Molina Healthcare Inc (MOH) 2021 Q1 法說會逐字稿

Good day, and welcome to the Molina Healthcare First Quarter 2021 Earnings Call. (Operator Instructions) Please note, this event is being recorded. I'd now like to turn the conference over to Julie Trudell. Please go ahead.

Good morning, and welcome to Molina Healthcare's First Quarter 2021 Earnings Call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim.

A press release announcing our first quarter earnings was distributed after the market close yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of the presentation, we remind you that the remarks made herein or as of today, Thursday, April 29, 2021, and have not been updated subsequent to the initial earnings call.

In this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2021 press release.

During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding to the COVID-19 pandemic, the current environment, recent acquisitions, 2021 guidance and our longer-term outlook. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report for the 2020 year filed with the SEC as well as risk factors listed in our Form 10-Q and Form 8-K filings with the SEC.

After the completion of our prepared remarks, we will open up the call and take your questions. Lastly, we want to invite you to attend our Virtual 2021 Investor Day meeting scheduled for Friday, September 17, where we will share more about our future growth plans and longer-term strategy.

I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Julie, and good morning. Today, we will provide you with updates on several topics. We will cover our financial results for the first quarter 2021. We will update our 2021 guidance in the context of our first quarter results, and we will then provide an update on our growth initiatives and outlook for the future.

Let me start with first quarter highlights. Last night, we reported adjusted earnings per diluted share for the first quarter of $4.44, with adjusted net income of $260 million and premium revenue of $6.3 billion. Our results for the quarter were strong across many dimensions. The 86.8% MCR demonstrates solid cost management fundamentals, particularly in light of some of the challenges presented by the pandemic. We managed to a 7% adjusted G&A ratio as we continue to reinvest the benefits created by our strong enterprise-wide fixed cost leverage in our growth initiatives.

We produced an adjusted after-tax margin of 4%, squarely in line with our long-term targets and exceeding our first quarter expectations. Our $4.44 adjusted earnings per share in the quarter were a 47% increase over the first quarter of 2020. And we accomplished all of this as we are generating 47% year-over-year premium revenue growth and successfully integrating businesses, representing approximately $5 billion in annual revenue. In summary, we are very pleased with our first quarter performance as we executed well, delivered solid operating earnings and continued to deliver on our growth strategy.

Let me provide some commentary highlighting our first quarter performance. Premium revenue was $6.3 billion, a 47% increase over the first quarter of 2020, reflecting increased membership, in line with our expectations in both Medicaid and Medicare and exceeding our expectations in Marketplace. We ended the quarter with 4.6 million managed care members, an increase of 573,000 over the fourth quarter 2020. Our Medicaid enrollment at the end of the quarter was 3.9 million members, an increase of 260,000 over the fourth quarter of 2020.

This sequential increase was the result of strong organic growth of 63,000 members as the suspension of redeterminations in a slowly recovering economy continued to positively impact Medicaid membership, although this growth catalyst seems to have moderated and growth of 197,000 members from the acquisition of Magellan Complete Care, which closed on December 31. Our Medicare membership was 126,000 at the end of the quarter, representing growth of 11,000 over the fourth quarter of 2020, which was primarily related to our acquisitions.

Our Marketplace membership grew by 302,000 in the quarter to 620,000, exceeding our initial forecast of at least 500,000 members. This growth was driven by several factors. Strong product design and competitive pricing, effectuation rates substantially higher than historical averages, lower-than-expected natural attrition rates and the extended open and special enrollment periods.

Turning now to our medical margin results for the quarter. Our first quarter 2021 MCR was 86.8%, reflecting modest COVID-related utilization curtailment, severe winter weather and the absence of a traditional flu season, offset by the direct costs of COVID-related care. While the net effect of COVID for the total company was negligible in the quarter and in line with our expectations, the impact varied by line of business. Our Medicare and Marketplace businesses experienced a disproportionately negative impact from the net effect of COVID, exerting pressure on their respective MCRs. This was offset by a modest favorable net COVID impact in Medicaid.

Some additional comments on performance by line of business. In the Medicaid business, we achieved an 87.5% medical care ratio for the first quarter, performing in line with our expectations. In addition to the external factors mentioned previously, which were unusually favorable in the quarter, the medical care ratio was also supported by our performance in utilization management and payment integrity.

A portion of our Medicaid outperformance was recaptured by the risk-sharing corridors, an impact which was well within our expectations. The corridors are designed such that they will act as a buffer to absorb some of the over and underperformance related to medical margin, no matter how that performance is derived.

Our Medicare business produced a medical care ratio of 90.3% for the first quarter. The medical care ratio was negatively impacted by higher-than-expected direct cost of COVID-related care and the temporary industry-wide challenge of risk score capture, which results in risk scores that do not fully reflect the acuity of the membership. The Medicare business performed as expected when normalized for these 2 discrete impacts.

