Good day, and welcome to the Centene Corporation 2019 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, please go ahead.

Thank you, Elisa, and good morning, everyone. Thank you for joining us on our second quarter 2019 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning’s call, which can also be accessed through our website at centene.com. A replay will be available shortly after the call’s completion, also at centene.com, or by dialing (877) 344-7529 in the U.S. and Canada or in other countries by dialing (412) 317-0088. The playback number for both dial-ins is 10132753. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-Q filing filed today, July 23, and the Form 10-K dated February 19 of 2019 and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our first quarter 2019 press release, which is also available on the company’s website at centene.com at the Investors section. Finally, a reminder that the Centene third quarter 2019 earnings call will be held on Tuesday, October 22, 2019 and our next Investor Day will be held Friday, December 13, 2019 in New York City. With that, I’d like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene’s second quarter 2019 earnings call. During the course of this morning’s call, we will discuss our second quarter results and provide update on Centene’s markets and products. We will also provide commentary around the healthcare legislative and regulatory environment as well as an update on the acquisition of WellCare. Let me begin with second quarter 2019 financials. We are pleased to report another solid quarter marked by robust top and bottom line growth and operating cash flows. Membership at quarter-end was 15 million recipients. This represents an increase of 2.2 million beneficiaries with 17% over the second quarter of 2018. Second quarter revenues increased 29% year-over-year to $18.4 billion. The HBR increased 100 basis points year-over-year to 86.7%. This was primarily attributable to the Marketplace business. As expected, margins have normalized from the favorable performance in 2018. The increase was also attributable to the HIF moratorium as well as the acquisition of Fidelis. We reported adjusted second quarter diluted earnings per share of $1.34. This compares to $0.90 reported in the same period last year, representing 49% increase year-over-year growth. Lastly, operating cash flows came in at $917 million or 1.9 times net earnings. This is the high end of our previously stated range of 1.5 times to 2 times net earnings. These solid results reflect the benefit of our ongoing diversification strategy, which has led us to become $74 billion enterprise. We’re no longer simply a Medicaid healthcare company. One has to look at the totality of this enterprise, as the scale and diversity allows us to absorb the ups and downs in rate cycles, markets and subsidiary performance. This ensures that no one part of the portfolio can jeopardize our total organization. Jeff will provide further…

Thank you, Michael, and good morning. This morning we reported solid second quarter 2019 results. Second quarter revenues were $18.4 billion, an increase of 29% over the second quarter of 2018, and adjusted diluted earnings per share was $1.34 this quarter compared to $0.90 last year. Adjusted diluted earnings per share for the second quarter of 2019 was driven by solid performance across our business segments. The reconciliation of the 2018 marketplace risk adjustment, which exceeded our expectations by $0.05 per diluted share and $0.03 per diluted share associated with a gain on the Ribera Salud acquisition. Let me provide additional details for the quarter. Total revenues grew by approximately $4.2 billion over the second quarter of 2018, primarily as a result of the acquisition of Fidelis Care, growth in the Health Insurance Marketplace business, expansions and new programs in many of our states in 2018 and 2019, particularly Arkansas, New Mexico and Pennsylvania. This growth was partially offset by the health insurer fee moratorium in 2019. Moving on to HBR, our health benefits ratio was 86.7% in the second quarter of this year compared to 85.7% in last year’s second quarter and 85.7% in the first quarter of 2019. The HBR increase was primarily driven by the performance in the Marketplace business, the acquisition of Fidelis, which operates at a higher HBR and the health insurer fee moratorium. As we have highlighted previously at our Investor Day, we expected a return to more normalized margins in 2019 for our marketplace business. Additionally, we continue to experience a higher membership retention rate compared to prior years. As members stay with us longer, it increases medical costs in the HBR. I just want to emphasize that this is a slight increase and we are still well within our 5% to 10%…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Scott Fidel with Stephens Inc. Please go ahead.

Thanks. Good morning.

Good morning.

