Molina Healthcare Inc (MOH) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Molina Healthcare Fourth Quarter and Year-end 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ryan Kubota, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and year ended December 31, 2017, and preliminary guidance for the full year 2018.

The company issued its earnings release reporting 2017 results and full year preliminary guidance yesterday after the market close, and this release is now posted for viewing on our company website.

On the call with me today are Joe Zubretsky, our President and Chief Executive Officer; and Joe White, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. (Operator Instructions)

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 our Investor Relations tab of our company website or on the SEC's website.

All forward-looking statements made during today's call represent our judgment as of February 13, 2018, and we disclaim any obligation to update such statements, except as required by the 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 our Chief Executive Officer, Joe Zubretsky.

Thank you, Ryan, and thank you all for joining us this morning. This quarter's results reflect the significant transition we are undertaking here at Molina. The disappointing contract losses in New Mexico and Florida and the related goodwill impairment charges, the continued expenses for restructuring and the catch-up adjustments related to the poor-performing Marketplace business are legacy issues that we believe are now behind us.

The performance of the core business, however, which we define as Medicaid and Medicare, was respectable, and when viewed on a run rate and full year basis, provides a solid baseline from which to achieve our margin recovery and sustainability plan. We are squarely focused on improving our operating margins and creating an earnings profile that is less volatile and more sustainable. Only when we have accomplished this will we be able to reap the full benefits of this franchise with its strong revenue base across well-diversified geographies and product lines.

This morning, I will be discussing the sustainability of our revenue base, the key operating and financial results from the fourth quarter and the full year and connecting them to our 2018 preliminary guidance and to the vision that I provided at a presentation to investors last month.

First, with respect to the disappointing news related to the reprocurement of our Florida Medicaid contract. We are taking urgent and focused actions to secure this revenue base. Today, we operate in 8 of 11 regions throughout Florida, serving approximately 360,000 Medicaid members with $1.5 billion of annualized revenue. The entire state is currently up for reprocurement effective January 1, 2019.

As we announced last week, we have been selected to negotiate for the award of a managed care contract in only one region of the state. That region, region 11, comprises Miami-Dade and Monroe counties, where we currently serve 59,000 Medicaid members. This outcome poses significant challenges. As a first step, we will do our best to secure a contract at region 11. Beyond that, we will pursue the various protests and appeals as appropriate.

In New Mexico, we were surprised last month that the state chose not to invite us into the next round of the reprocurement process. Our New Mexico health plan has a long history of offering high-quality service to our members. Upon review of the procurement materials made available, we have concluded that our reprocurement loss was primarily based on the rating factor in the bid and not the service aspect of the bid. With that fact in mind, we are currently working through the appeals process in an effort to retain this business.

That said, if the current decisions regarding our Medicaid participation in either Florida or New Mexico stand, they would have a significant negative impact to the company's revenue.

Although our Florida and New Mexico health plans have been unprofitable in 2017, to say that their loss is therefore not challenging would ignore the more significant issue. The lost opportunity of returning those health plans to profitability is of serious concern. Our plan with respect to Florida and New Mexico is as follows.

First, it is critical that we manage our 2018 operations in both states to achieve our 2018 plan. We will launch the appropriate protests and appeals necessary to ensure that we have exhausted every avenue available to us for retaining these contracts. If the outcome of these RFPs proves to be unsuccessful, we will transition our operations in an orderly fashion and in a financially responsible way, and then we will adjust our cost structure accordingly to mitigate any percentage margin impact on the consolidated enterprise. The long-term headwind, therefore, is not against our target margin percentage but against the absolute value of operating profit we can achieve.

We are particularly sensitive to this situation as we prepare for 2 other near-term reprocurements, Texas and Washington, where we will complete vigorously to win. We have already taken major steps to improve our RFP response process to better articulate and present the Molina value proposition.

First, we have marshaled more internal and external resources to support both efforts. We have engaged a broader and deeper array of very senior subject matter experts: Clinical, operational, regulatory and financial. We have infused more local market knowledge to the process. And we have retained outside experts in Medicaid procurement to prescore our proposals and conduct mock reviews. While this may sound like mere blocking and tackling, it is precisely these technical qualities that are the foundation for a successful bid. The combination of a well-executed proposal, leveraged with our deep community ties and long history of quality servicing in these states and our 2 recent wins in Washington give us confidence in successful outcomes.

Now turning back to our earnings. We reported a net loss for the quarter of $4.59 per diluted share and $9.07 for the full year. Looking more deeply into these unacceptable headline numbers, I would like to call out 3 important dimensions of our fourth quarter and full year performance.

First, we incurred $342 million for the quarter and $704 million for the full year of impairment and restructuring costs.

Second, we experienced poor Marketplace performance as demonstrated by a quarterly medical care ratio of 102.1% for the fourth quarter and 88.1% for the full year, a product that should run at 78% or below, based on 2017 pricing.

Finally, looking over the entire year and stripping away a number of legacy items, we were able to develop a clearer view of the underlying earnings base of our core business. I would characterize that underlying earnings base as stable.

Allow me to spend a little more time on each of these dimensions. First, the impairment charges were the result of the unfortunate combination of expensive legacy acquisitions giving rise to significant intangible assets and the unsuccessful reprocurements related to those same geographies. Relatedly, the restructuring charges were the result of the company growing its cost structure beyond its profit capacity, and this lack of discipline is now been corrected with improved monitoring and control.

Second, with respect to the Marketplace, we have taken significant actions to improve performance in 2018 as well as to reduce our overall exposure to this business. Specifically, we have implemented premium increases averaging 59% effective January 1, 2018. Those premium increases included a 20% increase for the absence of federal funding of CSR subsidies and a further 39% increase for medical cost trend, anti-selection risk, demographics and a variety of other rating factors.

These price increases, along with our market exits in Utah and Wisconsin, have resulted in a substantially lower membership. So in response to our Marketplace challenges, we have increased premium rates significantly, eliminated our exposure to uncertainties around CSR funding and reconciliation and priced up with the full expectation we would reduce our overall membership.

Finally, the fourth quarter performance in our core business was respectable. Our medical care ratio, excluding Marketplace, declined to 210 basis points to 88.8% when compared to the third quarter of 2017, reflecting decreased inpatient utilization as compared to the third quarter. This improvement was achieved despite an increase in flu-related costs, estimated to be $20 million.

Looking at 2017 on a full year basis, it is important to remember that our medical care ratio of 90.6% is burdened by substantial unfavorable out-of-period or nonrecurring items. These include approximately $150 million of unfavorable prior period claims development and another $90 million of unfavorable Marketplace items, most notably the lack of CSR reimbursement in the fourth quarter. Absent these items, our medical care ratio for 2017 would have been approximately 89.3%. In that context, I would like to provide some commentary on our core business portfolio.

