.4 billion at quarter end, including $7.2 billion held by unregulated subsidiaries.

Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level.

Debt at quarter end was $13.7 billion, which includes $93 million of borrowings on our revolving credit facility.

Our debt-to-capital ratio at year-end was 34.3%, excluding our nonrecourse debt and the senior notes issued to fund the WellCare transaction.

This compares to 37.4% at the fourth quarter last year and 35.6% at the third quarter of 2019.

Our medical claims liability totaled $7.5 billion at quarter end, and represents 45 days in claims payable compared to 48 days in the third quarter of 2019.

The decrease in DCP is driven by a reduction in state directed payments that are a component of our medical claims liability.

As we have highlighted in the past, we expect the DCP to be in the mid-40 range on a run rate basis, but state directed payments at the end of some quarters have increased our DCP to a higher level.

In the fourth quarter, we did not have any material state directed payments included in our medical claims liability, which drove the decrease in DCP.

Historically, these payments were administered as pass-through and not a component of medical cost.

But as states have moved these payments into premiums with a small amount of risk, they have been included in premium revenue and medical cost.

Cash flow used in operations was $651 million in the fourth quarter, and cash flow provided by operations was $1.5 billion for the full year 2019 or 1.1x net earnings.

Operating cash flow for the fourth quarter of 2019 was negatively affected by the timing of payments from a few of our state customers as well as the absence of material state directed payments that I previously mentioned.

Now let me provide an update on the WellCare acquisition.

We are pleased to close the WellCare acquisition on January 23 and have begun the integration process.

Each WellCare share was converted into 3.38 shares of Centene common stock, valued at $66.76, plus $120 per share in cash for a total value of $19.6 billion, including $1.95 billion of assumed debt.

Based on the closing price of Centene stock on the acquisition date, we expect our debt-to-capital ratio to be approximately 39% at close, excluding any share repurchases or repayment of debt associated with the proceeds from divestitures.

Given the closing date, the results for January will be prorated for our ownership period of WellCare and the divestiture of our Illinois business.

Now shifting to 2020.

As stated in our press release this morning, we will be providing consolidated guidance, including the WellCare acquisition, on Tuesday, March 3, with a conference call the morning of March 4 at 8:30 a.m.

Eastern Time.

As I just highlighted, we need to close the month of January and prorate the activity for the month's performance and account for the divestiture transaction.

Absent the WellCare acquisition and related divestitures, the Centene stand-alone guidance we provided at our Investor Day in December was still intact.

We remain comfortable with the previously communicated accretion targets of no less than breakeven in the first full year post-acquisition and mid- to upper single-digit accretion in the second full year.

Additionally, we continue to expect year 2 net synergies of $500 million, and run rate net synergies of $700 million.

We will provide an update to all these metrics on the March 4 call.

While we will provide our formal guidance in March, I would like to highlight a few headwinds and tailwinds that will affect the guidance for 2020.

First, the headwinds.

In the S-4, WellCare assumed the North Carolina contract would begin on February 1. Moving the start date to October 1, in line with our model, reduces revenue and earnings for 2020.

Second, due to the closing date, Centene will not incorporate 22 days of WellCare's January results into the combined 2020 guidance.

Additionally, the amounts in the S-4 did not account for any divestitures.

The total divested business represents approximately $3.6 billion in annualized 2020 total revenue and 650,000 members.

Now turning to tailwinds.

WellCare had a successful open enrollment period for both its Medicare Advantage plans and Part D plans.

Medicare annual enrollment was in line with expectations, and the PDP business currently has approximately 4.4 million members.

Given the timing of close, we continue to review WellCare's 2019 results, including any onetime items in the effect on the 2020 forecast.

As stated earlier, we will provide a full update on the March call.

In summary, 2019 was a successful year for the company as we continue to execute on our growth strategy.

We grew both total revenues and adjusted earnings by approximately 24% over 2018.

Total revenues grew by $14.5 billion and adjusted diluted earnings per share by $0.88.

We reduced our leverage by 300 basis points in 2019 in preparation for the WellCare acquisition and continued to expand net income margins.

Looking forward, we expect to leverage the combined capabilities to provide meaningful growth and efficiencies across all of our product lines.

We are focused on executing the integration plan and achieving our stated synergy and accretion targets.

That concludes my remarks.

And operator, you may now open the line for questions.

(Operator Instructions) Our first question comes from Kevin Fischbeck with Bank of America.

All right.

Great.

That WellCare commentary was helpful.

But I guess I just wanted to see if there was anything else that you would highlight as far as the delay in the guidance, because I think you guys provided the guidance for Health Net before the transaction closed.

So just wondering if there's anything else that kind of lowers your visibility or any other items that you really want to get color on before you provide maybe the proposed MA rates or anything like that that you want to get color on.

Yes, just a couple of things, Kevin.