Finally, our Marketplace business experienced a medical care ratio of 77.3% for the first quarter. The medical care ratio was negatively impacted by higher-than-expected direct costs of COVID-related care, as the COVID infection rate resurged in many of our marketplace geographies. We did, however, achieve our pretax earnings target due to the increased membership volume.

We continue to effectively manage our resources. Our adjusted G&A ratio for the quarter was 7%, identical to the 7% reported in the first quarter of 2020. Our performance reflects disciplined cost management and the benefits of fixed cost leverage produced by our substantial growth, offset somewhat by the higher-than-targeted G&A ratios of our acquired businesses, which will improve as our integrations progress. We are pleased with our first quarter results, as we continue to demonstrate the ability to produce excellent margins while substantially growing top line revenue and managing through the ongoing effects of the pandemic.

Turning to our 2021 guidance, beginning with premium revenue. For 2021, we now project premium revenue to be more than $24 billion, a 31% increase over the full year 2020 and a $1 billion increase from our previous guidance. Specifically, our premium revenue guidance now includes Medicaid enrollment benefiting from the expected extension of the public health emergency period and the associated pause on membership redeterminations, which we are now projecting through the end of the third quarter.

Recall, we had said that for each month public health emergency is extended beyond the month of May, it could increase our full year revenue outlook by $150 million and updated Marketplace revenue, reflecting the strong enrollment and retention performance mentioned previously. We expect to end 2021 with slightly more than 500,000 Marketplace members, and Marketplace premium revenue growth is now expected to be over 50%. We have excluded from our premium revenue guidance any impact of the Affinity and Cigna acquisitions. We do expect these transactions to close this year, representing upside to our premium revenue in 2021.

In summary, we are very pleased with our growth trajectory. Our growth is well balanced between a new contract win, organic growth, bolt-on acquisitions, benefit expansions in our existing geographies and greater penetration of our Marketplace and Medicare products in our Medicaid footprint.

Turning now to earnings guidance. We are raising our full year 2021 adjusted earnings guidance to be no less than $13 per share, an increase from our prior guidance of $12.50 to $13 per share. Specifically, the increase to our 2021 earnings guidance reflects the favorable impacts of the increase in our revenue guidance and the associated margin, the first quarter earnings outperformance and the combined effects of other individually minor impacts such as the sequestration delay in Medicare.

We have, however, hedged our guidance due to a variety of exogenous factors. First and foremost, we are still in a pandemic, which introduces a level of uncertainty with respect to any health care utilization forecast. We have continued to be cautious in forecasting utilization trends in the remaining 9 months of the year as the COVID pandemic subsides. How quickly and to what extent utilization rebound will depend upon the strength of the economy, consumer behavior, provider capacity and the level of COVID infection rates.

With respect to forecasting our marketplace utilization trends, we recognize there is an inherent level of uncertainty with regard to new member acuity levels, which we will monitor closely. And the risk-sharing corridors create an added element of variability. While any individual state corridor can be a buffer to that state's over or underperformance, predicting in which states over or underperformance may occur can create an element of forecasting variability.

Turning now to an update on our growth initiatives. We are very pleased to have been reawarded a major Medicaid contract in the state of Ohio. We were awarded contracts in all 3 regions in the state, maintaining our statewide presence. This reprocurement win is a testimony to our excellent service, innovative programs, strong relationships and our reputation as a business partner that can be counted on.

While Ohio did introduce at least 1 additional player to the statewide program, continuity of care is of the utmost importance to a Medicaid program. As such, we have every reason to believe our current business profile should not materially change. The agreement to acquire Cigna's Texas STAR+ PLUS membership is yet another example of an accretive, strategic, bolt-on acquisition. The business serves approximately 50,000 ABD and MMP members across 3 regions in Texas. Full year 2020 revenue is approximately $1 billion.

With a modest purchase price of $60 million, we project the acquisition will deliver returns well in excess of our cost of capital, benefit from local and enterprise operating leverage and will be immediately accretive. The expanded presence in Texas should position us well in the reprocurement, should the state proceed with that process.

Finally, some comments about the longer-term outlook for our business. The current rate environment is stable and rational. We continue to believe that the Medicaid risk-sharing corridors that were previously introduced are related to the declared public health emergency and will be eliminated as the COVID pandemic subsides.

We continue to be bullish about the performance of our acquired businesses. The operational integrations are proceeding as or better than planned, and we have high confidence in achieving our original accretion estimates and possibly even exceeding them. In the context of the pandemic subsiding and our acquisitions maturing, the embedded earnings power of the business as it exists today is at least $4 higher than our adjusted earnings per share guidance.

The emergence of embedded earnings, combined with our future growth, creates a very attractive earnings growth outlook. Our first quarter performance demonstrates that our growth plan is working well. We have built sound operational infrastructure, which allows us to operationally execute and maintain these attractive margins.

