Molina Healthcare Inc (MOH) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, July 27, 2016.

I would now like to turn the conference over to Mr. Juan Jose Orellana, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Pascal. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the second quarter ended June 30, 2016. The Company issued its earnings release reporting these results today after the market closed, and this release is now posted for viewing on our Company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions.

Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab of our Company's website or the SEC's website.

All forward-looking statements made during today's call represent our judgment as of July 27, 2016, and we disclaim any obligation to update such statements except as required by securities laws. This call is being recorded, and a 30-day replay of the conference call will be available at our Company's website, molinahealthcare.com.

I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan Jose. Thanks to everyone for joining us. I'm pleased to report that the results we published today represent a significant improvement over the first quarter. We earned $33 million in net income or $0.58 per diluted share and adjusted net income of $38 million or $0.67 per diluted share. I call attention to our adjusted net income because so many of you are now gauging our performance by that metric. We believe that adjusted net income per diluted share is very helpful in assessing our financial performance because it removes the non-cash amortization of purchased intangibles.

Last quarter, we shared with you some specific improvements that we needed to make to our operations. The results we have reported today speak to the progress we have made. We remain confident about Puerto Rico. We continue to improve our information technology and medical management infrastructure. We're making good progress in Texas, and the issues we identified in Ohio in the first quarter are substantially resolved.

Now let me take these in order. First, we told you that progress in Puerto Rico would take time, but we have reasons to be optimistic. While bad news in the Commonwealth continues to capture headlines, many of the underlying developments tell a more positive story.

Governor Padilla has argued consistently that payments for essential public services are a priority. There are more than words behind the governor's commitment. As of today, Puerto Rico is current on its premium payments, and we believe they will continue to make payments on a timely basis.

I'm also happy to report that our rate discussions with the Commonwealth have gone well and that we received a rate increase of approximately 2.5% that was effective on July 1.

Stepping away from the macroeconomic situation on the island, there remains much that is within our control. We have identified numerous utilization management and provider contracting opportunities in Puerto Rico that give us a great deal of confidence in the future.

We also remain vigilant of Zika infection trends in Puerto Rico and are actively contributing to prevention and education efforts on the island.

In addition, health officials in Florida are investigating two possible non-travel related Zika cases. Again, this is not a Medicaid-specific risk but a general public health threat, and the concern now is a lack of adequate funding to local government agencies to respond to Zika in a comprehensive manner.

During the first quarter, we discussed the substantial growth in our enrollment and the stresses that this growth place upon our information technology and medical management infrastructure.

In order to avoid a repeat of what happened in the first quarter, we have re-prioritized and accelerated improvements that were already planned and budgeted for 2016. Costs associated with these enhancements have already been contemplated in our 2016 outlook.

Two improvements are worth specific mention. In the area of information technology, we have supplemented our systems with a hyperconverged infrastructure. This software-centric architecture enables us to achieve a greater level of scalability, improved operational efficiency, shorter deployment times, and enhanced security by tightly integrating our computing, storage, and virtualization resources.

On the medical management front, we have also selected a new software platform to manage pharmacy and medical care. This effort will further unify our medical and pharmacy clinical management within one platform rather than managing these two functions separately.

We also spoke to the utilization management and provider contracting issues that contributed to our problems in Texas during the first quarter. Even without the benefit of the outer period quality revenue adjustments that John will talk about in a few minutes, the medical care ratio of the Texas health plan would have been approximately 85.3% in the second quarter. That is well under the 92.8% medical care ratio we reported in the first quarter.

We continue to work with local providers in innovative ways to supplement our contracted provider network. We entered into an agreement with Memorial Hermann in Houston to add this prestigious hospital to our network in 2017.

Finally, we shared with you our opinion that the problems experienced by our Ohio health plan in the first quarter were transitory in nature. Today's results support that opinion. The medical care ratio of the Ohio health plan decreased to 89.7% in the second quarter of 2016 from 92% in the first quarter. Health plan and corporate staff have worked together to address the root causes of the utilization management issues that contributed to our first-quarter results.