I think it's just purely the timing of the closing, the WellCare -- or the Health Net transaction closed around the end of March and their annual 10-K audited financials were already out.

And so literally, I think it's just the timing of close.

And I think you also have the fact that their audit is not complete as well as the last step in the regulatory approval process in this transaction was the Department of Justice piece.

So again, we were operating as 2 independent companies until the time of closure.

That is a considerably larger complex number of states and businesses they're involved in.

And we want to -- as you know, Kevin, we'd like to do it methodically and carefully, so taking an extra 30 days or so seemed to make sense.

Okay.

And then just my last question.

The MLR on the exchange is coming in higher than you expect in the quarter.

Can you provide a little more color as to why that was the case?

And why we shouldn't be worried that that's going to impact your 2020 outlook?

If costs are higher, why doesn't it flow through into how you price for 2020 if it came in after you priced?

I might just start and then Jeff, pick it up.

We want to remind you what we have said historically.

One, it is falling within our guided range of 5% to 10%.

Two, we had commented how we are keeping the members longer, and so that could have an impact on the MLR in the fourth quarter.

But because of keeping them longer, the total margin impact is not affected by it.

You may want to go a little bit beyond that, Jeff?

Yes, I would say a couple of things, Kevin.

I would say we did see some higher noninflation costs in the fourth quarter than we anticipated.

But also a little less than half of the fourth quarter costs in the exchange business that were higher than our expectations was associated with the reconciliation of outstanding claims items that were settled and resulted in more favorable reimbursement going forward.

And the majority of these were in states where we have MLR rebates.

So -- and then the other thing, as we have mentioned -- we did mention in our December Investor Day that we did expect the exchange margins to continue to moderate slightly in 2020.

So I guess what I would say is you combine all that together, we're still comfortable with where our 2020 expectations are for the exchange business.

It's a very strong business.

And as I commented, all the demographics continues to own the growth.

And basically what people expected additional competition, et cetera, we continue to do well, and it's -- and these onetime things Jeff talked about can have an impact.

But that's -- that really has a benefit going forward.

So I guess just to make sure, you're saying that some of these settlements were going to also prospectively impact costs upward, but there are markets where you have rebates.

I guess if you had a settlement like that in Q4, and you're paying rebates, why would that impact your...

No, no, no.

What I'm saying is, is that we had costs that we incurred in the fourth quarter that will provide better reimbursement going forward.

Oh, better.

Yes.

And those -- yes, and the -- more favorable reimbursement going forward.

And those costs that we incurred in the fourth quarter happened to be in states where we have MLR rebates, so there is some mitigating effect.

And it reduces those MLRs 3-year rolling calculations, so it reduces the effect of the MLR going forward.

Our next question comes from Josh Raskin with Nephron Research.

The first one, just on the difference between sort of first year at least breakeven versus missing the first 3 weeks.

Should we assume that that's actually a favorable thing in terms of, I think, about PDP benefit design?

Or should we think of it as 2020, no material difference than first year post-closing?

Well, I mean that's why it's one of the reasons why we're waiting, Josh, is you have to actually close the month of January.

And as you're well aware, there could be variability on the medical cost side.

I think on the revenue side, you kind of know your members and you know the premium, but the cost side is what you don't know.

And so one of the reasons we're waiting until the beginning of March to give the combined guidance is just to get the actual numbers for January and do the proration math.

Okay.

And then how are you guys thinking about PBM opportunity on the legacy WellCare book?

I don't think there was a formal announcement.

I know they were talking about making some changes, or at least going through the process there.

Now it's part of Centene overall, and I assume you guys will be instrumental in that decision-making process, so how are you thinking about that?

I think -- let me -- I'll let Jeff give you the more specifics.

But we said earlier that the PBM will be based in Tampa, and Drew is going to drive that process for us.

And we see some real benefits in the total purchasing power without having a consolidation, but you can give more specifics.

Yes, Josh.

I think they were in process on an RFP.

I think they've concluded that process.

Right now, is what I would say is we're in-flight on the synergy analysis, obviously, looking at their contracts and our contracts and all the PBM capabilities.

And I would say, harmonizing those to achieve the value that we're trying for in the synergies.

So I guess that's where we are.

We've begun the process, and we're in process on that now.

More to come in March.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

One follow-up on your answer on the PBM question.

You mentioned that WellCare concluded the RFP process.

Can you just clarify, did they make a decision on that?

Or do they just concluded the review of the RFP process?

No, no.

They've made a decision in that.

I think they extended their contract with CVS for a period of 3 years.

Okay.

And then just as you think about the MLR obviously, you talked about the moving parts in the fourth quarter that impact your initial thought.

So should we think about kind of like the flu is a 20 bps impact?

Do you think it was kind of like the difference between the high end of your initial range versus where you came in?