Looking at our core business by product line for the full year 2017, TANF represented approximately 40% of our total Medicaid revenue and at a medical care ratio of 92%, which was above our 2017 target of approximately 90%. Improving profitability for this product will require more effective utilization controls and care management, particularly with respect to high-risk pregnancies; reducing unit cost of high-cost providers; and more effective rate advocacy.

Our Aged, Blind and Disabled product represents approximately 37% of our total Medicaid revenue and had a medical care ratio of 94.7% for the full year as opposed to our 2017 target of approximately 91%. Keys to improving ABD performance include: improved care management and coordination of services for high-acuity populations, focusing on the integration of behavioral and physical health services; targeting high-risk members for care management intervention and more comprehensive documentation of medical conditions; and improved management of community and other long-term care services for members in this product line.

Expansion represented 23% of our total Medicaid revenue and had a medical ratio of 84.9%, which was above our 2017 target of approximately 83%. Expansion continues to contribute favorably to our overall profitability and was responsible for approximately 40% of our total Medicaid medical margin for 2017.

While premiums and margins for expansion have been declining in recent years, the rating environment appears to have stabilized. States generally look at rate adequacy holistically across all of Medicaid. Strategically, this product may be an important companion product to our Marketplace business as certain states contemplate merging the 2 markets.

In 2017, Medicare and MMP, combined, generated approximately $2 billion of revenue and had a medical care ratio of 88.4%, which was below our 2017 target of approximately 92%. These products are important because they present opportunities for the integration of care on an even more comprehensive basis than is the case with many of our ABD members. The [MMP] plans, in particular, provide the opportunity to demonstrate that all aspects of care: behavioral health, physical health and long-term care services can be delivered to more efficiently through managed care.

As I presented to investors last month, we have a very well-diversified geographic portfolio, the majority of which is already operating at our target margin level and the minority of which is profitable but below target and the remainder unprofitable.

Moving from a product line view of our company to a geographic view, I have the following commentary. Of our 4 largest health plans that generated over $2 billion annually in core business premium revenue, 3, California, Ohio and Washington, operated at medical care ratios that were at least 200 basis points below our consolidated core medical care ratio of 91%. Texas, the fourth of our health plans with core business revenue over $2 billion, has a heavy concentration of members receiving long-term care services, which explains why its core medical care ratio of 92% exceeds the company's overall average. These plans are operating at target margins, have long tenured and experienced management teams, excellent product diversification mix and excellent standings in their respective states. Although it is midsized, I would also include Michigan on this list of well-performing plans.

Our underperforming plans: Florida, New Mexico, Puerto Rico and Illinois, are under intense review for performance improvement irrespective of their reprocurement status. New Mexico's performance improved in the last half of 2017 and is projected to be marginally profitable in 2018. Florida's issue largely stemmed from aggressive Marketplace membership growth in 2016 and 2017, that, combined with Medicaid challenges, overtaxed many core operations. With its reduced Marketplace profile in 2018, combined with our improvement initiatives already in flight, this business should improve.

Puerto Rico's performance and that of the entire island was impacted by the hurricane as utilization abated dramatically and then bounced back. In the back half of the year, performance stabilized. And to note, the entire island will be reprocured this spring.

In Illinois, we had significant unfavorable prior period development due to a variety of issues. In 2018, with a new statewide contract, we will start the year with a slight premium revenue increase. We are working toward rebuilding relationships with the providers in the central part of the state as we reentered those areas at the beginning of the year.

Our fourth quarter SG&A ratio of 7.4% represented a 20 basis point decline from the third quarter and was 60 basis points lower than the full year ratio of 8%. This improvement reflects the actions taken in 2017. The tighter controls and productivity standards that we have implemented will ensure that our costs stay in line with our revenue base, and we expect to continue to find additional savings above the $235 million we have already announced.

Moving on to the subject of capital management. Enhancing our balance sheet and instilling capital discipline are also key parts of our plan. We took a number of steps in this regard during the fourth quarter. We strengthened our liabilities for medical claims, Marketplace, CSR and risk adjustment. In December, we repurchased a portion of our 2044 convertible debt in exchange for equity. This transaction enabled us to lower our total debt-to-capital ratio by approximately 5 percentage points while also allowing us to release, for general purposes, approximately $157 million of restricted cash.

Finally, we entered into a bridge loan that will provide funding in the event that our $550 million face value convertible notes due in February 2020 are presented to us. While we think it is unlikely that those notes will be presented to us in the near future, we concluded that it was important to mitigate this risk. Our total debt ratio remains too high, and we will continue to delever and improve our overall capital structure to achieve our targets.

I turn now to the preliminary 2018 guidance. We describe this guidance as preliminary because of the inherent uncertainty around achievement and timing of our numerous profit improvement initiatives. While these initiatives extend across the various dimensions of managed care fundamentals that I described to investors last month, many are in the early stages of development and implementation and therefore not included in guidance.

Therefore, our guidance should be viewed as a preliminary estimate of what we expect to achieve until we see the profit improvement from these in-flight initiatives manifest themselves in the earnings stream. Once we have the benefit of first quarter earnings and further insight into the execution of our profit improvement initiatives, we will be able to update you with a firmer view of our guidance.

To provide for an appropriate amount of execution risk, our preliminary guidance has therefore been developed with appropriately conservative views of medical cost baseline in 2017, medical cost trend for 2018, potential rate increases and retained amounts of revenue at risk and the turnaround of the Marketplace business until we can observe the achievement of the margins implicit in our 2018 pricing.

With that said, our preliminary guidance is as follows: For 2018, on a preliminary basis, we expect earnings per diluted share to be in the range of $3 to $3.50 on a GAAP basis. We expect premium revenue to decrease from $18.9 billion to approximately $17.5 billion. The vast majority of this decrease is driven by lower Marketplace enrollment, which is only partially offset by higher premium rates. Our preliminary guidance anticipates that Marketplace membership will begin the year at approximately 450,000 members from 815,000 at December 31, and decline to approximately 300,000 members by the end of 2018.

We expect our 2018 medical care ratio to be approximately 89% compared to the 90.6% medical care ratio we reported for 2017. Although our preliminary guidance takes a cautious view of medical cost improvement in 2018, we expect our 2018 performance to benefit from an absence of the unfavorable prior period claims development we experienced in 2017. That unfavorable prior period claims development in 2017 amounted to $150 million.