We are pleased with our progress to date. This quarter has given us added confidence that we are making use of the right tools and getting the right results.

I look forward to updating you again on our progress. I would now like to turn the call over to John.

Thank you, Mario, and hello, everyone. Today, as Mario said, we reported adjusted net income per diluted share of $0.67 for the second quarter compared to $0.51 per diluted share on an adjusted basis for the first quarter. These results were driven by lower medical costs as reflected by a 60 basis point improvement in our medical care ratio compared to the first quarter. Comparing our year-over-year performance is no longer meaningful given our growth, changes in product mix and acquisition activity, so I will focus most of this discussion on sequential comparisons.

While changes in accounting estimates resulted in several significant out of period adjustments during the quarter and for the year to date, it is important to note that in total these items only added $0.04 of a benefit to our quarterly results. For the first half of the year, these adjustments were, in fact, a $0.19 drag on our performance. In other words, however important these items might be to a particular geography or program, they were not significant to our consolidated quarterly results.

The important facts about the quarter are as follows. As Mario said, we have reasons to be optimistic in Puerto Rico. Effective July 1, we received a 2.5% increase in premiums on the island. We also have multiple medical management and provider contracting opportunities that we are pursuing while we speak.

Operationally, we have addressed the infrastructure problems that contributed to our first-quarter difficulties. Despite the noise around our 2015 estimate change, we are satisfied with our marketplace performance. Through June 30, 2016, the medical care ratio of our marketplace business for 2016 dates of service alone is approximately 78%. This accounts for risk adjustment accruals that we are making for calendar year 2016, and we believe that our marketplace pricing for 2017 is adequate.

Finally, the primary drivers of our margin improvement resulted from the work that has been accomplished in Ohio and Texas. The medical care ratio in our Ohio health plan decreased by 230 basis points over the first quarter of 2016.

Improvement in Texas was even more pronounced. Even without the benefit of out of period quality revenue adjustments, the medical care ratio of our Texas health plan was approximately 85.3% in the second quarter. That is well under the 92.8% medical care ratio that we reported in the first quarter.

Now let's quickly review the significant out of period adjustments in the second quarter. All of these adjustments are the result of new information we received during the quarter that required us to make changes to our accounting estimates.

First, we recorded increased pretax income of $51 million or $0.58 per share relating to the recognition of previously deferred Texas quality revenue. The Texas Department of Health and Human Services notified us this quarter that it would allow health plans to retain all outstanding quality revenue for calendar years 2014 through 2016. Based on that notification, we recognized $51 million of revenue for 2014, 2015 and the first quarter of 2016 that had previously been deferred.

Of the $51 million, $44 million related to 2015 and 2014 dates of service and $7 million related to the first quarter of 2016.

As you know, we have been very transparent about the measurement difficulties with this program and the related accounting treatments which has affected our earnings. We are happy to be able to put this to rest for a while.

Second, we recorded a $37 million or $0.42 per share decrease to pretax income related to marketplace 2015 dates of service. As a reminder, on June 30, 2016, CMS published its final update on risk transfer and reinsurance payments for the 2015 calendar year, and we adjusted our accruals accordingly.

Based on information received in 2016, we now know that our 2015 accruals were light. We continue to refine our accrual methodology as we get more information and believe we are more accurately reserved for the 2016 benefit year.

I want to emphasize that our marketplace strategy has been to provide an accessible extension of our Medicaid product to those individuals whose eligibility for Medicaid tends to fluctuate due to variability in their income. Remember, the segment most likely to purchase an exchange product from Molina includes those individuals under 250% of the federal poverty level. Approximately 90% of our marketplace members continue to receive a government subsidy for co-pays and premiums, and it's no coincidence that we have grown significantly in states that have not expanded their Medicaid programs.