And then when we think about the impact in the first quarter, and I know that you don't guide to the quarter, how should we think about the flu continuing to weigh on MLR?

Yes.

I guess a couple of things.

I just bifurcate the marketplace versus flu.

Again, this is versus our expectations.

I would say the marketplace was 2/3 of the variance, with the flu being 1/3.

So I think that gets you close to 20 to 30 basis points on the quarter.

So I think you're close on that.

As far as the flu for Q1, we'll have to wait and see.

1 month is not a quarter, and so we'll have to see how flu costs pan out for the entire quarter.

As you're well aware, we did talk about the effect of leap year and the additional day on the first quarter's performance, and I think we discussed that ad nauseam at our December Investor Day.

Our next question comes from Charles Rhyee with Cowen.

Got it.

Sorry.

Maybe one more follow-up on the PBM question.

If there's an extension for 3 years with CVS, is there any change of control provisions that would allow you as you do the analysis to consolidate the PBM operations sooner?

Or would you have to wait for the 3 years to be over to really kind of roll something altogether?

I think there's certain flexibility built into the contract.

So obviously, they knew they were in the middle of a transaction.

And so I think there's some flexibility in that.

But again, we're doing the full analysis as we speak, and more to come in March.

It's really the -- and pricing, with the amount of purchasing power we have will be very important.

Understood.

And then just going back to individual a little bit.

I think you said that, for the year, you're sort of well within the target range of 5% to 10%.

But when we think about margin normalization over the near medium term, where do you think we are in the process?

Do you think we're going to -- where do you think we kind of stabilize out over the next year or 2?

Yes, I'll kind of go back to our -- what we said at our December Investor Day.

A couple of things to just highlight, remember, we've always talked about 2018 was a very good year for the marketplace business.

And what we saw in '19 is a margin, a pretax margin that was very consistent with 2017, '16, '15.

So we have seen very consistent margins since the inception of the exchange business.

For us, the outlier is really 2018, which had an exceptional year.

And so as we close 2019, I would say margins were exactly -- they're roughly in line with that experience, meaning, consistent with '17 and '16.

So we're still comfortable that in the 5% to 10% range.

And I think we mentioned at our Investor Day that we saw them moderating slightly, but it's not substantial.

We don't see a material moderation of margin from '19 to '20.

Our next question comes from Sarah James with Piper Sandler.

So 2020 is probably expected to be a more competitive year for exchanges.

And wondering if you can tell us if you've noticed any difference on the impact that it's having on market share ramp in new markets compared to expansions in past years?

I think I heard the same thing last year.

And we grew 10% in a market that shrank 1%.

And I think we have strong networks.

We saw a -- we saw the continuity of our members increase by 2%.

We saw the effectuation increase.

So -- at every level, and I said all last year that we know how to be competitive.

It makes us better.

And I think there is -- the product is strong.

And our consumers recognize it, like the networks we have.

And we expect to be more than competitive ongoing.

Got it.

And maybe you could talk a little bit about the boost that ascension and some of the JVs could give to Medicare growth?

So should we think about that as potentially providing an opportunity to grow above market rates for Medicare?

No.

I think we're still working through.

And now that we're able to work with WellCare, and as I said, we're going to be consolidating that and we'll also be headquartered in Tampa.

We might pull in.

And so we're working through that.

They're working with us on the joint ventures.

Those are things that are unfolding very nicely.

They'll take time.

And I think the time to talk about the impacts they'll have will probably be when we give guidance for 2021.

And the team has had the full look at it.

But we really see our trajectory changing with the input of the marketing and other capabilities that WellCare has demonstrated.

Our next question comes from Steve Tanal with Goldman Sachs.

I guess, one on the RxAdvance and WellCare.

Sort of curious, did WellCare have full visibility into the cost and benefits of RxAdvance before renewing with CVS?

And what your view as...

Well, we were -- I want to be very clear, we were very careful, prior to the approval from Department of Justice, to operate as 2 very separate companies, and that we had no insight into their contracts, and we were careful they didn't have any of ours because the rules of that are very clear, and it's the old story.

You have to be honest and appear to be honest.

And so we -- they'd had no insight into it.

Got it.

Okay, that's helpful.

And maybe just one other on Centene Forward.

Wanted to understand how you guys are sort of thinking about in the context of earnings.

Did you expect at any point to sort of commit to a certain net number contribution?

And is that not '20 or '21?

Like, just any color on that?

Yes.

Let me start.

I think as we said from the beginning, we are really self-funding a lot of development in our systems and systems capability.

And the name of the game going forward is that -- and that's where our scale and size as a $100 billion company is so important.

We have -- it gives us the resources to continue to focus on the systems that's going to deliver the kind of performance, margin improvement, et cetera, in '21, '22 and going forward.

And as we start to let some of that fall to the bottom line, as such, Jeff will be in a position to disclose that in a succinct way.