I just wanted to start on the exchanges. And maybe just update us in terms of the margin front. I know that you’re still within that 5% to 10% range. Just interested in terms of are you tracking sort of right to where you had thought previously? And any sense in terms of within that range you maybe sort of tracking for the year. Then just as a follow-up, just on the exchanges as well. Just interested, we’re seeing a lot of the rate filings coming out and the proposed rates for 2020. And just interested in your updated views on how the pricing environment appears to be trending for 2020 and the exchanges and just reviews on whether competition is increasing in the marketplace? Thanks.

Okay. I want to start-off with the margins, make a little comment on competition, and then let Jeff and Kevin and others comment. The margins are well within a 5% to 10% targeted range. I cannot emphasize enough to everybody that in this business and I’ve said this historically at Investor Day so many times, you will see movement up and down within that range. Now in this instance, we commented our retention of membership has been longer than typically – what we have typically seen. That means we are going to get increased revenue because we’re retaining that membership. They will reach their maximum amount of pockets. And so some of the cost will go up, but we’ll still have increased revenue and increased earnings from that increase. It’s the nature of this insurance business. And it’s really what one expects. And the longer we retain a member, the better it is, because over time, we have demonstrated we’re keeping for a long period of time, we’re bringing the cost down for that person. So as I said, it’s a little frustrating to see people concerned about a margin and moving the margin which is doing so well within the range is normal health insurance performance and shows that this business is really growing and performing as we expected to. And we’ve commented earlier to expect this. So from a margin standpoint, it’s doing just what we wanted to do and what we expected to do. And we see that continuing. And the longer you keep the member, the higher the MLR it might go. But also you get all that incremental revenue, in the end which gives you actual dollar earnings increases, and the shareholders, everybody benefit from it. I’ll start off a little bit from the competitive standpoint, but we like competition. And we think it’s important we have – it just makes us better. And we’ve also commented that in our segment, which is 400% the Federal poverty level and below that it’s fully subsidized, highly subsidized and therefore price in those types of issues do not give somebody trying to commit on price and advantage. So I think this is a solid business. The actions we took in building it and becoming a leader of it I think it’s going to pay a lot of dividends for our shareholders going forward. Jeff, anything you want to add?

Yes. I think Michael addressed the member staying longer comment. I think the only thing I would like to bifurcate is we did talk about – previously about margin normalization and if marketplace margins would be consistent with 2017, 2016 and 2015 and that 2018 was a very good year. And so that piece was completely expected in our forecast. And then the second piece, I think that Michael mentioned here was the member staying longer, which just to highlight, we’ve increased our guidance, our revenue guidance over $1.4 billion for the first and second quarters here, really due to the member retention and them staying longer. And I completely agree with the comments you stated about them.

I want to make one more comment. When we have a $75 billion business, similarly, you have a $20 billion, $30 billion business. And we have more complexity, you have more products, you have more states. It’s going to be some variability, but it’s really a very strong position to be in. And that it really affords us the offsets. And with that site business and now going international – even every market they may have an issue. It’s no different than investors that have funds and have a stock that maybe is not [indiscernible] if others have offset it. Marketplace is one of our key strengths and I can’t emphasize that enough, Scott.

Got it. And it sounds like Michael, so just to clarify on 2020, with what you’re seeing the pricing at this point, it sounds like you’re still comfortable with the growth rates that you’ve been targeting in that market for next year.

Yes. I think I commented in my prepared remarks that I expected to grow next year. So – and I think that’s – and I still feel that way.

Okay, thanks for the color.

The next question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Good morning, Kevin.

Good morning, thanks. So I guess maybe two questions. First question being when you think about the guidance update, there are a few item in there. You had the $0.03 gain, and then you had the $0.05 that came in, but I think you’re spending $0.05 away. When you think about the components of the guidance raise because I think the raise is a little bit less than what the beat leverage versus consensus in the quarter. How do you think about that guidance raise? How much of that is kind of core operational earnings versus kind of one-time things versus potential offsets as far as reinvestments?