We continue to have a disciplined approach to our pricing strategy, and we believe that we have adequately priced our marketplace products for 2017.

An important consideration as you analyze our marketplace pricing is to compare our pricing with that of other health plans that primarily serve Medicaid members, as opposed to those that primarily serve commercial members.

Next, we recorded an $11 million or $0.12 per share decrease to pretax income for 2015 dates of service related to Puerto Rico. As disclosed in our 10-Q for the first quarter, this matter arose as a result of enrollment discrepancies between our health plan and the Commonwealth in the early stages of our contract.

Let me be clear. We believe that we have a valid claim to all of the premiums withheld. Nevertheless, we reduced premium revenue by $11 million during the second quarter in connection with this matter.

The Company is affirming its previously announced earnings outlook. That outlook anticipates earnings per diluted share in the range of $2.15 to $2.60 and adjusted earnings per diluted share in the range of $2.50 to $2.95. We believe that adjusted net income per diluted share is very helpful in assessing our financial performance because it removes the non-cash amortization of purchased intangibles.

Furthermore, we expect our 2016 marketplace margins measured absent the impact of the 2015 true-ups to decline significantly during the second half of the year as a result of four factors. One, we will incur higher costs as members reach the limits of the cost-sharing provisions of their insurance coverage. Two, higher cost members will be added through the special enrollment period. Three, there will be attrition among lower utilizing members. And, four, utilization among new members will increase as they become more engaged with our networks.

While we expect our Ohio and Texas health plans will continue to perform well, additional improvement over and above the performance this quarter will be difficult to achieve.

In particular, the decline in marketplace margins that we expect in the second half will be especially notable in Texas. Puerto Rico will begin to improve but slowly and towards the end of the year.

Rate increases will provide a modest lift to the second-half performance as follows. For Medicaid rates in 2016 and excluding Medicaid expansion, we receive increases of approximately 3% in California and 2.5% in Puerto Rico, both effective July 1 and approximately 3% in Texas effective September 1.

For Medicaid expansion rates in 2016, we saw decreases of approximately 11% in California and approximately 2% in Ohio, both effective July 1.

Finally and somewhat related, we saw the implementation of a medical care ratio floor of 86% for the South Carolina Medicaid business effective July 1.

At June 30, 2016, days and claims payable were up two days to 48 days from the previous quarter, and cash and investments were in excess of $4.3 billion. Cash flow from operations was $139 million, in line with the prior quarter, and we held more than $465 million in cash and investments at the parent.

Finally, we wanted to provide you with ample notice that we are postponing our 2016 fall Investor Day in September in order to have a more meaningful discussion that includes our third-quarter results. We've moved that to another date. We will communicate that new date once it has been selected. It was a very good quarter, and I want to thank all of those employees who worked very hard to make it such a success.

This concludes our prepared remarks. We are ready to take questions.

(Operator Instructions) Joshua Raskin, Barclays.

Good work this quarter, guys. I guess my question is just starting on the marketplace, and this sort of, I don't know what you want to call it, sort of same-store 78% MLR, excluding all the out of period stuff, I guess you know I know we've asked this before how is that sustainainable, and I know you guys keep producing solid results and you are targeting low income, but we are seeing a lot more pressure sort of across the board. So I'm just curious, are you seeing any of these issues that have been reported by others in terms of chronic cost and dialysis or substance abuse or any of these other issues? Are any of these factors that you guys are seeing, is it just you guys were better prepared? I'm curious.

This is Mario. Yes, we have seen that, all those things to some extent in our members just like everyone else. I don't think that we are any different in that respect.

Okay. So I guess I'm just curious, like there has been no deterioration though in those trends, and it sounds like others have seen it. Because you guys have taken on a ton of membership. And I'm just curious, were they previously insured with other carriers or -- and just not new to it? I'm just curious how you guys are doing such a good job here.