We have reinvigorated our platforms to drive organic membership growth. We have built winning RFP and M&A capabilities that catalyze our growth in accessing new opportunities, and we continue to focus on capital allocation and free cash flow generation to create shareholder value.

The political, legislative and regulatory trends are positive for the businesses we are in. And our management team is well-established, disciplined and laser-focused on our mission to serve members and shareholders. I look forward to sharing more about our future growth plans and longer-term strategy at our Investor Day in September.

As I conclude my remarks, I want to express my gratitude to our management team and our nearly 13,000 Molina colleagues. Their skill, dedication and steadfast service form the foundation for everything we have achieved and everything we will achieve in the years to come.

With that, I will turn the call over to Mark Keim for some additional color on the financials. Mark?

Thank you, Joe, and good morning, everyone. This morning, I will discuss some additional details on our first quarter performance and then turn to our growth strategy, balance sheet and some thoughts on our 2021 guidance. Beginning with some detailed commentary about our first quarter results. There was virtually no incidence of the normal flu in the first quarter. Historically, a normal flu season would have resulted in $25 million to $40 million in medical costs in the first quarter.

Severe winter weather resulted in unusually low utilization in many areas of the country in the month of February. While it's difficult to separate weather effects from other effects, there's no question it had an impact on the month. To the extent the types of services not utilized during the time are elective and discretionary, that utilization will likely begin to rebound. Much of the impact is timing.

While the net effect of COVID was in line with our expectations and negligible to the quarter in total, the impacts were varied across our lines of business. We experienced higher direct cost of COVID-related care in January, which then tapered off as the quarter progressed. We saw some pockets of non-COVID-related utilization increases. But overall, utilization was in line with expectations.

In Medicaid, we generally experienced a modest utilization curtailment on inpatient and outpatient services. A significant portion of the resulting medical margin outperformance was recaptured by the COVID risk-sharing corridors in several states. In contrast, our Medicare and Marketplace businesses experienced disproportionately negative impacts due to an increase in direct cost of COVID-related care in the quarter. The year-over-year MCR comparisons in these lines of businesses are less meaningful as the current quarter includes these impacts from COVID and the first quarter of 2020 does not.

In Medicare, the net effect of COVID increased the MCR by approximately 400 basis points in the quarter. In addition, the Medicare MCR was negatively impacted by the temporary challenge of risk scores that do not fully reflect the acuity of the membership. This is an industry-wide issue that we mentioned when we gave our initial guidance. We are expecting COVID to dissipate through the year and anticipate full year Medicare MCRs in the high 80s.

Marketplace experienced a high level of COVID cases early in the quarter, which moderated throughout the quarter. Several of our markets were disproportionately impacted by COVID as a result of higher local infection rates. The COVID impact in Marketplace increased the MCR by approximately 500 basis points in the quarter. With that said, we expect the net effect of COVID to subside and continue to expect full year pretax margins in the mid-single digits.

I will now provide some commentary on our growth strategy, beginning with M&A. Last week's announcement of our intent to acquire Cigna's Texas Medicaid and MMP business marks our fifth acquisition since our pivot to growth, ultimately reflecting the addition of $7 billion in annualized revenue.

The Cigna transaction is expected to increase our Texas membership by 50,000, provide approximately $1 billion in annualized revenues and drive accretion of at least $0.40 per diluted share in the first full year of ownership. This transaction is expected to close in the second half of 2021, and it's not included in our full year 2021 guidance.

We now expect the Affinity transaction to close in the third quarter. Affinity is expected to increase our New York membership by approximately 300,000, provide approximately $1.5 billion in annualized revenue, with accretion of $0.15 to $0.20 per diluted share in the first full year of ownership. The impact of the Affinity acquisition is also not included in our full year 2021 guidance.

Acquisitions will continue to be a meaningful part of our growth strategy. While we are a scaled government-sponsored managed care company, we are still at a size that our pipeline of smaller consolidation targets can have a meaningful impact on our growth rate. We see significant earnings growth from these acquired revenues. We have demonstrated our ability to fix underperforming businesses, have the discipline to harvest fixed cost leverage and have every expectation of managing our acquisitions to margins that are reflective of our current portfolio performance.

Our pipeline of M&A opportunities is robust. We continue to pursue bolt-on acquisitions, single state plans and provide our own plans. We will not pursue capability plays. We are a pure-play, premium risk-bearing, government-sponsored managed care business, and we see significant growth opportunities within this space. Our strong cash flow makes the acquisition growth possible. At our current margins, we generate significant excess cash and additional debt capacity.

Between cash on hand, near-term cash flow and additional debt capacity, we currently have acquisition capacity of over $1.3 billion. At the multiples we have paid in recent transactions, this gives us the current ability to drive well in excess of $3 billion in annualized revenue growth. And more importantly, at our current level of performance, this acquisition capacity is repeated and produced every single year.