We expect to manage our administrative cost ratio to approximately 7.3% for all of 2018. This reflects the full year run rate value of the $235 million of savings that we announced last month as part of our restructuring efforts. We will update you with a firmer view of our 2018 preliminary guidance on our first quarter earnings call and at our Investor Day.

I have also spoken about the need to bring additional talent into our company. While we have many talented leaders at Molina, the rigorous demands of our turnaround require that we continue to assess our talent needs across the company and expand our leadership team. Mark Keim, our new Executive Vice President of Strategic Planning, Corporate Development and Transformation, will be the chief architect of our continued restructuring and will lead the analysis of the business portfolio and work to unlock value in all of our major vendor and ancillary cost contracts. Mark's years of recent experience with me at Aetna, where he performed these similar activities, will surely create a significant amount of value.

I would also like to announce of the hiring of Pam Sedmak, Executive Vice President of Health Plan Operations. Pam will be responsible for all health plan operations, turning around the underperformers, solidifying our reprocurement efforts and executing our margin recovery and sustainability plan across the fundamentals of managed care.

Pam has a long and successful career in managed care, particularly in her role as President and CEO for Aetna Medicaid, where she oversaw 17 health plans whose Medicaid business achieved over $9.5 billion in premium revenue. Most recently, Pam was a Senior Adviser at McKinsey & Company, servicing clients in the health care services space.

In closing, I am excited about 2018, and I look forward to providing more details on our longer-term strategic plans during our Investor Day on May 31 in New York.

With that, I will turn the call over to Joe White for more detail on the financials.

Thank you, Joe, and hello, everyone. Yesterday, we reported a net loss for the quarter of $4.59 per diluted share and a net loss of $4.52 per diluted share on an adjusted basis. As Joe mentioned, embedded in these results are several significant items outside of our normal operations that warrant further discussion.

First, we took a $73 million charge as a result of the federal government's decision to stop paying cost-sharing reduction rebates, or CSRs, to health plans beginning in the fourth quarter of 2017. To be clear, we believe we are legally entitled to those payments and will pursue all available means to collect them.

We recorded a further charge of $50 million to increase liabilities for Marketplace risk adjustment in CSR that related to the first 9 months of 2017. Our Marketplace premium deficiency reserve was reduced to 0 as of December 31, 2017. This was a $70 million benefit in the quarter. We recognized approximately $20 million in incremental flu costs in the quarter.

We recognized $269 million of the noncash impairment losses at our Florida, New Mexico and Illinois health plans. The impairments at Florida and New Mexico were the result of our recent contract losses. The Illinois impairment is purely an issue of historical cost. While we are confident that we can improve profitability in Illinois so that it is a meaningful contributor to our company, the current profit profile of the health plan does not support the purchase prices paid for certain membership years ago.

We recognized approximately $73 million of restructuring costs in fourth quarter of '17. In the fourth quarter, we also incurred approximately $14 million in expense related to the exchange of equity for $141 million of face value of our 2044 convertible notes.

Finally, we recognized approximately $54 million in additional tax expense during the fourth quarter due to the remeasurement of our deferred tax assets as a result of the Tax Cuts and Jobs Act of 2017. It is important to keep the transitory nature of these items in perspective as we continue to evaluate the business through the lens of the margin recovery and sustainability plan that we announced last month.

A full understanding of our underlying business requires that we look beyond the disappointments of our 2017 Marketplace performance, the items I outlined a minute ago and the $150 million of unfavorable prior period development that we experienced in 2017. As Joe noted, we have 5 large health plans, California, Ohio, Washington and Texas and Michigan, that are operating target margins. Additionally, several other health plans have good prospects for ultimately achieving their target margins. We also saw continued administrative cost improvements in the fourth quarter. The quarter benefited from about $60 million of the annualized administrative cost savings of $235 million that we achieved in 2017.

Let me now take a few minutes to discuss our Marketplace performance during the quarter. First, in keeping with our commitment to resolve legacy issues, we booked a $73 million expense for the termination of CSR reimbursement in the fourth quarter. As I said a moment ago, we believe that we are legally entitled to these federal payments, and we will pursue all available means to connect them.

We also recorded $50 million of Marketplace risk adjustment in CSR expenses related to the first 3 quarters of 2017 as a result of updated third-party data that we received during the fourth quarter. As a reminder, the estimates we book for risk adjustment are a result of our own member risk scores measured against those of the overall market. The blending of estimates for both our own and peer performance is necessary because the final true-up for risk adjustment is based on our performance relative to our peers.

Absent the change in CSR and risk adjustment estimates, the $70 million premium deficiency reserve we accrued at September 30 for fourth quarter performance would have been adequate. As Joe noted earlier, we have taken significant actions to improve Marketplace performance in 2018 as well as to reduce our overall exposure to this aspect of our business. We believe that our more robust pricing in 2018 will lead to improved financial performance for our Marketplace product.

In keeping with our focus on enhancing our balance sheet and improving our capital management discipline, we have made it a priority to closely manage our subsidiary capital position and to dividend excess statutory cash to the parent company when possible. In the fourth quarter, we were able to dividend approximately $150 million up from our subsidiaries. And as of December 31, 2017, the company had cash and investments of approximately $695 million at the parent.

In addition, our days and claims payable at December 31, 2017, increased sequentially by 4 days to 54 days. Approximately 2 days of this 4-day sequential increase were due to the timing of provider payments, while the remainder was a result of our strengthening of claims reserves.

Finally, I will add a few additional thoughts related to our 2018 preliminary guidance. As Joe said a few minutes ago, to provide for an appropriate amount of execution risk, our preliminary guidance has been developed with appropriately conservative views of medical cost base line in 2017, medical cost trend for 2018, potential for rate increases and retained amounts of revenue at risk and the turnaround of the Marketplace business until we can observe the achievement of the margins implicit in our 2018 pricing.

Our 2018 preliminary guidance anticipates that our medical care ratio for the full year of 2018 will be approximately 89% compared to 90.6% for all of 2017. It is important to remember that our 2017 medical care ratio was burdened by approximately $150 million of unfavorable prior period claims development and a net $90 million of unfavorable impact from various Marketplace, CSR, risk adjustment and premium deficiency reserve items. Absent these items, our medical care ratio for its 2017 would have been approximately 89.3%.

The relatively small improvement we are anticipating in our medical care ratio when compared to an adjusted 2017 medical care ratio reflects the conservatism built into our preliminary guidance. For example, we have taken a conservative position on the turnaround of the Marketplace business by adding an appropriate level of contingency for not realizing the margins implicit in our pricing.