Well, Josh, it's Joe. I would just point out that, while we are seeing those conditions as any health plan would, we continue to have on a risk score basis comparatively healthier members. We've put aside for 2016 dates of service about $220 million so far this year for payables back to CMS for risk adjustment.

So, it -- I guess I would say that we are not seeing a huge number of chronically ill members.

Okay. Then, Joe, I think you might have just hinted on this, but the CMS update you know where they said you guys have got to catch up a little on your accruals from last year, did that inform your accruals for 2016? Did you make any catch-ups in 2Q as to where you are now?

In a nutshell, yes.

Okay. And then just last question from me. On the Texas performance fees, I just want to understand what happened with the state. Did they actually prove out, yes, Molina satisfied all of the requirements to earn these performance fees, or was it just simply the state said, okay, everyone that thinks they are owed money, yes, we agree at this point? Just it wasn't clear from your comments if there was something specific that you guys achieved that helps you understand how this works or if this was just simply Texas kind of clearing the deck for the last couple of years.

Josh, this is Mario. Texas suspended the program, and so the revenue that we had not recognized, we were able to recognize. They are going to institute a new program. We're not sure exactly what that will look like yet, and we still have to perform all the quality measures and report those to the state.

Okay. So they sort of capitulated and just told everyone forget about the old program. We are going to start something new and recognize all the revenue that we've previously withheld basically?

That's correct.

Okay, thanks guys.

Kevin Fischbeck, Bank of America Merrill Lynch.

Just wanted to go into the ramp that your guidance basically assumes for the rest of the year. In the press release, you guys outlined a number of things that were going to kind of inform and drive that improvement. I was wondering if you could maybe try to quantify each one of those buckets between medical management initiatives and rate increases, etc.?

This is Mario. I think we've done that to the best of our ability. We've given you the factors. We've spelled out the rate increases. Beyond that, it's hard to quantify exactly how much each of those initiatives is going to contribute. But we have also told you that the back half of the year is where the lion's share of the profit is coming from this year.

So I guess like the first bullet point in your guidance was savings realized from medical management initiatives. Would you say that those in aggregate are a bigger driver to the improvement in earnings than the rate increases are, or -- just trying to get order of magnitude?

This is John. Yes, medical management is going to continue to be the biggest profit improvement driver.

Okay. And then just trying to understand, you said that from a G&A perspective that you made a number of initiatives around [fences], etc., things that you had planned for the year but you had accelerated. Does that mean we should expect G&A to be a little bit lower in the back half of the year than it normally would be because you moved what was supposed to be second half into the first half, or how do we think about modeling G&A as the year goes on?

It's Joe speaking. Generally, a lot of those kind of expenses we are talking about are capitalize, so they would be reflected in the D&A rate.

With that said, though, I would expect that we'll see a little bit of moderating of the G&A rate that you saw this quarter through the second half of the year. Our full-year guidance I think is about 7.8% G&A ratio.

Then just last question for me then, the fact that you are postponing the investor day until after Q3 results, is there something unique about this year or a lack of visibility or a catalyst that you are going to get more visibility on in that October timeframe that makes -- I guess, theoretically, you've had similar issues in years past, and you've always had analysts at the same time. What was the -- what are you going to get by delaying it by a couple of months? Is there something specific you are looking for?

Kevin, you are right. We've had this issue in the past, and we just felt that with the passage of time, we would be in a better position to talk about things. It's a little awkward to be talking about issues that close to the end of the quarter.

All right. Thanks.

Chris Rigg, Susquehanna Financial Group.

Just on Puerto Rico, I just want to make sure I understand sort of dynamic there at this point. You are going to get or you did get the rate increase earlier this month, but is the improvement at this point largely just going to come from medical management initiatives? And if that is the case, where are the areas that you feel like you were weakest sort of coming into this year and where the greatest improvements will come from?

I would say the answer is going to be both medical management and re-contracting, Chris. On the island, the provider groups are more accustomed to taking pharmacy risk than they are, for example, on the mainland. That will become an issue for us as we re-contract with some of the medical groups.