I will make one comment and Jeff can go into all the detail you want, okay. But what we’re trying to say is that we have this Centene Forward, which is really working well. It’s going to – it’s used to freed up funds to invest in technology, the things that are paying big dividends going forward, couldn’t be more pleased with it. What happened is we started to realize results in this quarter. And the shovel-ready projects won’t be ready until next quarter. So we had to take the earnings but – and in fact said, we’ve taken the earnings this quarter. But next quarter, we’re going to have the expense. And Jeff, you might just further…

Yes. I mean, a couple of things I would say is that if you’re comparing to I think, the consensus number, I think that was around $1.24, that’s $0.10. So we were at $1.34. So that’s a $0.10 beat. $0.05 is really driven by what Michael mentioned to Centene Forward, which we’re reinvesting in the back half of the year. And then you would have another, call it, $0.05, $0.03, from the Ribera Salud gain and call it $0.02 from operations, if you’re comparing to consensus. And so I would say the guidance raise was in line with that. It’s the $0.03 from the Ribera Salud gain plus $0.02 from operations, again if you’re comparing against consensus that we increase the guidance by.

Okay. That’s helpful. And then I guess, the second question being, it looks like you raised the MLR guidance by 10 basis points. Can you talk a little bit about what was driving that? I would have thought that the better exchange enrollment and retention might have helped bring that MLR down a little bit.

Yes. So if you’re comparing to year-over-year and specifically for this year, I think Michael commented on the higher member retention. So what we did have in the forecast was the margin normalization. And we talked about that at our December and probably Q1 earnings calls that we anticipated that exchange margins would be similar to 2017 and prior and then 2018 was a very good year. And so Michael commented on the membership retention and if members are staying longer and so it’s increase in the HBR, the margins just a little bit and that’s why we did the tenth on the increase in the HBR guidance.

In other words, Kevin, they stay longer, so they reach the maximum amount of profit. It doesn’t mean that their health conditions have deteriorated, if anything. Over time, we’ll see improvements the longer we keep them. But that’s really why you see that jump – it’s a normalization of the business. And the good news is I like the fact we’re retaining people, this is longer term, we’re going to have a very strong base there.

I mean, I clearly can see why the higher MLR versus a normal exchange person. But I thought a normal exchange person had below average MLR. So even if it was higher than an average exchange person it might be lower than your consolidated MLR. You’re saying that if you keep them longer, it’s actually higher than your consolidated MLR, which holds up your consolidated MLR?

No. No. It’s just higher than our previous expectations, Kevin. I mean, we had – I mean, if you look at the Q1 and Q2 how we raised guidance at the top line, that’s over – almost $1.4 billion of additional revenue. And what we’re saying is that that MLR is higher than our expectations that we originally had. So the members are staying longer, which is outside of our expectations well and we’re adjusting the forecast for that.

All right, thanks.

Our next question comes from Josh Raskin with Nephron Research. Please go ahead.

Hi, thanks. Good morning. Just want to ask on the $0.05 that gets reinvested. I guess first question is on the $0.05. That reinvestment in Centene Forward, does any of that go into the MLR line or is that all G&A?

The bulk of that would have been in the G&A line.

Okay, got it.

But it is, Josh. It’s a lot of investments. In other words, we will continue to update our systems. And we’ve said when we’re going to be investing in that and that’s going to deliver longer return, real efficiencies. And so this whole effort on reducing our G&A costs and reinvesting that money without affecting our earnings stream, as expected, that’s where it’s all about. It’s recognized that growth.

Okay. That makes sense. And then my real question is just from a strategic standpoint Michael, you alluded to the potential to close WellCare slightly earlier than it sounded like, by the end of the first half of next year. It sounds like you’re seeing some progress on the regulatory front that gives you some comfort there. So my question on that is does that do anything strategically? As you think about the Medicare advantage line, any other investments or branding or your M&A strategy or anything along those lines that changed based on your ability to potentially close the transaction faster?