Looking beyond 2018 preliminary guidance, here are some important facts regarding what we know about our Marketplace product today. We price to a pretax margin of 4.6% and a medical care ratio of 65%. This compares to a pretax margin of 3% and a medical care ratio of 78% that was priced in 2017. Approximately 70% of 2018 members are renewals from 2017. Acuity of our 2018 membership appears to be within our pricing expectations.

In general, 2018 Marketplace membership appears to be tracking with our 2018 pricing, which would represent substantial improvement over 2017. Nevertheless, due to the volatility we experienced in 2017, we are taking no credit in our preliminary guidance for Marketplace improvements until such improvements manifest themselves in our results.

SG&A costs are expected to drop by approximately $200 million in 2018. Broker and exchange fees associated with our Marketplace product are expected to drop by approximately $150 million. The cost savings takeout (inaudible) in 2017 will reduce costs by another $160 million on top of the $75 million already recognized in 2017. These savings will be partially offset by a replenishment of our variable compensation and employee merit increase pools and costs associated with new activity, such as our Mississippi and Idaho startups.

We have received a significant number of questions relating to our share count and our effective tax rate. We have observed that there is a wide range in estimated share count for our company as well as a wide range in estimates of our effective tax rate for 2018. With that in mind, let me share the following assumptions that underlie our 2018 preliminary guidance.

First, our preliminary guidance assumes a diluted weighted average share count of 67.3 million shares and is based on a share price of $100 per share. This share count may be higher than what some of you are expecting. It is primarily the result of the dilutive nature of our convertible debt at higher share prices. For example, our convertible debt is not dilutive at a share price of $55, but at a share price of $100, that same convertible debt will add about 7.4 million shares to our diluted share count.

As a further example, at an average share price of $80 for the year, our diluted share count would be 65 million shares. At an average share price of $120, our diluted share count for the year would be 68.8 million shares. Regardless of the assumptions you make around the dilutive impact of our convertible notes, please remember that we issued 2.6 million shares as part of our exchange of equity for $141 million of face value of our 2044 convertible notes last December. These additional 2.6 million shares should be included in our share count regardless of assumptions you may make around dilution caused by our convertible debt.

Second, as many of you know, our effective tax rate is higher than the federal rate of 21% due to the non-deductibility of several items, but most notably, the health insurance provider fee. Regarding the impact of tax reform, the preliminary guidance effective tax rate of 41% to 43% would have been approximately 64% based on our 2017 tax rate.

On another note, our 2018 preliminary guidance assumes that state Medicaid agencies will reimburse us in full for both the ACA health insurance provider fee and the tax impact of that fee's non-deductibility. Even if all Medicaid agencies did ultimately reimburse us for that fee, we will not be able to recognize the added revenue until we receive assurances from those agencies that the fee will indeed be reimbursed. Any delays in receiving such assurances will result in delayed recognition of the related revenue, which would sharply reduce our earnings until such assurances are received. Please keep this in mind as you assess our quarterly earnings reports in 2018.

Finally, our 2018 preliminary guidance does not contemplate any restructuring charges. Costs and benefits associated with our restructuring activities in 2017 are now captured in our 2018 run rate. While we may undertake further restructuring activities in 2018 and beyond, the costs associated with those activities have not been fully scoped. While we cannot say with certainty that we will not incur additional restructuring charges in the future, we have not contemplated additional charges in our 2018 preliminary guidance.

As a reminder, we will be providing additional detail about our margin recovery and sustainability plan and preliminary guidance on May 31 in New York City.

This concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions) The first question will come from Sarah James of Piper Jaffray.

And I appreciate all of the detail about 2018 guidance, but there's a couple of pieces that weren't spiked out I was hoping to get more clarity on. First, tax reform benefit, how much is in there from that? How much turnaround savings is assumed? If we assumed flat is there still a drag from Pathways? And then [HIF], you had previously talked about, about $0.04 of tailwind from their admin costs, but now it sounds like it may be offset by comp changes. So how should we think about the HIF contribution changing?

Sarah, it's Joe White. We struggled to hear you. Could you ask those questions one at a time, please? Thank you.

Sure. So just trying to look through a few of the moving pieces on guidance that weren't spiked out, the first one being tax reform. How much benefit there was on tax reform?

Sure. Sarah, it's Joe Zubretsky. On tax reform, if you just look at the 35% statutory rate versus the 21%, it created a $59 million benefit to our 2018 guidance, which is about $0.87 of earnings per share. I will remind everyone that as we either exceed our plan or miss it, for every dollar of earnings above or below, our marginal tax rate is 21%. And the reason our guidance is at about 42% is the result of the non-deductibility of the HIF. Another question we are often asked is did we change our spending outlook for 2018 because our rates were set when tax rates were at 35% versus 21%. And I would say no. We had a plan in place of our margin recovery and sustainability plan. It does require investments to be made. Those investments were fully baked in our SG&A loads for 2018, and we did not change the course of that spending as a result of the new tax rates.

And the other moving pieces I was hoping you could spike out, are flu, if there's any change from the '17 to '18 on your assumptions there. Pathways, which has been a drag in the past, if it's assumed to continue. And then exchanges. In the past, you talked about there being a tailwind from a lower admin load, I'm not sure if that's still assumed going forward.

With respect to flu, as we said, we recorded a $21 million top-up to our fourth quarter as we observed pharmacy and physician costs higher than normal, particularly in the CDC hotspots. I would tell you that, that trend continued into January, pharmacy and physician costs were higher than normal due to the flu season that we are experiencing and others are as well. With respect to pathways and our other sort of non-core subsidiaries, I would just say the earnings picture is just not material. It's stable, they're performing well and it's just not a material part of the story.

Got it. And one more clarification, if I could, then I'll hop off. You talked about unwinding Florida if the appeals are not successful. How long should we think about that taking? So how much time could there be SG&A overhang with no matching revenue if the appeal in Florida is unsuccessful?

Sure. If we are unsuccessful in Florida and/or New Mexico, then we have a plan in place where we will try to transition our service profile in those states in an orderly fashion, whether we transition it to another incumbent or a new player or whether we just extricate ourselves entirely. Obviously, when the revenue stops on January 1, you still have a claims tail to service, you still have member calls that you need to service, and so we'll have to hold on to part of the operating platform through the tail period. But we're not going to let the administrative costs of running those plans and runoff be a drag on our earnings. We'll have to extricate ourselves quickly, but there would be a slight drag on 2019 as we work the claims tail off.

The next question will be from Justin Lake of Wolfe Research.