In terms of the medical management and what needs to be done additionally, some of the hospitals that we've been dealing with are fairly restrictive in terms of concurrent and prior authorization for admissions. So we are working with them to beef up that ability.

And then on the marketplace enrollment, our marketplaces and the performance there in the second half, I think you mentioned Texas specifically as being a pressure point. I could have misheard you, but if that is, indeed, the case, can you give us a sense for what's going on there?

Well, again, what we said was that Texas is not going to -- shouldn't be expected to improve beyond what we did in the second quarter. Once you take out the effect of the additional revenue. One of the reasons that Texas had a very good MCR for the second quarter was because the marketplace performed very well in Texas in the quarter, and we're not going to see continued increases in profitability on a percentage basis.

And then just one last follow-up on the marketplace. Where do you think the right sort of MCR should be for the year or just maybe even what are you guys targeting sort of longer-term? Thanks a lot.

It's Joe. I think obviously you have to consider all the stuff we've talked about about higher, you know, higher admin burden and all of that. But I don't -- I think a -- and 83% -- 82%, 83% for the year might be okay. 80% to 82%.

Great. Thanks a lot.

Sarah James, Wedbush Securities.

Thank you and congrats on the strong quarter, and I appreciate the level of detail you provided in the release. It makes things very clear.

I wanted to talk a little bit about earnings progression. So last quarter, on the call, you thought two-thirds of earnings would come in the back half, but this would put you guys above current guidance. So should we think about there being some conservatism in guidance right now, or did some of the cost improvements in Ohio and Texas resolve faster than you had previously anticipated?

Sarah, it's Joe. Let me give a technical answer to caution everybody. Then Mario and John may have something to say more strategic.

First of all, be careful extrapolating on anything per share related. We are at about 38% for the first half of the midpoint of our pretax guidance. Remember, obviously, the share count is going to fluctuate depending on where our share price goes. So, I don't think a -- I don't think earning 38% of pretax through second quarter really contradicts saying about two-thirds of our income is going to come in the second half. So I think we are being pretty consistent on that.

Obviously, we hope to spend the second half of the year developing the medical management initiatives and the other initiatives we've talked about to drive sustained profitability into 2017.

Yes, let me just follow up. Sorry, this is John. I think we've tried to be very consistent with what we've said this year. We are driving towards a 1.5% to 2% margin in Q4 of 2017. That's what we are focused on. And so the plans that we put in place already get us at that point or to that point rather. Some of the may take longer, some of them may catch a hold sooner, and that's what's going to be sort of the delta for 2016 as to where we are in our guidance range. But we are less focused on where we are in the guidance range this year and more what are we putting in place to hit our commitment for next year.

Thank you. I appreciate that. And just to clarify here on Ohio, historically it's kind of been in the [mid-80s%], but I know there is some mix shift going on. It sounded like earlier on the call you thought the majority of the improvement was done. So should we think about this as the new run rate for Ohio, or is there still more improvement to be had?

I think this is probably the new run rate for Ohio.

Thank you.

A.J. Rice, UBS.

Maybe just a couple of clarifying questions real quick here. On the comment about the 82% to 83% general MCR in the exchanges, I'm guessing that puts you solidly profitable on the exchanges this year. When you think about going forward in 2017, as you've said you've addressed what you've seen in the (technical difficulty) bids. Are you thinking that you will maintain profitability, or are you thinking you can improve it further from here? And I just wondered on the exchanges as well, is that -- I can't tell from the comments, are you -- is this the margin you thought you were going to have when you came into the year, or is the margin a little compressed versus what you thought when you came into the year?

This is John. The margin is tracking about what we thought, about what we've priced at. Remember, as we said, the back half of the year is going to be more challenging from a profitability standpoint on the marketplace for those four reasons that I identified, and we think that for 2017 the margins are going to be similar to our Medicaid business.