But it's -- that -- so -- I can't -- I'm trying to remember who that deal -- you have to -- that cost a little bit.

Like your fingernails, you have to continually trim them.

And we see this as incorporated in the company.

And it's a continuous process of reducing costs while improving the capabilities of the company.

And we're clearly more pleased with the $500 million that we were able to achieve this past year.

And we see it continuing to grow an additional funding this year, which will just continue the next-generation of systems work.

And in fact, I'm going to give you just a little more color that we have -- we were really bifurcating or trifurcating, I guess, would be the word, our systems.

We have that -- we have a group that's going to be maintaining the systems that work day in and day out.

We have a group that's going to be working on the transition, because there's a lot of transition with these systems.

And I make no stink of it, and they don't either, that WellCare knew they were going to be sold at some point.

And so there's a lot of little systems that's going to take some time to transition.

And that's why we've said it's a 2-, 3-year process to do it right and get it right, and we're focused on that.

And the third group are the advanced technology group.

And these are the think tank people, the people that have brought us things like Interpreta and others that give us real-time -- HEDIS for the physicians.

They're going to take us to the next generation.

So that's being funded by these savings.

Our next question comes from Justin Lake with Wolfe Research.

First, I just want to follow-up, one last question on the PBM.

There were some talk by WellCare Group getting better economics potentially pulled forward into 2020 debt renewal, even though the contract doesn't begin or doesn't end to the end of the year, the original contract.

So I'm curious, is that something we should consider that maybe 2020 could be -- could have better PBM costs rather than 2021?

And then can you tell us if the strategy is to move Medicaid over to RxAdvance from WellCare Group thoroughly and then leave the Medicare PBM for CVS during the contract?

Yes, Justin, Jeff here.

So as I mentioned before, I mean we're going through the process right now comparing the PBM contracts and all the capabilities that both companies have and rationalizing that for the synergy opportunity.

And so I'm not going to comment today.

I kick that question to March when we provide full combined guidance because then we'll have the opportunity to have the benefit of visibility on both those contracts.

Yes.

And Justin, if I may.

Just if we think about when you're combining these 2 companies, we had multiple work streams that were developed during the period of time we're waiting for Justice approval, and that's whether it's systems, it's combining them.

When you take the Florida and Georgia, they're large companies, both sides combining them.

And the things that we're doing, and while we have divested some plans, we have obligations there to ensure a smooth transition of that membership, you put all that together, it's very complex.

So we were just trying to take a -- use the next 30 days to take a very careful view of it and get it right.

We're not trying to duck anything except say, it just takes time when it's as complex as this one.

It's -- I keep telling you, it's not how fast, it's how well you do it.

Totally makes sense.

I appreciate that.

And then just my follow-up is on the exchange medical costs in the fourth quarter.

So Jeff, if we think about the -- you were above the high end of your range by about 20 basis points on MLR, so 80 basis points for the quarter.

Can you give us some delineation in terms of how much of that was the exchange miss?

Was it 50 or 60 out of the 80 basis points?

Just trying to understand where exchange margins were in the quarter.

Yes.

Yes.

I'll kind of package everything that I've said together in one; maybe this will clarify everything.

So you're right on the 80 bps.

So MLR for the quarter was higher than our expectation by 80 basis points.

I said 2/3 of that was marketplace, 1/3, I would say, is flu.

And those are just rough, right?

That's -- and then of the marketplace piece, I said a little bit less than half was associated with these reconciliation of the outstanding claims, where we effectively had medical costs in the fourth quarter that will provide a best fit going forward, right?

And some of that was in states where we had MLR rebates.

And so there's an offsetting effect there, but it's not a 1:1 because the MLR calculation is a 3-year rolling calculation.

I want to restate it.

Just if I may, in my simple nonfinancial.

Okay.

In fact, the -- when you look at what we did there, we had some states where balance, billing things were issues because we didn't have a contract with the hospital.

We now have contracts with them.

And we got those things settled.

We got it right with them.

So we had the expense to settle those claims with those groups.

But now going forward, and these are larger states, going forward in 2020, we're going to be in a stronger position because they're now part of the network.

And those kind of issues won't be there.

So it was really a onetime, get it right.

And it could happen again, Justin, be very candid, but I always view those things as that's where the long term comes in.

We were in this, and we continue to do very well in a long time.

It will cost us a couple of bps here or there in the quarter.

I'm looking at 2020, and I'm really pleased with what we see happening, particularly when I see the membership, the effectuation rates, the demographics, it's just a really great business for us.

Our next question comes from A.J. Rice with Crédit Suisse.

Just on, first, the comment about Medicaid rates.

I think you came in, if I've got my notes right, into 2019 looking for a 1.5% increase.

And I guess today you're saying that you ended up with about a 2% all-in increase.

And I'm just wondering, is that mostly due to some true-ups around the research verifications?