A few questions here. Just want to start off on the Marketplace. You talked a lot about the membership numbers and the pricing, so the math should be pretty straightforward there, but I want to make sure we've got it right. And I think your revenue was about $3 billion in premium in '17. Can you give us the number there for 2018, is it around $2 billion? And it sounded like you said there was no improvement assumed in terms of the economics on the margin, and I think you lost about $100 million-plus for '17. Is at the right ballpark for '18?

Justin, the revenue number for 2018 contemplated in our guidance is about $1.5 billion. And you have the pricing right. I mean, obviously, at 102.1% for the quarter, 88% for the year against a target of 78%, we lost money in the Marketplace this year. The way I would characterize our guidance is we cleared the clutter on 2017, obviously getting the one-timers behind us, getting a cleansed view of the 2017 run rate, projecting for our pricing at the 4.6% target margin. But until we see the effects of our profit improvement initiatives and that pricing take hold in the market, we did not include a lot of that turnaround benefit in our guidance. We need to see it emerge in the first quarter before we firm up our guidance for improved Marketplace performance.

Okay. So the $1.5 billion of premium just sounds a little bit low relative to the decline in membership and then adding in a 50% price increase. Am I missing something there? Or is it geographically biased to some of the lower-premium states? I just...

Justin, it's Joe White speaking. There are a few issues at play there. One would be shift over to bronze relative to silver. The other one would be a geographic matter as we continue to see proportionally stronger enrollment in Texas.

Also bearing in mind that we always project a 2% monthly decline in membership. So while it's starting in the year at 450,000, it's going to end the year at about 300,000, at least in our projection.

Okay. And then just staying on premium guidance for a second, premium guidance is going to be -- it looks like it's down about $1.5 billion when you adjust for the reclassification of some of the HIX collection -- or I should say, the HIF collection. So that makes sense. To your point, the Marketplace is a big part of that. But beyond that, it doesn't seem like there's any organic or same-store growth assumed in there. And I would have thought there would a 2% or 3%, which would add $500 million to growth there. Am I -- is there any offsets or any other bad guys we need to think about besides Marketplace? Or are we just assuming kind of not much in the way of organic kind of same contract growth in 2018?

Justin, we had slight Medicaid membership decline, particularly in Michigan, where the not-for-profits are taking share, and in Ohio, where we've run into some redetermination issues. Slight, not a lot, but enough to matter in the bridge year-over-year. Medicare is up slightly, but holding on to our membership and getting good grades. And we do have 2 new markets. We have the (inaudible) SNP in Idaho and the inception of our Mississippi TANF contract, which will begin in October of this year, and that's a couple of hundred million dollars, all in. So Medicaid membership, a little bit of a slip, 2 new market entries in Medicare is growing nicely to rates.

Okay. If I could just ask one more numbers question, I think Sarah asked around flu. Is there a dollar number you can give us, Joe, in terms of what you think we could be looking at here relative to last year in terms of flu costs in the first quarter?

Honestly, not yet. We just closed the books just literally within the past few hours, and we've intentionally looked at the underlying trends in pharmacy and physician, which is where you need to look. And while we know we are experiencing a higher-than-normal flu season continuing into 2018, I really can't peg a number for you right now, Justin.

The next question will be from Matt Borsch of BMO Capital Markets.

If I could ask about, Joe, your view on margin levels. And I know you have your preliminary guidance out for 2018, and we appreciate getting that, I'm not looking for guidance for another year, but when you think about the net margin that we see at, say, peer companies at a little above 2%, is that structurally a place that you think Molina can get to over time? Because prior to this year, the trailing 5-year average is something like 0.5%. It just seems that there's been a structural barrier to getting to the margins that are comparable to peer companies.

Well, Matt, I appreciate the question. But no, I really don't think there are any structural impediments in our portfolio. As I said to investors last month, this is clearly a question of performance, it's not a question of portfolio. We have many high-performing plans, we need to fix the hotspots. As I said in my prepared remarks, all of our products are just running slightly north of where they need to be to hit their target margins. And you can look inside the numbers and you can go around sort of the wheel of performance in terms of what you need to do with your network, what you need to do with utilization controls, what care management protocol for high-acuity populations, holding on to more of our revenue at risk. As I said to investors last month, we are holding on to fewer dollars of revenue at risk than we think our competitors are, and we need to get better on risk scoring and quality scores to hold on to the quality withholds that the states hold on to. So I clearly believe it's a question of performance. And if we look at the fundamentals of managed care, on a mix-adjusted basis, I still feel confident in saying we can get to the competitors' range of 1.5% or 2% after tax.

That's great. And also just one more, if I could. I don't -- I may have missed it. Did you touch on your diagnosis of the reasons for the downsizing of the Florida arrangement? The Medicaid contract, I mean.

The reasons that we lost?

Yes, yes. Sorry. Yes. I know you touched on New Mexico, I didn't hear on Florida.

Well, we touched on New Mexico because we actually have the scoring and were able to conclude pretty much that it was rates and not service and technical capabilities. In Florida, we have not seen the scoring yet. So as part of the process, we will get the scoring. We'll analyze it and then structure our appeal or protest around the scoring parameters.

The next question will be from Chris Rigg with Deutsche of Deutsche Bank.

Just wanted to get some clarification on the cost savings from the restructuring plan that are in 2018. It sounds like the run rate savings achieved by the end of 2017 were $235 million. And then you're expecting $160 million to be realized this year with the delta being realized last year. Is that correct? And do you still think you're going to get to the $300 million to $400 million target by the end of the year? Run rate target.

Those numbers are correct. $15 million in the third quarter. $60 million in the fourth for a total of $75 million. An incremental $160 million for 2018. And bear in mind, when Joe and his team put out that longer-term target, that was not merely SG&A savings, but were cost structure savings across all the dimensions of managed care, including network and care management. And yes, if the 1.5% to 2% after tax margin and EBITDA margins north of 5% are in our future, which we predict they will be, then yes, we have to achieve those types of cost savings over the next 2 years. And as I mentioned previously, we have not included many of those cost improve -- those cost structure improvements and performance improvement initiatives in our 2018 guidance. We'll wait to see them emerge before we adjust our guidance accordingly.

Great. And then along the same lines, in your prepared remarks, you noted that you guys are in the process of retaining several subject matter experts to help you with upcoming reprocurements and then maybe they'd even do a look-back analysis on the states where you didn't win. Are those people that should be employed full-time by Molina? Or are these people, per like industry standards, that normally are consultants? And then are the costs associated with these experts in the guidance? Or are these going to be treated as onetime items?