Turning now to our balance sheet. Our reserve approach remains consistent with prior quarters, and our reserve position remained strong. Days in claims payable at the end of the quarter represented 48 days of medical cost expense compared to 50 days in the fourth quarter and 49 days in the first quarter of 2020. Prior year reserve development in the first quarter of 2021 was modestly favorable. But any P&L impact was absorbed by the COVID-related risk corridors.

Debt at the end of the quarter is 1.9x trailing 12-month EBITDA. Our leverage ratio is 52%. However, on a net debt basis, net of parent company cash, these ratios fall to 1.6x and 47%, respectively. Taken together, these metrics reflect a reasonably conservative leverage position. In the quarter, we repurchased an aggregate of approximately 577,000 shares for $122 million, at an average price of approximately $211 per share. Our full year guidance continues to be based on 58.5 million shares. At the end of the quarter, our parent company cash balance was $436 million.

A few additional comments related to our earnings guidance. In raising our full year 2021 adjusted earnings per share guidance to be no less than $13 per share, the following assumptions are relevant. A higher proportion of medical margin performance will be absorbed by the risk-sharing corridors over the remainder of the year. The net effect of COVID remains a net cost of approximately $1.50 per share for the full year. And lastly, we expect 55% to 60% of full year EPS to be produced in the first half of the year.

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

Kevin Fischbeck of Bank of America.

I guess I wanted to go to the -- first to the comment about $4 of upside still to the guidance. I guess it sounded like the guidance raise was due in some part of the lease to redeterminations and the revenue and earnings from there, which obviously not something we would forecast going into next year. Does your $4 number now include the Cigna deal in there? Or are there any kind of other puts and takes now that you're affirming the $1.50 COVID impact, that component hasn't changed.

Let me summarize what is in our guidance, Kevin. This is Joe. The -- when we guided to no less than $13 a share, we are including an additional margin on $600 million of Medicaid revenue due to the extension of the redetermination pause. We're also including a margin on the additional $400 million of Marketplace revenue due to the increased membership. We are then hedging our forecast due to the uncertainty related to utilization in the last 9 months of the year. So very clearly, increasing our guidance to no less than $13 a share.

What we have said when we gave our original guidance and continue to say is that the net cost of COVID inside that forecast is $1.50 a share. And if you recall, the way we measure the COVID impact is any impact of curtailment or suppression of utilization, offset by the direct cost of COVID-related care absorbed then by the risk-sharing corridors. We continue to believe that will cost our earnings $1.50 a share. So if you look at the impact of COVID as being an overhang of $1.50, the disruption to Medicare risk scoring costing about another $1 per share and then extend our acquisitions to their full state of maturity, we say the embedded earnings power of the business currently is $4 higher than our current year guidance.

Yes. I guess that's what you said last quarter, too, but you've taken up the core number this year in part on things that don't seem sustainable. So I guess I was just wondering if there's any other kind of moving pieces in that.

And to be clear, that $4, that's not a 2022 guidance number or outlook. That is, as we sit here today, there are certain overhangs on the earnings projection of the business that are causing our earnings to be lower this year than they otherwise would be when our acquisitions mature and when COVID disappears. Obviously, there will be a lot more puts and takes into next year. And when we give our outlook in September at our Investor Day, we'll give you a better look at what 2022 looks like.

Obviously, the redetermination pause, increasing revenue this year, where does it peak, how far does it fall, how quickly does it attrit is going to be a major item in a year-over-year comparison. With 47% revenue -- premium revenue growth this year, we're not at all that concerned with the optics of 2022 versus 2021 at this point.

Yes, agree. Maybe just last question. You mentioned that SEP membership, and right now, the acuity is hard to forecast. Do you have any early data points around metal types or demographics on that enrollment that might give you some comfort that, that's not going to be a significantly higher acuity population?

Well, any time you take on a new membership, you -- by its very nature, inherently, you don't yet understand the acuity of that population. I mean you start with an assumption that if somebody buys insurance, they generally need it. But our Bronze, Silver mix is about what we forecasted for the year. We are -- we have improved dramatically in attaining risk scores. We've improved that operation from last year. Recall, it was a performance glitch last year. We've improved on it.

All I can say at this point is we know we've improved in attaining risk scores compared to ourselves. Obviously, we don't have the industry data yet to compare how we're doing to our competitors, which will ultimately decide what risk scores we had attained. But we are doing better compared to ourselves. We'll be able to give a much clearer forecast on utilization trends generally, Marketplace, Medicaid, Medicare, when we report our second quarter. But at this time, it's very prudent just to remain cautious given the effects of the pandemic as it is still in full throes here in the first quarter and subsides into the second and third.

Your next question comes from Robert Jones at Goldman Sachs.

This is Kevin on for Bob this morning. I just want to clarify. So you made some comments just about hedging as it relates to COVID. I was curious if there's anything that you're actually seeing today that would make you more cautious? Or if this is just reflecting some conservatism given the environment is just generally uncertain?