Or is it something else?

And were there any reverifications of note in the fourth quarter?

And you're saying 1.5% for 2020, are there potential reverifications that can help you in the early part of 2020?

Well, I think we said the rebirth, the -- it's really moderating.

And yes, we've had great success because of real-time systems we've had in getting the states to recognize the membership mix and the acuity mix within it.

We're never satisfied with the timing in how fast they make those investments, but part of it is, while they say we have real-time systems, they have to wait and see what some others are doing that don't have that real-time capability, and that can slow down the whole process.

So on balance, we were comfortable that the states and the large states we're working with are going to get it right with us.

And it's just a matter of timing, so which quarter it fall was in?

That's a little more hard -- that's a little harder to forecast, but it's all coming together right there too.

Jeff, anything you want to add?

No, I think Michael's exactly right.

It's a timing perspective.

We're not -- there are some states that were still searching for rate adjustments heading into 2020.

So again, it's a timing issue, and we're still looking for additional rate adjustments in certain states for this effect.

Okay.

But maybe my other follow-up question would be, once you complete the WellCare deal, you said your pro forma, I think debt to total cap will be at 39% as sort of you're where -- that's within your target range, I believe.

So do you need some time to digest WellCare?

Or are you back on the acquisition hunt if something comes available that's attractive to you?

Let me comment.

One, that 39%, we still have to determine the proceeds of sale, and we're looking at both stock buyback and retirement of debt.

So that will help.

But I guess I have to respond to this and say, we're not going to look at anything serious and large until we're really comfortable that the trade, this transaction and the integration has taken place to a level that's appropriate.

But those people that know us know that we have an insatiable appetite.

And so I would say, as soon as -- and they also know we're balance sheet managers, and we look very carefully at that.

So I would say, as our balance sheet continues to strengthen, this gets integrated.

And if we see opportunities, we'll be back out there.

But I have to emphasize what we said at our Investor Day, and I say it every chance, we are very driven by organic growth.

And I remind people, we had almost $7 billion of organic growth last year.

So we're going to continue to focus on that, and that's our primary focus.

And then as we see new capabilities and things we can add, we'll go in the M&A route.

Does that help you?

Yes, that's helpful.

Our next question comes from Steve Valiquette with Barclays.

This is Andrew Mok on for Steve.

Just wanted to follow-up on the MLR and exchange commentary.

It sounds like you're attributing most of the MLR pressure to the exchange business.

If we look back at full year 2019, how did Medicaid MLR perform relative to your expectations?

Medicaid, in aggregate, I think Medicaid was within the range.

It wasn't -- we would have called it out if it was material one way or the other on the full year, when you look at year-over-year results.

And then one clarification related to divestitures.

You noted that the S-4 did not include divested business.

That comment was referring purely to revenue, correct?

Your deal -- your net deal synergies have always reflected synergies, correct?

Just specifically on the revenue line.

Our next question comes from Scott Fidel with Stephens.

First question, just on the new block grant proposal.

I appreciate that you're still digesting that.

And Michael, I know you gave some initial comments.

Just interested, just at this sort of initial sort of stance here.

How are you thinking about this in terms of this being more of a net sort of positive around the innovation opportunity that you mentioned?

Or more of a net potential negative around the funding caps and potential risk to rates?

Or do you see -- think that there's simply going to be some different moving pieces in terms of headwinds and tailwinds to this?

Let me -- I don't want to be very general on it because it's so early in it.

But as we said, this is -- this involves expansion, not the current businesses.

This is key and focused on the expansion of the area.

Caps -- or block grants work really well in states that are not growing and states -- at Oregon have an impact.

So various states will have various impacts.

But as we look at it, we think -- I'm going to say that I tilt towards a net positive on it, because it's giving the states some opportunities to be innovative.

And as you know, we are very decentralized, and our local plans have strong relationships with those states.

And I think they'll be in a position to be able to help the states with that and use some of our assistance capabilities and tests and model things.

But it is limited to the expansion aspect of the business.

So that's key.

So I think going forward, I'm going to tilt to the positive side, but we're going to continue to work with it and help to make it better.

Okay.

And then for my follow-up question, I know there are a bunch of different MLR dynamics discussed in the exchanges.

Jeff, just interested in sort of where the thinking is right now on the risk adjuster payable ending the year, really 2 things in particular, I just wanted to ask about one, one of -- one of your peers had cited the weekly report that came out at the end of the year, and that had led them to make some adjustments to their risk adjuster assumptions.

And then also just interested just in terms of those higher 4Q costs that you had in the exchange business.

Does any of that sort of flow through to the estimated acuity profile of your population relative to the market?

Or were those just sort of other factors that don't play into the risk adjuster assumptions?

Yes, a couple of things.

I guess our risk adjustment was in line with our expectations.

And when the 10-K comes out, you'll see the total number.