Okay. And then just to clarify on Puerto Rico, I know last time -- and I think you touched on it maybe in response to Chris's question -- but last time you said that one of the big issues was around branded versus generic and maybe some cross-incentives there between what the government wanted and what was potentially best in terms of long-term costs dynamics. It sounds like you are working through trying to address those incentives for the physician to prescribe the generic, etc. How long do you think that takes to make that adjustment? When would you expect to see us benefit from that, and how big might (technical difficulty)?

-- expensive drugs to equivalent drugs that are lower in costs. At the same time, there are re-contracting efforts underway to give them some risk on the pharmacy side, to give them an incentive to use generic drugs. That's going to take place over the course of the rest of the year, I think.

Okay. But when you go into 2017, you think you'll pretty much have that into place?

I think we will have improvement. I'm not sure exactly how much it will be in place at that point, but there will definitely be an improvement. And I think the state also acknowledged in the negotiations with us that the pharmacy costs had come in higher than they had anticipated as well. It wasn't just us, but I think the whole program seemed a little bit higher than they anticipated.

Okay. All right. Thanks a lot.

(Operator Instructions) Andy Schenker, Morgan Stanley.

I just wanted to follow-up a little bit on your MLR guidance from last quarter, assuming that's still in place. It kind of implies (technical difficulty) the step down both sequentially and obviously versus the first half, but you kind of just told us marketplace is actually going to get a little worse. Ohio and Texas are stable. So what's really going to be driving a lot of that step down there as the rate increases and others face general cost containment in the other states? What's moving the MLRs lower for the rest of the year?

It's Joe speaking. A couple points. The rate increases we talked about are going to be a definite help. They are obviously directed at TANF and ABD, so we should see some sequential improvement in TANF and ABD margins, which, given their relative size, is going to offset anything happening in marketplace. So that's really where you should look for it.

Okay. So it's just kind of broad-based any place we kind of got rate increases?

Yes. I mean you just have to look at the relative scale of ABD and TANF to our business, and it's very substantial. Yes?

Okay. And then Texas quality so you recognize this taking last year out $7 million in the first quarter, did you also recognize $7 million in the second quarter, and are we assuming that it's $7 million every quarter for the year for 2016? How did that kind of compare to the original assumption back at the analyst day where I think you guys assumed 75% of total quality revenues would be kind of realized there? And then, lastly, understanding the Texas program is changing, do you think we should be assuming those 2016 numbers are to some extent going to continue in some form next year as we probably put a haircut on it thinking going forward?

It's Joe speaking. Compared to guidance for the back half of the year, it's probably closer to $3 million -- $3 million a quarter incremental. The state's communication to us suggested that they are -- that the program would not be resumed until 2018, but obviously they have the right to set the program how they want to.

So we'll have to see how that develops later. But the most recent communication from the state said there would be no program in 2017.

I guess so to that -- sort of what are you expecting to be total revenues related to 2016 that we are going to recognize in 2016?

Previously the program had been $35 million to $40 million, and we anticipated recognizing I want to say I think we talked about it at Investor Day maybe 20% of that. So the difference of that would be the pickup.

Okay. Perfect. Thank you very much.

Ana Gupte, Leerink.

This first question was just on Ohio. I'm really glad you got the MLR down. Can you give us some color on what exactly was the approach taken? You had talked about systems capacity issues in Ohio more broadly and clinical staffing issues and some of the standards you had on prior authorization. Is that all pretty much addressed, and can we be confident that there won't be something like this again perhaps in another state that is large enough for you to make a difference?

That's a great question, Ana, and the answer is, yes, those are the things that we talk about. Those are the things that we did, and we have applied this across the enterprise, not just in Ohio. It's had the biggest impact in Ohio, and I think we are seeing nice results as utilization in the Medicare line of business is starting to come down.