Yes. All the costs are in the guidance. And yes, because these proposals are in-flight, we decided to add to the complement of resources we have internally with outside resources. But ultimately, if we're going to turn on the new business and the reprocurement machine permanently, begin growing again after we return to our target margin profile, then yes, we will build internal teams that are capable of routinely winning reprocurements and new bids. So because they were in flight, we went outside. But ultimately, they need to be built inside.

The question will be from Peter Costa of Wells Fargo Securities.

Joe, welcome back to the earnings conference calls. Wanted to ask you a couple of questions. The first one is just you've done a lot of -- talked about the MLRs for the Marketplace business. But if we exclude the Marketplace business and look at all the rest of the businesses, is your expectation to get to the 89% loss ratio that the MLR will improve or decrease for that business? Or will it get worse?

Well, if you look at, and again, 2017 was a very noisy year. And so you have to sort of clear the clutter on 2017, where the reported MCR, consolidated, was 90.6%, 130 basis points of which was prior period development. When you started looking in -- at the detailed product lines, TANF reported at 92%; ABD, 94.7%; expansion, 84.9%, and so on and so forth. You can pro forma and project network contracting, retaining more revenue, better utilization controls in care management to get to our 89% and beyond. So we were very cautious in 2018 guidance not to include the results of the performance improvement initiatives. But they are in flight, we expect them to work, but because of this company's past history of execution, we were hesitant to put them in our guidance. But very comfortable with the approximately 89% for 2018. And when we see our performance initiatives manifest themselves in earnings, we would adjust accordingly.

So beyond the prior period development going away, you're not expecting necessarily for that other -- the rest of the business to improve, is that correct?

Yes, that's a good assumption. Our guidance for 2018 is just slightly better than the pure period for 2017.

Okay. And then moving on. Joe, you come from a background of having seen far more advanced systems. How difficult will it be to get Molina's systems to the point where you need them to be so that you can avoid fighting hotspots and instead be proactive and be sure of the performance you have going forward?

A very legitimate question. And you're right, in this business -- this is an information business, primarily. And the veracity and velocity of medical cost trend information is critical to the lifeblood of a well-managed managed care company. The systems here are okay. We have many sources of -- data warehouses that create good medical insights. We have an actuarial community that I believe is very, very good. We can get better and the investments needed to create higher velocity and more veracity of information are baked into our plan. And I think, as part of our margin recovery plan, we contemplate getting better information on a real time basis and reacting to the trends that are emerging in the Marketplace more quickly than this company has reacted in the past. I'm running this organization a lot flatter, and I'm closer to the 13 health plans than my -- than the predecessor management. And with Joe and his team, Pam Sedmak on board, we're going to make sure that we discern the emerging trends more quickly and react to them on a more real time basis.

The next question will be from Dave Windley of Jefferies.

It's Dave Styblo on for Windley. And welcome over, Joe, again. Wanted to just come back to comments that you made at a prior conference, kind of laying out the 1.5% to 2% net margin. I'm just curious, do you have an updated view of that considering the negative fixed cost levers that comes from the unexpected New Mexico and Florida RFP headwind? Does that change your thinking about getting to those margins or perhaps the timing of being able to do that in the 1- to 3-year target that you previously talked about?

Sure, Dave. Whatever we thought we were going to achieve, and I still believe 1.5% to 2% is achievable. Obviously, if there's some stranded fixed costs as a result of withdrawals from a market or 2, that would create a headwind. But as we've analyzed this, I don't consider any cost to be fixed. Obviously, the variable costs of the plans -- operating the plans, are easy to identify and extricate, step-variable, very easy to identify. And we're going to right-size the enterprise to the new revenue base. And so the headwind, in my opinion, is not in the percentage of target margin, but in the actual dollars that underwriting margin and operating profit will produce, which, to some extent, has been compromised if we lose these 2 contracts. So no, I'm not backing off the long-term margin percentages, although if there are fixed costs that need to come out and they become stranded, then we just need to work harder to get them out.

Okay. And just to be clear, is that target range excluding upside from tax reform or not?

Yes. We haven't updated our long-term view because, as I've said publicly, it's not clear to me. And while there's no specific tax line item in the rate development in state contracts, whether states at least contemplate or consider the new tax regime as they structure rates, the various rating factors, it's not clear to me that -- it's not going to -- rates are not going to settle back to the after tax margins that we're seeing today. And until we see that prove out, I'm not going to increase the target. But certainty, there would be upside if the rating environment does not consider the new tax regime.

Right. Got it. Okay. And then apples-to-apples on the non-exchange MLR improvement of 210 basis points sequentially, I think my understanding is that 4Q had less unfavorable development than 3Q, so maybe that explains some of the improvement, but I'm curious what some of the other factors could have been in there. I guess flu, you had spiked out, and that was something that you had to overcome. But is there some -- a bridge that you could provide to the 3Q to 4Q MLR?

Joe, I'm going to turn it to Joe since he obviously heavily involved in those quarters.

Sure. I think you're -- as you take a look at quarter-to-quarter fluctuations, you obviously have to be careful in this business about what you read into them. But I think it is a fair statement to say that, excluding marketplace, where we made some out-of-period adjustments in Q4, I think your statement, Dave, that there was less unfavorable development in Q4 than Q3 is correct and just reflects a general trend we've been making to improving the quality and the sustainability of our reserves. I think there's also -- there were some pleasant surprises in patient utilization in a couple of parts of the business and particularly on the Medicare side. I also think, in some cases, in some of our plans that haven't performed as well over time or recently as we would've liked, we're seeing the benefit of new management teams settling in. New Mexico showed some improvement in the second half of the year. Puerto Rico, while they've had some -- continue to have some one-off issues related to provider risk-sharing accruals and things like that, they continue, I think, on a positive trend. So I think overall, it just reflects the general stabilization of the business; the benefits of certain cost take out that we took last year; and the, just essentially, getting a lot of the heavy lifting around the increasing of reserves behind us.

The next question will be from Josh Raskin of Nephron Research.

Wanted to touch base just sort of on a longer-term revenue perspective. And not much organic change expected in the current year. And we think about New Mexico, I think you sized that at $1.5 billion in terms of your '18 expectation, I don't think I heard a Florida expectation. Maybe we'd just assume the '17 number is pretty similar. But want to understand, you talked a little about these changes to the RFP process, bringing in new hires, congrats to both of them as well, and hiring external. But I'm just curious, what do you think about a revenue run rate once you kind of rebase the business, take out, let's call it, $2.5 billion for the lost contracts in 2019; add back the HIF. So really, just what do you think this business grows at? When do you think you'll sort of be back in the RFP-winning game? And then I guess on the side question, the Marketplace, is that a business you're still in, in 2019 and beyond?