We've got roughly $1 billion payable to the government on the books.

So it wasn't really a risk adjuster phenomenon for us.

It was really just higher non-inpatient costs.

And as you're aware, we have to get those -- we're estimating a significant portion of our medical costs.

And so we'll have to wait for those claims to come in and look at the diagnosis codes and submit those for risk adjustment.

And so there may be an effect there, but it's too early to tell.

Our next question comes from Lance Wilkes with Bernstein.

Yes, a question on how you're going to manage the company going forward.

I was interested in both what's the org structure you've got in place right now as far as Michael, to you, the direct reports?

And then as you think of management process, what's the process you've got in place now for legacy Centene, legacy WellCare and integration?

And how do those differ?

Yes.

I think let me -- from a management perspective, we laid out, at our June Investor Day, the organization chart that we were working with initially.

Drew is going to report to me, become part of my senior management team because of the increased focus on pharmacy at this point in time.

Ken, in fact, he should be here later today, in his new role of markets and products, and he'll help me to do that and bring that in place.

But that's all been laid out.

And we operate in what I call a partnership.

And people have clear responsibility, they have the accountability, the responsibility and the authority to manage their businesses.

And when you're at a scale, we are -- this enterprise is now international in scope, you have to do that.

So it's very -- the accountability is just very, very clear.

So going forward, that's the basis in which we're doing it.

In terms of the integration, as you raise it, there's different work streams -- the systems, and I've commented on that that's going to take time.

And there's a group working on the transition of systems.

WellCare is in the middle of transitioning some of their systems.

We're bidding in another.

So that all has to be brought into play.

The general measure, I think, Jeff explained, we'll be on a general measure by July 1. So that will all be in place, and that's in place.

They'll be moving to our form of -- we've reserved calculations as that occurs, and we're doing some of that now.

We use date received.

So all those things, there's different work streams for it, it's coming together.

We know who will be managing what markets, and they control that.

And that's moving through.

And it's because of the need for systems that we're going -- it's going to take a little bit of time.

You take Florida, they had a large business, we have a large business.

And so we're going to operate there in 2 systems for a short period of time, so we can convert to our systems.

So this has all been laid out, and it's very detailed.

And it's something that the Board looks at every quarter.

We've probably spent 30, 40 minutes reviewing where we are and how it's going at our Board meeting yesterday.

So it's something we're very comfortable with.

And I remind people, it's something we've done historically.

I mean Fidelis was a large company last year, and it's fully integrated, simply moving the claims platform, which we said all along would take some time.

Health Net was integrated.

So I mean this -- and the fact that we have strong management in both companies.

Now I just want to add one more thing that we just lay out to everybody, so they know it.

That we had culture surveys of their culture and our culture.

And we can say this is yours, this is ours, and ours is the one that will prevail.

We're not trying to blend things, and we have found historically, that makes a difference.

We also said right up front that all things being equal, in terms of performance, the Centene person gets the job if there's 2 people for the same job.

That does not mean that the WellCare person will not be re-purposed into a very senior position that gives them challenging new opportunities, but it also gives them comfort that the next time we do a deal, that they have that same protection.

So these are things that we have historically done that worked really well for us and helped to ensure a smooth transition, and we expect that again.

Does that help you?

Yes.

Yes, it does.

And just as a follow-up, as you spoke about maybe not doing large-scale M&A right now until this is digested, but obviously, having an ongoing appetite for M&A in general.

Could you talk a little bit about the priorities and talk to whether there are regions or particular capabilities in light of having the combination of both companies?

Okay.

Well, I think it's going to -- once again, it's -- we talk about capabilities.

Some of that may be systems.

And there's some small acquisitions we can make, because of our size of scale, we don't even have to disclose it.

I have jokingly told people that we did 1 deal and the person was thrilled we didn't have to disclose it because he said, "Now my families aren't going to be chasing me for some of this money." So I mean there's some benefit there.

But we do that type of thing.

Two is the capability.

See, if some other opportunities come up nationally, internationally, we'll do it.

But when I say scale and size, when you're now a $100 billion plus enterprise, with $5 billion of EBITDA at bottom, and the balance sheet that we have, and the improved credit rating that we have.

And what we're able to sell our bonds at and what our bonds are trading at, it says that what's relative and what can be done has changed a little bit from several years ago.

But we will, once again, just focus on what's the strategic value and it has to make financial sense, first, then strategic value, and then we'll look at the capabilities it brings.

And I can't go beyond that because then I'd be starting to tell you who we're looking at.

Our next question comes from Peter Costa with Wells Fargo Securities.

Just want to belabor the point on the MLR guidance for the HICS business one more time, just to make sure I fully understand what you're saying.

You've talked about being in the range of 5% to 10%.

But you've trimmed that back, that guidance into that range a couple of times now, so it seems like you're probably in the mid- to the lower half of that range.