Okay. So you're comfortable on that one. On Texas I had thought also when we spoke last that it was going to be mostly the second half thing, perhaps with contracting maybe with hospitalist contracts as well on utilization. So what exactly was undertaken in Texas and that helped so much in the first half of the year, even ex- the Texas quality payments?

I think it's all the same things we've talked about. They may have taken hold a little faster than we thought in Texas, but we are cautious. It's one quarter, so we'll keep a close eye on that.

All right. Then third, on Florida and Michigan, you are running at pretty high MLRs. You did get the rate adjustment in Florida. What type of MLRs should we be baking in on a go forward basis from a structural perspective and then just for the second half of this year?

It's Joe. We get into some of that disclosure on the state-by-state basis in the 10-Q that's been filed. I would take a look at that. Remember, that Florida in particular has been impacted by the out of period marketplace adjustments.

Okay. Then, finally, I think maybe a couple more. One is on seasonality. As I understand, it is supposed to help you in the second half of the year. So, in terms of earnings progression, what is the driver of favorable seasonality? It seems like on the health insurance marketplaces it works against you. So what is working for you in the second half of the year here?

You are right. This is John. The seasonality typically when we were more sure of Medicaid, the third quarter tends to have the lowest medical care ratio. You are talking about the summer months. However, more and more of our revenue now is coming from marketplace, and as we discussed earlier, the marketplace in the back half of the year has a deterioration in the medical care ratio because people are eating up through their co-pays and deductibles. And then you got a bit of adverse selection as folks who aren't utilizing the system drop off because they don't pay their premiums, and you've got people who are qualified through the special enrollment period.

Marketplace hasn't been until this year a significant impact on the consolidated business. So it's been tough for us to see what the impact overall is going to be on seasonality.

And with the variance that you came out with, I thought you had assumed a significantly higher risk adjuster payable after the first quarter. So I was a little surprised that you had such a large negative variance on the two Rrs compared to what the 10-Q might have suggested in the first quarter. I'm not sure if I'm missing something.

It's been a tiger by the tail, Ana, and the -- we were getting some information. I want to think in May was the last [Wakely] number we came out with. But suffice to say, we got a lot more information in the second quarter that we didn't have in the first quarter.

And the risk adjustment program for the marketplace really is unlike the risk adjustment programs that we have experienced in Medicaid or Medicare. So it has taken us a while to thoroughly understand a fundamentally flawed calculation.

Got it. All right. Thanks so much. Appreciate it.

Dave Windley, Jefferies.

A couple of smaller ones. In the Florida premium adjustment that you've shown in the press release, I think the view is that that would also perhaps influence or lead into forward-looking rate adjustments. Do you have any greater visibility on that, or are those baked into kind of the overall rate adjustment that you may have already gotten?

This is John. We haven't received any additional information on prospects for our rate increase in Florida effective -- I think Florida is September 1. We are waiting to see. Certainly, the fact that they miscalculated the rates for a period of time and have adjusted those upwards will have an impact as they calculate the rates on a go forward basis. Just how much of it is we don't know.

Okay. In California, the Medicaid expansion rate saw a reduction of 11%. I'm curious about how much were you perhaps already against an MLR for where you were rebating back such that that doesn't really affect the go forward profitability, or vice versa how much does it impact profitability?

It's Joe speaking. We think we are still within the give back after that change. Not by much, but we think we are still there.

Okay. So you still would be in a rebating situation.

Very marginally but yes.

Okay. And then kind of on a different topic, curious about how the kind of series of acquisitions that the Company has done, how have those integrated and how are those performing within the book of business? Not a topic that's come up yet.

This is John. I think that they are all in various stages because they closed on different dates. The plans in Illinois, for instance, closed January and March, but I would say that for the most part, they are all forming as expected.

And Total Care is still expected to close later in the third quarter?

We are expecting Total Care to close this year, yes.

And the last question. The marketplace revenue adjustments of $37 million in the quarter, is it possible to give us a sense geographically of how those would hit plan so that we can kind of make that adjustment? The Texas and Ohio or, excuse me, Texas and Puerto Rico are easy enough to do, but the marketplace seems like it could affect multiple states.