Sure, Josh. This is Joe. The revenue trajectory hasn't changed in my view. And all I've said was we're pushing the pause button on new business growth while we repair and restore the margins to target. I am very hopeful that that's a 2018 exercise. Meanwhile, during 2018, Pam, myself and others will be rebuilding the new business procurement machine so that we can begin to participate in 2019 pipeline. So this is not a story without growth. We're just pushing the pause button on North Carolina and Kentucky and a few other opportunities until we can actually see the margin restored and start moving to target levels. So I would -- for the long term, I do not view the story as anything different from the growth story than any other Medicare and Medicaid company is portraying. With respect to Marketplace, but early on, there were all these strategic views of you needed to be the Marketplace if you were in Medicaid, and vice versa. And I think the market has learned that, while there are similarities in network configuration and cost, that these 2 businesses are quite independent of each other, and that you can't really warm-transfer a member between the 2 markets. If they go into the exchange, they go into the exchange. So in my view, the business has to produce a target margin and cash flows that fit with the portfolio, stands on its own. Our Marketplace business in Texas is incredibly profitable. It was Florida that was the problem. And in the 5 other markets, it's not at its target, but it is still profitable. And so we're going to file rates in April. We're going to see how our profitability emerges this year, make that final call in August and September when you need to. But we're pretty confident that with 59% rate increases, 4.6% pretax target margin, that this could be and is a sustainable business for the enterprise.

Okay, okay. And then just on New Mexico, Joe, you made the comment that the loss was on the cost proposal portion. Certainly looking at that, I think the average, you guys were 150 points off the average, I think 275 points off the winners. And so I concur with that. But there were some areas in technical that were noticeably below average, around care coordination and info systems and some of those. And it didn't look to me -- I think you guys would have been fifth place just look at the technical scores. Didn't look to me like Molina was really that well positioned as an existing plan, even if you throw the whole cost proposal out. So I assume, as part of this RFP revamping and revitalization plan, I assume there's more going into that. And I was just curious if you could provide some color on how do you kind of fix that sort of stuff. Is it capabilities? Or is it just the proposal responses weren't really perfectly written? And I'm just curious what your thoughts are there.

First, Josh. As we've gone back and reverse-engineered the scoring, we have us actually closer to being third than fifth or sixth, as you suggested, when you remove pricing. But we can debate that back and forth all day long. The real issue is the one you suggested. I don't think our proposals, as we go back and look at Florida and New Mexico, reflected the capabilities that we have. We've been in New Mexico a long time, we enjoy a good relationship with the state. Our service to members and to providers has been very good, and I don't think we reflected our capabilities in the proposal well enough. And then clearly, when you're participating in a rate auction and purposely bid at the 75th or 80th percentile in the range, just pure auction theory is you're not going to win. And during that period of time, there was a very unclear view of how New Mexico was performing. There was all types of backlog claims and prior period development, and it wasn't performing well. And so the management team at that time bid higher in the range. With hindsight, maybe we would have or wouldn't. But clearly due to rates and not performance, in our opinion. But we're revamping the entire proposal-writing machine to better reflect the capabilities that we do have in these markets.

The next question will be from Steve Tanal of Goldman Sachs.

Just wanted to clarify some comments around target margin rates, the time line and also tax reform as it relates to those items. So it sounds like, Joe, you don't expect to keep the tax benefits, but in 2018, they do represent, you guys said $0.87 in the outlook. And so if we're kind of pulling that out, it seems like the net margin goal for this year is closer to sort of 80 or 90 basis points. And assuming that math is right, where should we think about the next sort of 70 to 110 bps of margin improvement coming from in '19 and beyond? And is the timeline for 1.5% to 2% still kind of 2 to 3 years?

Yes, and that's exactly the math. And you've captured it appropriately in terms of the tax impact on our guidance for 2018. In the first year of a turnaround where we're trying to get to 1.5% to 2% after-tax, all-in, having an after-tax margin of 1.2%, which should suggest a slightly below 1% when adjusted for sort of the tax benefit of the tax law change, is a good starting point. As we said, as we look at the back half of the year, most of our businesses, at least, are operating in a stable way. We've identified the underperformers. And the next margin enhancement benefit is -- again, I hate to keep coming back to managed care 101, but our utilization controls are not consistent across the country in all our health plans. Our care management for high-acuity members. Our integration of the behavioral and medical is very good in some places and lagging in others. Our network contracts are -- in certain places, are priced too high and the networks are too wide. Some of our ancillary contracts have unit costs that are far too high for the volumes we're giving our vendors. Our retained revenue, our risk adjustment scores are not keeping pace with the acuity of the population. We're giving too much back on the revenue withholds. But I keep coming back to all of the performance measures that one looks at to run a managed care program. And we can see outlook for meaningful improvement across all those measures. And that's where the arrival at a target margin will come from.

Understood. And just one follow-up from me. Just on Illinois, trying to think about that rate increase as well as the state-wide expansion. I guess just most helpful maybe is just to understand what MCR is assumed in guidance. And maybe it would also be helpful to understand where the plan would have ended the year if not for sort of the unusual items that occurred over the course of last year. And then I'll yield.

Sure. With the rate increase we were given and with the major corrective actions that we had to put in place in Illinois, Illinois is in our guidance at just about breakeven for 2018. And for 2017, it was -- it lost money. It was unprofitable for 2017.

The next question will be from Kevin Fischbeck of Bank of America Merrill Lynch.

I just wanted to ask about this sort of top line. You mentioned that losing New Mexico and Florida would be bad from an earnings power perspective. I guess if we assume that those contracts were lost and then you kind of annualize the contracts that you won at the end of this year and I guess maybe your view about exchanges, what is the right kind of normalized run rate as we enter 2019 from a revenue perspective? Or do you expect revenue to be down year-over-year if you lose those 2 states?

Yes. I mean, if we lost the Medicaid business in New Mexico and let's say we lost the -- we kept Miami-Dade in Florida but lost the other regions, then yes, revenue would certainly be down in 2019. There's no way -- the new launches that we've had are small. I mean, Mississippi is going to be 100,000 to 120,000 TANF members to start. There's probably an ABE contract on the back end of that. But yes, I don't think there's any question that, if we are unsuccessful in retaining the majority of those 2 contracts, revenue would be down in 2019.