You talked about for next year, still some nonmaterial moderation of that.

So does that really imply that next year you're going to be in the lower half of that range that you've talked about for sure?

Presumably, the tailwind that you pick up from the risk adjusters being a little better as of the fourth quarter reconciliations doesn't help you that much.

And then finally, does this have anything to do with the Iowa Medicaid claim payments that you were delayed?

Okay.

The Iowa, we all know, had some issues.

We were culpable as and so they got our attention.

It's being fixed.

And we made all the progress we made, and that's kind of historic.

And it's not material; we're going to get the funding.

It's not a question of that.

On the medical loss ratio, I want to remind you that it will vary from quarter-to-quarter based on out-of-pockets, maximum out-of-pockets, a lot of different things.

So what we're saying is that in any given quarter, you'll see some variation.

Now we also know that the last quarter of the year tends to be higher because the maximum out-of-pockets have been met, and sometimes people try to get some services and other things done.

And Jeff commented that the inpatient was a little bit higher, but I expect some of that.

On balance, the 5% to 10% is a solid range.

We're very comfortable with it.

And in the first quarter, it's going to be in the higher part of that range.

In the last quarter, it could be in the lower part of that range, but on balance.

And we tend to -- we love to be conservative.

We love to under-promise and over-deliver where we can.

And so we're saying it's realistic to say that as the business grows, there may be a little moderation, but it's still solid and it's solidly in the 5% to 10% range.

But if just I tell you where, then I'm giving you more than we have historically -- it serves no purpose.

It's great business.

Our next question comes or Matthew Borsch with BMO Capital Markets.

Just a quick question about the group commercial business.

I know it hasn't been front and center for a while, and I'm curious what your thoughts are on the state of that business coming to 2020, the intensity of competition there?

Yes, we have some of it in California.

We've said we'll maintain it.

It's good business for us.

And I would say that all that's under a strategic review.

But honestly, Matt, I'm back burning a little bit, so I want to get -- I want to get WellCare fully integrated and get things before we start distracting people in some other opportunities.

Our next question comes from Michael Newshel with Evercore ISI.

Maybe just going back to the divestitures.

Thanks for the revenue number, but can you also make any comments relative to profitability and size of the proceeds?

And have you actually decided whether you're going to redeploy on buybacks or debt paydown?

Or is that still to be determined as you put the consolidated guidance together?

Yes, we -- where we're going through right now, that analysis, and that's going to be a function of stock price as much as anything.

And so stay tuned.

That's something will resolve, probably, Jeff, what, next 30 days or so?

Yes.

Yes, absolutely.

And then the other thing on the size of proceeds, $1 billion pretax.

So $1 billion pretax is the proceeds.

And that, by the way, that also includes statutory capital as well.

Yes.

Got it.

I think it was a fair transaction for everybody.

Maybe one more, just -- sorry if I missed it.

But do you have any update to marketplace enrollment expectations for 2020 now that open enrollment is over?

Yes, we said 2.2 million, 2.2 million members, peak.

Our next question comes from Ralph Giacobbe with Citi.

First, just a quick clarification.

Did you say the higher MLR, was it non-inpatient?

I think, Jeff, that's what you said.

I thought Michael, in my recollection, said inpatient.

Yes.

Yes.

I'm sorry.

It was non-inpatient.

I -- I...

Yes, non-inpatient.

It was non-inpatient side.

And then if you could just flesh out when you say non-inpatient, is that just elective outpatient?

Is it drug?

Just help us in terms of what areas popped to that magnitude to drive the MLR?

I think we just saw normal PCP visits.

So it wasn't necessarily in the specialist category.

So just higher doctor visits is what I would say.

Okay.

All right, fair enough.

And then just my quick follow-up here.

Any initial comments around some of the proposed changes for HICS in 2021?

And I guess specifically around pulling tax credits for those who pay 0 premiums if they don't enroll and don't update their income.

I guess just trying to understand logistically, do most update each year so it's a nonissue?

Or how easy would it be for you all to sort of aim in making sure this sort of gets done?

And if you could, just what percentage of your HICS enrollees pay 0 premium?

It's Kevin Counihan.

So the payment notice just came out Friday, as you know.

We're still digesting a lot of those issues that you speak to.

We've got broad diversity of folks within the FPL range, I think as you know, though we tend to have the majority under 250%.

So again, not trying to be evasive, but we still are just working through the payment notice.

Our next question comes from Dave Windley with Jefferies.

So I wanted to ask a question on revenue, may seem trivial, but you were outside of your revenue range by about $400 million.

It doesn't seem like exchange retention is enough to account for all of that.

I just want to make sure there weren't any onetime benefits flowing through the revenue line.

No.