No. I mean, Robert (sic) [Kevin], we try to be clear on this. We're not implying or merely suggesting we're being conservative. We're declaring we're being conservative. As we work through the quarter-over-quarter effects of the pandemic, starting all the way back in the second quarter of last year, the mini and micro inflections up and down that occur are very geographically dispersed, very much tied to local infection rates, very much tied now to the improvement in the acuity of the population due to the vaccination rate and opening up of economies.

And it is the variation in modeling utilization for the balance of year. The variation in the various models is so wide that we believe it's prudent, just to be very cautious on how fast utilization will rebound. When does it rebound to pre-COVID levels? Does it rebound fully to pre-COVID levels? Where and when and how is very much a variant at this point, and it just is very prudent to remain cautious on utilization for the balance of the year.

Got it. That's helpful. And then just one quick follow-up. I know you touched on -- still thinking about the COVID headwind being $1.50. I know last quarter, you also talked about the MRA headwind being a $1. Is the $1 the still right kind of headwind to think about? Or has your assumptions changed on that at all?

No, that's still a good number. The disruption in risk scoring cost about 300 basis points in our Medicare MCR for the quarter. And so you can do the math on that. That's still pretty much $1 for the year.

Your next question comes from A.J. Rice at Crédit Suisse.

Maybe just 2 quick questions. One, we've heard some about the marketplace environment that maybe there's some shifting in competitive landscape, a rush to more narrow network programs that -- maybe there's also been an uptick in churn among the members. You're growing that better than you expected. Are you seeing any of that? Or how would you put any of that in perspective?

Yes. The competitive landscape hasn't changed all that much. Yes, some of the new entrants came into some of our markets and started to build market share in those markets. But we're a very niche business. We do not serve affluent suburbanites. We serve the working poor. We've always said we built our Marketplace networks off our Medicaid networks. We price them off our Medicaid networks, and we're seeking out fully and highly subsidized members that are on government assistance. This is clearly an extension of our Medicaid strategy, servicing the working poor.

We like the position we're in. Not only are we improving our performance and growing, but it's now rightsized in the portfolio. Early on, as we started this journey 3 years ago, there was no question that the marketplace earnings were outsized in relation to the portfolio. Now with marketplace revenues representing about 10% of the total margins, mid-single digits, so the earnings about 10% of the total as well, it's positioned nicely in the portfolio, strategically leverages our Medicaid infrastructure and is now a very good complement -- financially and operationally good complement to our Medicaid business.

Okay. That's great. And then my follow-up would be on the risk corridor comments. I think the original guidance had that being about a $250 million impact this year. It sounds like maybe it's a little more given how things have trended, but I wondered if you've updated that number. And have you -- it sounds like you're thinking, at some point, these risk corridors are going to roll off. Can you just tell us -- have you seen any states that have actually begun to take action to eliminate these? Or what are you hearing as you talk to the states about any kind of timing around eliminating these risk corridors?

Sure. A.J., when we gave initial guidance, we never actually parsed to the components, curtailment, direct cost of COVID care or the corridors. We said that the components are highly variable, but the fact that the corridors do exist, they do act as a buffer that we were very comfortable in the projection that COVID in total, net, would be a drag on earnings of $1.50 per share, and we continue to say that. We never actually gave a specific corridor number.

And you really shouldn't because corridor number is going to flex up and down with curtailment in the direct cost of COVID-related care. That's how they work. So to me, it's really the net number that's really important. Obviously, if the component parts get materially different, maybe we'd report on that. But right now, saying it's going to cost us $1.50 a share is the best metric to hang on.

With respect to your second question, yes, there is positive momentum that not only suggests but is concluding that the risk-sharing corridors were related to the public health emergency. They were fully intended to recapture the portion of the capitated rate that was never paid out in benefits due to the pandemic, and there's growing momentum with many of our state customers, the actuarial community, the public policy fund, et cetera, that these will disappear as the COVID pandemic subsides.

In fact, New York did not introduce a risk-sharing corridor for its '22 fiscal year, which started on April 1. And California publicly declared that it is not introducing a corridor for its '22 fiscal year, which starts on January 1, 2022. And there's lots of good momentum legislatively, administratively in many other states that are suggesting that these were related to the public health emergency and will begin to fall away as the pandemic subsides. Obviously, as that happens, as they become enacted or not enacted, when we see draft rates, we'll report as we report our quarters.

Our next question comes from Scott Fidel from Stephens.

Wanted to first just ask about the Texas deal with Cigna. And it seems like a very attractive price that you're paying on a price per revenue basis. And obviously, you're expecting it to be nicely accretive as well. So just want to get some more insight into essentially how you're able to acquire that asset for that type of pricing, maybe some insight into the existing margin profile. Is it underperforming now and you think that you'll be able to approve that, improve on that? Or is the margin profile already running at a pretty solid level?