It's Joe speaking. Obviously it's going to be most pronounced in Florida with the majority of it is in Wisconsin.

Okay. Thank you.

Michael Baker, Raymond James.

John, you kind of indicated some confidence around seeing some Puerto Rico improvement by the fourth quarter, maybe not so much in the third quarter. Is that just a function of the timing of provider re-contracting along the lines that you guys spoke about earlier in the conference call, or are there other factors as well?

I think that was Mario expressing the confidence, but I would agree with him. It's probably going to be more fourth quarter than third.

And what are -- so is it pretty much the timing of provider contracting, or are there other factors as well?

No, that's the big one. Provider contracting.

All right. Thanks.

Scott Fidel, Credit Suisse.

Most of my cues have been asked. Just have one clarification. Just on the California Medicaid expansion rate cut of 11%, how does that compare? I remember at the Investor Day, you had talked about a rate outlook for 13% cut in January of 2016. Is this essentially replacing that, or is this on top of that?

This is Joe speaking. You are correct. That January 16 was meant to be July. So that -- (multiple speakers)

Okay. So, at the time, you were thinking 13% for July and it came in at 11%.

Yes.

Okay. Great. Thanks.

Peter Costa, Wells Fargo.

A question on your pricing for 2017 in the marketplace. We've seen your California pricing, and it seems relative to other plans you are increasing prices a lot less than some of the other plans, suggesting that perhaps you'll pick up some of their membership when people start to price ship.

First of all, the question is, is that what we should expect to see, a much faster growth rate for you guys in California, and is your pricing in California in the marketplaces reflective of what you've done across the country?

So, this is John. I don't want to get into too much talking about enrollment for 2017. We went back a number of times and looked at pricing for all of our marketplace products on a geographic-specific basis. We factored in changes in our network, changes in utilization, and we thought the competition would be doing in order to get a competitive priced product for the population we are targeting.

So, in -- you mentioned California and LA County. We don't have Cedar Sinai in our network, for example. Not that they are not a fine institution, but they are priced way above what we and our population were targeting kind of forward.

So that's how we did it. We wanted to raise prices to protect ourselves against adverse selection as folks drop out, but we also didn't want to have a product that was priced so high that our people couldn't afford it.

What happens in 2017 with the ultimate enrollment is going to be a function of education, broker marketing and folks choosing our networks.

So was California reflective then of what you've done in other countries -- in other states, rather?

Yes.

Okay. And so when I look at the low pricing relative to others and others backing out of the marketplaces or raising prices much more dramatically, are you concerned at all that you are going to pick up some of their less healthy populations and create more of an issue for you guys going forward?

I think if you look at the other Medicaid-focused plans, they are staying in the markets, and we are priced competitively with them.

Okay. Thank you.

Tommy Carroll, Stifel.

Hey, guys. Good afternoon. Very, very nice quarter. Like to see it. I think everything -- most of my cues have been asked and answered.

One follow-up from an administrative standpoint. Just cash at the parent. John, I think you mentioned that. I missed it. If you could just tell us that again.

And also, wanted to ask about some of the acquisitions that were done in the last 12 months, specifically drill down on a couple of the larger ones like HealthPlus and Integral. I wonder if you could just make some comments about either one of those. Anything of note. Thanks.

Well, Tom, I'm extremely disappointed that you tuned me out. The number of cash at the parent is $465 million.

In terms of the acquisitions, Integral is doing very well for us. I think Integral is actually performing better than we initially modeled it. HealthPlus is, likewise, doing fairly well.

So you'd call that -- you'd call those two performing better than plan? Is that fair?

I would, yes.

Okay. Very good. Very good. And I never tune you out. I think I was doodling or something. Have a good one.

Well, if there are no questions, we're going to sign off. Thank you very much for attending the call. We look forward to talking to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.