I think, Dave, I think we -- there -- we mentioned in the, I guess, in our December Investor Day that we thought the fourth -- it was either Q3 call or December Investor Day that our fourth quarter revenue will be lower than our third because of the size of the pass-through payments.

And I think we did get a few pass-through payments in the quarter that kind of helped revenue.

We don't have great visibility on these from states, and so they just show up.

So I think our -- we expected a bigger drop in revenue from Q3 to Q4, but we had $100 million or so in payments.

Okay.

And then second question, just again, to go back to your headwind and tailwind commentary.

I want to make sure I understand that that is relative to S-4 but your guidance, both on to the earlier question about divestitures, but also in terms of timing of close, that it would seem that those 2 items, relative to what you would have baked into your neutral in year 1 and mid- to high single-digit accretion in year 2, that particularly the year 1 element of that that those 2 things probably came out better than you expected.

Is that a fair conclusion timing of close in divestitures?

Which 2 items came out better than we expected?

Timing of close and the magnitude of divestitures.

Yes, yes, but the time you closed.

I mean when we gave our numbers, we are -- the accretion target is a full year, right?

So it doesn't really matter when it starts, it's a full year.

And my point on the guidance is that we're going to have to prorate January, and that's going to have an effect, right?

I mean if you just take the WellCare top line number that they were -- they expected to hit for 2019 and you take 22 days out of that that's a sizable number.

Our next question comes from Gary Taylor with JPMorgan.

I appreciate the -- I wanted to -- I had a clarification on that last point as well.

So maybe I'll try to put it a little clearer because I've had a few questions.

So Jeff, when you'd laid out some of the headwinds around health care, those are relative to ultimately the 2020 consolidated pro forma guidance you're going to give, those are not headwinds to the year 1, at least, neutral accretion guidance?

Yes.

Yes.

Yes, that is correct.

Yes, yes, yes, you're correct on that.

Okay.

I just had a couple of questions.

My last one, I wanted to go back to the exchange question just 1 more time, and make sure I understood about -- you had mentioned that some of the increased costs were in states where you were already up against the minimum MLRs that had some accruals.

So effectively, costs -- additional costs you would have incurred in those states, I guess, might have -- would not have impacted earnings because you'd already -- your margin is essentially already capped or your MLR is already capped.

And consequently, moving into next year, any improvement wouldn't flow through the earnings.

Because again, your MLR, at least, is already essentially capped if you're into the minimum MLRs.

Am I understanding that correctly?

Or is there a different point you were trying to convey on that part?

The biggest piece of that that you're missing is that the MLR calculation is a 3-year rolling calculation.

So to the extent we had costs in the fourth quarter, and you're in a minimum MLR rebate, it's not a 1:1, right?

And it depends on the magnitude of the prior year MLR rebates.

And so when you go forward, if I had lower MLR rebate in 2019, that is a lower amount that I have to deal with in the future, right?

So it's not a 1:1.

I mean you could -- if everything was equal per year, you could say it's a 1/3 benefit.

So if we had costs in the fourth quarter, we'd get 1/3 of that back.

But the math isn't that simple because every year is a different MLR number.

So the math is complex, but I think the point you were trying to convey, though, at least, was that the thought that incurring some of these settlements and reaching in network agreements with some of these PCPs, ultimately, was going to provide some better overall performance in 2020.

Yes, right.

Is that fair?

Yes.

Well, I would say there's 2 things.

Number one, it's better reimbursement, more favorable reimbursement for us going forward as a contracted provider, right?

So that helps.

And then yes, it reduces the aggregate level of MLR payable that you have, and so thereby, provides a benefit going forward.

Our next question comes from George Hill with Deutsche Bank.

A lot of my questions have been answered.

I guess I'd ask one kind of philosophically on the Medicaid demonstration projects around the block grants.

Do you guys, in the pharmacy business, feel like you're better off with the statutory rebate on the drug side?

Or do you feel these guys -- like the business would be better served taking a formulary approach in being able to negotiate your own discounts and rebates?

Well, I mean I always -- I've always liked the idea we are more masters of our destiny, right?

But I think when you have the systems we have and the capabilities and where we're going, we have the flexibility to work either way.

So we'll make our decisions, as I've always said, based on the facts of what they are at the time, and these are still issues under discussion.

And there's opportunities to influence some aspects of it, we believe.

And that's what we'll do.

And it's -- we just take a very open-ended approach to it.

And I'm comfortable we'll end up in a strong position at the end of the day.

This concludes our question-and-answer session.

I would like to turn the conference back over to Michael Neidorff for any closing remarks.

Well, we thank you for your comments and thoughts today and the chance to clarify some of these things.

And we're looking forward to the March 4, as I recall that's the date, Jeff, where we're going to be able to give you the full guidance and kind of set the baseline on what this combined company will be doing going forward, and we believe it will be very significant.

So thank you, and we'll be talking to you again in March.

The conference has now concluded.

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