Well, Scott, on the price, look, willing buyer, willing seller, and that's the price we agreed to. And without an allocation of capital, 6% of revenue is clearly attractive. Now it's all about the Texas reprocurement and how this positions us in the reprocurement. So bolting on $1 billion of revenue to our Texas Medicaid business, which is $2 billion strong right now, increasing it by 50%, adding 2 new regions where we're not present, overlap a third is very, very attractive to our statewide presence.

The business is profitable, marginally profitable. But again, we bring Texas scale. We bring a lot more infrastructure, and we're going to leverage the daylight side of our fixed cost structure in the state of Texas. So we will be able to improve the margins due to our existing presence. So attractively priced. We'll recover the purchase price with the 2 first years of cash flow, making it a free option upon reprocurement.

Got it. And second question, just wanted to sort of net out, I guess, the framing on the exchange business. And obviously, you had the COVID costs in the first quarter that you're not expecting to recur throughout the year. You said you're keeping your outlook conservative, but at the same time, you are keeping your mid-single-digit margin target in place for the HIX business. So just interested maybe did the composition within that mid-single-digit margin view change a bit where you're maybe assuming a bit higher on the MLR and you're getting more G&A leverage off the growth? Or just trying to sort of sync up sort of thinking about that being conservative to change the margin target?

You're actually captured it perfectly. Our MCR while it will likely be in the mid-to-high 70s, where previously, it was in mid-to-low 70s, but we're getting the G&A leverage. Our G&A ratio is improving by 200 to 300 basis points, which again, clearly puts us in the mid-single-digit pretax category.

Now there's a range around what pretax, single-digit pretax means. But we have every reason to believe that given what we experienced in the first quarter, if the pandemic does subside, we get appropriate risk for us on the new membership that will achieve mid-single-digit margins even on the increased size of the business. Any time you grow a business, it puts pressure on margins, but we're still committed to and forecasting that we'll be at mid-single digits pretax, even on the increased revenue.

Our next question comes from Justin Lake from Wolfe Research.

First question, Joe, a lot of talk about the federal emergency and the benefits of this year as you go through the year. Just wanted to get an idea, within that $4 of kind of upside you talked about in earnings power, how much are you pulling out for the assumption that the federal emergency goes away? So if that shuts off completely for 2022, would all those members leave? Is there a number that you could share with us? I know that's not going to happen that way, but just kind of understanding what you're pulling out of that earnings power of the $4.

The first answer to the very specific question you asked is no. That was an embedded earnings. It wasn't a 2022 forecast. It wasn't a bridge to 2022. It was if -- when these 3 or 4 factors disappear, the earnings power of our business, the embedded earnings power is $4 higher. It was not a projection. It was certainly not a forecast of the peak in membership and the attrition rate.

So here's what's in our guidance. We extended the public health emergency and the redetermination period out 4 months. We originally said that for every month it gets extended, it would produce about $150 million of revenue to our annual total. So that's the $600 million. If it gets extended to the end of the year, it's probably another $300 million, $400 million. Now where does it peak and how far does it fall and where does it fall is very much unclear. I maintain that all of the membership that we grew since the pandemic started organically.

At its peak, it will be 750,000 members, 600,000 to the end of last year -- 650,000 to the end of last year, another 60,000 in the first quarter, maybe another 40,000 in the second. So at its peak, we've added 750,000 Medicaid members organically. And whether that's through the redetermination pause, struggling economies, it doesn't matter. That was the organic growth. How fast that attrits and where does it bottom? Unclear.

I maintain that a larger proportion of those members will sit because the low-wage service economy has been ravaged. We all see the economy coming back. But if you look at the numbers, the low-wage service economy, the sandwich shops, the restaurants, the dry cleaner shops aren't coming back real fast.

And I still think there will be a significant amount of that membership that would be on Medicaid for an extended period of time. So no, that wasn't '22 forecast, but your supposition is correct. When we do give 2022 guidance later this year or into next year, we'll have to bridge you from the peak of Medicaid membership this year to the trough next year and that will be a year-over-year comparison item.

So removing 2022, Joe, just to be clear, like in the $4, are you assuming that, that membership goes away? Or would it be current run rate plus $4 minus whatever happens with the federal emergency membership, that 750,000?

What we're saying is -- no, we're not saying that. What we're saying is this year, with the membership we have, we're earning $13 a share. And inside of that number is a $1.50 overhang due to COVID. It has nothing to do with the membership. It's just the direct cost of COVID-related care, utilization suppression in the corridors. So the only thing that's in the $1.50 are those 3 items, those 3 -- not included in that COVID impact is any impact from increased membership.

Okay. So we would have to subtract that, just to be clear, from the $4?

If that was the calculus that you were doing, yes. But again, we were not giving a 2022 forecast. We were giving a pro forma view of the embedded earnings power of the business as it exists today. It was not a forward forecast.

Our next question comes from Ricky Goldwasser from Morgan Stanley.