Okay. And then you talked about DCPs in the quarter, I guess, DCPs being up 4 days, and 2 of those, it sounded like just timing due to reserve strengthening. Is that -- is the reserve strengthening, in your view, because it really just the under-reserving heading into the period previously? Or is there, in your view, kind of an extra cushion now because of all the moving pieces that have been going on but you kind of view this as -- I don't want to say over-reserved, but conservatively reserved?

Yes, we are appropriately and conservatively reserved. Joe?

Yes, I think that's a fair statement. Given everything we've seen develop in 2017 from the 2016 reserve, we thought it was appropriate to not only replenish reserves to previous levels but to allow additional cushion for everything we've seen happen this year and the variability in our reserve development.

Okay. And then last question. How do you think about leverage? Because I guess, like, when we just look at it on a gross basis, you're, like, 60% debt to cap. Obviously, you've got some cash on the balance sheet. How do you think about where your debt-to-cap is now when you kind of look at all the pieces there? And then what's the target? And what's a reasonable time frame to get to that target?

Bear in mind -- I'll kick it to Joe in a minute, but bear in mind that we were -- after our note exchange, we had moved down to about 57%, I believe, on -- measured on a GAAP basis. And the reason we popped over 60% isn't because of leverage, it's actually because of the reduction to equity due to the charges we took. So Joe, do you want to expand on that?

Yes, I think the best way to express it is, if we were viewing leverage really in the same light we are as our expectations for 2018, we'll be able to make better-informed decisions once we see the profit improvements driven by everything we've talked about today manifest themselves in earnings. So basically, what we're going to do now is we're going to manage cash and leverage as appropriately as we can. We're going to bring as much discipline to it. We're going to be more focused on the management. But as far as any major decisions going forward, we're going to first see how much we can grow our way into a lower debt-to-cap ratio through retained earnings.

But right now, it looks like you guys think that if you hit your plan and execute, you'll be able to grow into the balance sheet you want over time. There's no need to do anything if you're hitting your targets?

Yes. It's all about earnings and the sustainability and the lack of volatility in earnings. And sustained earnings is actually as much the problem with our capital base as the capital is itself.

The next question will be from Ana Gupte of Leerink.

On the Texas and the Washington contracts, can you give us a sense of what the states are thinking about on these 2 in terms of supplier consolidation? Is it a price bid or something else around member provider networks or quality? And how do you feel about the positioning of Molina? And what is also the timing of the submission and awards?

Let's take them -- Ana, it's Joe. Let's take them one at a time. Texas, the response to the Texas ABD proposal is in-flight and is due to be submitted in early March. And we are told that awards will be announced as late as October 2018. We're in 6 of 13 regions in Texas right now, and it's a statewide proposal. So obviously, our first focus is to retain what we have. But there's actually room to grow. And with our service profile, deep provider relationships, skilled nursing facility networks and a really good service platform, it's possible that we could actually grow in this RFP. I would remind you that rates are not part of either one of these proposals, it's all capability and service profile. Rates needs to be negotiated later. So that phenomenon where a new player can come in and try to sort of invest in the state, that doesn't exist in either one of these. In Washington, with 55% market share, a great platform of integrating behavioral and medical, a track record of having won 2 of the 9 regions already. Two of the 9 regions in Washington actually went into procurement in the past 2 years and we won them, and we actually grew our membership after we reprocured. We have 50% of our cost base in Washington running through value-based contracts, which we believe is best in market. So we're feeling pretty good about both of these, both from a market share perspective, the ability to grow and our service profile and track record in either state. The Washington RFP hasn't arrived yet. It's supposed to arrive in the next couple of weeks. And I'm struggling to remember the actual submission date, but we can get back to you on that.

On just one follow-up, more broadly on the states and the discussions you're having around rates and what you might expect this fall. Is the environment likely to be supportive despite tax reform? And might this become a tailwind to your margin expansion goals for '19? Or are you hearing around anything about clawbacks? And does that differ rather blue states or specific states?

No, we haven't heard. First of all, in '18, we haven't -- there's no discussion about clawbacks. The rates -- 80% of our -- the rates on 80% of our revenue are locked in. And due to various renewal dates throughout the year, 20% are not. But 80% -- rates on 80% of our revenue are locked in. So 2018, we think, is devoid of any renegotiation. And look, all the rating factors, what the state argue about various medical cost trends, sort of backdoor rate increases by including benefits in the service profile, there's all types of ways to "structure and negotiate rates," and I'm just guarded that I'm not yet ready to declare that the after-tax margins in the Medicaid business are now going to be higher than everybody projected because of the new tax regime. But there's been no discussion specifically about taxes vis-à-vis the rates that we're negotiating, which I think it's a good sign.

The next question will be from Leigh Pressman of Morgan Stanley.

This is Zack Sopcak for Morgan Stanley. Quick question, Joe. As you think about the overall Medicaid opportunity now versus back when you were doing your due diligence stepping into the role in November, is there anything from a regulatory standpoint that's surprising you, work requirements, states that may or may not be expanding or anything else?

No. Not really. Look, when you're in this business, you have to make sure you can tolerate sort of the vicissitudes of legislative and regulatory affairs, and keeping track of all that is quite challenging, as you know. But no. As we look at the regulatory environment, as we look at the very legislative proposals, Medicaid is here to stay. There is contemplation of perhaps certain states sort of merging the expansion market with the Marketplace market, that's possible. There's still a groundswell of support for having the high-acuity populations, ABD and long-term services and supports, in a managed environment. And I think the industry has done a great job of demonstrating that there's managed savings by having those high-acuity populations in managed care versus fee-for-service. So no, I don't think there's anything legislatively or regulator-ily that causes me to think differently about the attractive growth aspects of this business.

And the final question this morning will be from Gary Taylor of JPMorgan.

Just a couple of questions. One, for 2018 Marketplace, of that $1.5 billion of premium you were talking about, how much of that would be in Florida? Ballpark?

We -- of the 450,000 members, I believe Florida is projected to have around 50,000, down from over 200,000 in 2017. So I would tell you that probably between $300 million and $350 million.

And then my other question is, I guess I'm in the camp of one of those having a little trouble on the share count. I think I understand the convert dilution pretty well, but maybe I'm just missing where you ended the quarter. So 57.1 million average diluted shares for the quarter. Could you give us end of quarter basic and diluted, kind of as the jumping off point?

I'll kick it to Joe.

Sure. It's right around -- end of quarter, it's right around 60 million. I think what you're missing there is the impact of the exchange of equity we did for some of our convertible notes in middle of December, which involved issuing about 2.6 million shares.

And ladies and gentlemen, this will conclude our question-and-answer session. And it will also conclude our conference call for today. We thank you for attending today's presentation. At this time, you may disconnect your lines.