Just want to go back to your comment around the exchange strength. And one of the things that you talked about was the strong product design. We saw that in Ohio, you embedded primary care business, Cityblock in the RFP. Just kind of like wanted to get some more color on your primary care strategy and how we think embedding it in other states?

Well, our network strategy in Marketplace is very traditional. We build the networks off of our Medicaid networks. In many cases, they're slightly wider, bearing in mind that wider networks are always very attractive from a membership perspective, but they carry a cost.

But our marketplace network strategy is very traditional when it comes to hospitals, when it comes to specialty services or primary care services. We are introducing in our Ohio RFP win a few new twists and turns with vendors, partners that are going to help us deliver more community-based care wrapping around primary care physicians to make them more effective.

But I would say, on balance, our marketplace network strategy is very traditional. We did introduce a couple of very innovative programs in our Ohio RFP. There's a company by the name of Cityblock, which has a very, very innovative approach to delivering care in the communities, in the home setting, reaching out into neighborhoods to find people that need care.

This is a big problem in Medicaid. When people come into the hospital, we'll get them the care we need. But finding them before the bad stuff happens is really a challenge. And I think this company, Cityblock, which is a great partner, is going to do a great job for us in the state of Ohio.

So should we think about this as sort of a pilot? And if this is successful, it's something that you can expand into other states?

I would answer the question more generally that we are passionate about serving our state customers. And I talked to and my team talks to the leaders of the Medicaid agencies, the governors, people in high administrative physicians and government, always trying to understand what their most burning problems are and whether it's social determinants of health, whether it's the opioid use, epidemic, racial disparities in health care. We are creating and providing innovative solutions to solve those problems, not only through our delivery of our Medicaid product but also in our $150 million commitment in what we call the MolinaCares Accord to put money back into the communities we serve.

This is really important part of the relationship with the state customer. Not only innovative programs that help drive down cost in the Medicaid program, but being committed to the communities that we serve. So yes, it is a very common theme, no matter where we go in our existing states or when we pitch a new state.

Our next question comes from Stephen Valiquette from Barclays.

So just for the public health emergency, you changed your expectation for this to run through the end of 3Q '21. Some of your MCO peers have assumed this around through year-end. It seems HHS themselves have given some signals reported in the press that it also could run through year-end.

I guess I'm just curious if there's any political tea leaves or some that suggest to you that maybe it's less likely to run through year-end. Just any additional color on your thought pattern of extension through 3Q versus something beyond that?

No. Thanks for the question, Steve. No, don't read any political insights into that. We just chose to extend it 4 months out to the end of September at $150 million per -- that's $600 million of additional revenue. But no, we have no other insights. If it gets pushed out to the end of the year, it's likely at a minimum $300 million more in our 2021 premium revenue forecast. So no. No other insights, except perhaps a measure of conservatism.

(Operator Instructions) Our next question comes from Josh Raskin from Nephron Research.

Joe, just want to clarify, I think you said no new corridor in New York. I think that was just for 2022, but I assume you got the 2021 with the retro. And then are any states actually contemplating new corridors that are still kind of a little bit behind in the game that are trying to look back and figure that out.

And I guess last part of the question would be, why would a state eliminate it? What would the rationale be for a state to operate into the future if there's other issues, et cetera? What would be the rationale for saying, "Hey, we don't need the corridors in place?"

The answer to the first question you asked very specifically was yes. Fully captured the retro corridor from April 22 back but they did not introduce one for April 1 -- I'm sorry, April '21 back. They did not introduce one for the '21/'22 fiscal year. So that is correct. The white papers have been written on this.

In the midst of a pandemic, when you believe that a lot of the capitated rate is not going to get paid in services, you come up with a construct as arbitrary as it is to recapture a portion of that rate. There are lots of ways to do that. We believe and many others believe that the risk-sharing corridors, even as -- even being symmetrical are not the appropriate way to do that.

And here's the basic reason why. It actually penalizes an efficient operator and promotes and rewards an inefficient operator. These things are symmetrical. If you have a 90% MLR target and you're beating it, you pay in, whether you beat it because of COVID or beat it just because you're better, you pay in.

And if someone is operating at 92, they get a check. So it promotes inefficiency by not allowing efficient operators to hold on to the portion of the capitated rate that they're truly driving through performance, knowing that whatever costs actually emerge, end up in rates eventually.

If we keep driving down the cost of the program by being efficient, that ends up in the rate base on a lag basis. And that's why we should go back to, and most people believe that the traditional rate setting process, setting a rate prospectively based on the observed trends in the business is the right way to go.

Clearly, during the pandemic, they needed to do something quick. They got actuarial advice that supported this. But the momentum for these things is waning. And the discussions that we're having with various of our state customers is suggesting that these things are going to disappear as the pandemic subsides.

That makes a ton of sense. So do you have alternatives? I mean I understand the rate setting processes -- the traditional rate setting process is your preferred way. But clearly, in a pandemic, it's very difficult to parse out, to your point, what was COVID-related versus what was company efficiencies or inefficiencies. Is there -- have you provided data to these states? Do they feel comfortable? Do they actually know what the COVID impact was? Or is that kind of why they're using the blunt object of risk corridors?

Good question. It has been provided. And of course, they have their own actuary. They use some of the largest firms in the country, household names that are recognizable to you. So they have their own actuary resources. But yes, that's exactly the point. And as trends come back to normal, without these mini and micro inflections that happen across the country, we believe, and I believe the actuarial community believes that we'll just revert back to the traditional rate setting process on a prospectively set basis.

Eventually, costs end up in rates. When costs are reflecting high, they lag and managed care suffers. And when trends are trending low and rates lag, you win, and you just work the ebbs and flows and the mini cycles of the business. That served this business well for decades and decades, and we believe that most Medicaid directors and most actuarial firms get that and are of the mind that as the pandemic subsides and disappears, these constructs will disappear as well.

Our next question comes from Matt Borsch from BMO Capital Markets.

Maybe I could just pick up on Josh's question there. Are the timing of the risk corridors rolling off? Is that actually going to be potentially a net negative to you, at least relative to what you might have experienced if those risk corridors remained in place? What I'm really pointing to is the potential for above trend utilization in maybe the back half of this year or going into 2022, where the risk corridors would have served as something that was actually helpful to you. And so I guess what I'm wondering -- are they being pulled away at exactly the wrong time?

Good question. Here's the way we think about it. First of all, about sort of getting surprised by them or having an inordinate effect or an unanticipated effect, they can no longer be retroactive. So the ones that are in place are in place. In order to be enacted, they have to be prospective in nature, and they will coincide with the rate cycles.

Most of our rates are 1/1, January 1 rates. We have a couple this fall, Michigan, Texas. We have some July ones: Mississippi and South Carolina. So they will follow the rate cycle. So the corridors that we're now recording are the ones that have been enacted. You can't record a corridor that hasn't been enacted. Now if any one of these states that comes up for renewal inside the year enacts one, it could be an additional item for the year. But our feeling is that most of the states that come up this year, it's either late in the year or they're smaller, and it shouldn't have a big impact.

The real wildcard in forecasting these is where your under and overperformance happens. There is very, very clearly that if you're in the money on a corridor, $1 of overperformance goes against the corridor. Very simple. But where is the $1 of over underperformance is going to occur? If it occurs in California that has no corridor, we get to keep it. If it happens in Michigan, where we have a corridor, we don't.

And so when we said that the existence of these corridors adds an element of variability, it's projecting where you're going to over and underperform that adds the element of variability. But right now, we know where they are. They cannot be enacted retrospectively. They could be introduced for the 2022 fiscal year in a couple of states. We don't think that will happen, but it's possible. So we don't think there's a huge element of variability with respect to the introduction of the corridors, but there is an element of forecast variability to where your under or overperformance actually occurs.

That makes sense. And then just a follow-up on a slightly different point. With the Medicare risk adjusters and the impact there, it seems like it's having a larger basis point impact on your MCR in Medicare, if I compare that to some of your -- some of the other companies that, of course, have much larger books in Medicare. Is that somewhat the law of large numbers or law of small numbers that would account for the higher volatility?

Yes. We're very concentrated. A lot of this happens in our MMP book. Michigan, which had a very, very high infection rate and where we have a very robust Medicare business, got hit specifically. So yes, it's a law of large numbers. We're not nationwide. We're in a handful of places with material membership. I cited one, but that's what it is. It's the randomness of where the infection is and where our membership is.

If I may operator, before the next question is asked, because no questions were really asked along these lines, I did want to make a comment that doesn't respond to a question. But last night, there was some very positive news that broke. And I wanted to take this opportunity in a compliant format to mention it.

Last night, the Kentucky State Court issued an order, which supported Molina's position as a Medicaid participant. There was -- as you know, there were some legal challenges to our award itself denied. There were legal challenges to our purchase of Passport denied. There are legal challenges to the novation of the Passport contract to our business on September 1 denied.

What was upheld was the sixth plan model that the court stipulated many, many months ago. So as it stands today, the ruling is that the Medicaid program continues on as is. We are operating in Kentucky under the Passport brand. We have 326,000 members at the end of the quarter. We're performing really, really well, and we're good standing with the state, and the court has ruled as such.

Now having said that, the one stipulation that court did say was there was enough -- I would say, irregularity, but at least some aspects of the proposal process that perhaps weren't to their liking, and they asked for a reprocurement but didn't stipulate a date or time to that. So our point of view is whenever that happens, we'll be bidding on the contract, but we'll be bidding as a strong incumbent.

We've already won the contract twice. We'll win at a third time. And we're in great standing in the state. So positive news out of the Kentucky State Court last night. And just in case nobody asked a question that got to that issue, I wanted to use this format to give you our position on that. Thank you.

Thank you. That does conclude our conference for today. Thank you all for joining us. You may now disconnect your lines.