Well, I think that, okay, one, I mean your first thing was right, we’re seeing a lot of success with the states, they understand it. We’ve good discussions with Justice. We understand their role and what they have to do and providing them all the material on a expeditious basis. And I want to just cautiously let people know it’s going well enough that it could close earlier. Now the sooner it closes and we get the company integrated, the sooner we’re prepared to move ahead with some accelerated activity we have in mind. But we’re going to be patient and manage it through carefully after we’ve demonstrated this is fully integrated. We’re not going to bite off more than we can chew. And we know how they integrate companies. We’ve demonstrated that. And so anything that picks up that speed just puts us in a position to do something sooner.

Perfect, perfect. Thank you, Michael.

The next question comes from Sarah James with Piper Jaffray. Please go ahead.

Thank you. The DoDs talked about TRICARE moving to risks on the next RFP. Can you help size what that would mean for Centene if you retain the same region? And are there any quality metrics for that contract you can share with us that gives us insight onto how Centene is performing from the DoD’s viewpoint?

Kevin, you want to take that?

Sure. Hi, good morning. We’ve been working very closely with DoD for a while about this potential new arrangement and also with House and Senate Armed Services Committees. There’s – to your point, there’s a variety of different thinking going on within DHA as well as in House and Senate Armed Services Committees about what that final new benefit plan might look like. The risk arrangement that you’re talking about is one of the things that they’re considering. But there’s a lot of different things they’re considering too with respect to care management, with respect to value-based contracting, with respect to network design. We’re very pleased to be at the table and providing a lot of different recommendations and ideas to them.

Got it. And when do you think that you’ll know how the contract will evolve and potential difference in size of the new contract versus what it’s contributing to Centene now?

Well, as you’re probably aware, there’s a leadership change that’s going to be taking place over the next couple of months. And so our thinking is probably, after that takes place, which is probably in the late summer or early fall, we’ll probably no more. So I would imagine with the next three to six months.

Thank you.

The next question comes from Lance Wilkes with Bernstein. Please go ahead.

Yes, good morning. Could you talk a little bit about Medicaid medical cost trend and the components of that. Was interested in what the implications are for Iowa in the latter part of the year and maybe as a contributor to MLR guidance, just given the withdrawal of the one of competitors in the end market?

Yes. This is Jeff, Lance. I think what Michael said, we continue to see stable, stable cost trends in the Medicaid business. And as far as Iowa, it’s nothing has changed. I would say our commentary around Iowa has been that we don’t have that forecast that are projected to be a contributor to earnings in the first six months of operation for this year. And I think Michael had reiterated in his commentary, his prepared remarks that we do see kind of a normal, what I would call Medicaid margin profile on a going-forward basis.

Yes. We typically have said that we always book at a higher level for the first three quarters and so, sometimes four. But it doesn’t mean it’s losing, it’s just – it may be breakeven – but a new business, we work with our providers, on evolution not revolution and so it is an educational process as we work through it, and they’re in our systems and things. So, we see it performing normally as all new markets do.

And is the membership you’re getting there kind of all above what your original expectations were or is it in line with those original expectations in your…

Chris, you want to comment on that?

Sure, sure. Thanks, Michael. We – as I think Michael mentioned in his remarks, we’re at about 254,000. We do expect to come in close to our anticipated membership of 300,000 by the end of the year.

So, we do see a growing and being a very effective market for us.

Great. Thanks.

Thank you.

The next question comes from Matt Borsch with BMO. Please go ahead.

Yes. if I could just ask the first question on the Texas RFP, The Texas Contract Awards, is there any visibility on the timing at this point?

Yes. They’ve indicated the end of August. But I’ve said historically, but I think my quote is, I don’t put my hand in fire for any stage in their timings.

Okay.

Because as they do what they want, we’re still confident that it’s going to continue to be a good opportunity for us.

Okay. Okay. And if I could also ask, you’ve talked about supporting price transparency, should I – should we take that to mean that you would support the initiative to have hospitals and insurers, essentially open up their books in terms of their negotiated rates and if so, do you think that would be something good for pricing and good for Centene?

I think, I don’t think that everything I’ve read about it. Historically, where they’ve tried those kinds of things, it tends to have a negative impact on pricing. All prices seem to rise to the highest level now dropped to the lowest level. I don’t think – I don’t think that would be good. What I’m talking about is, particularly in pharmacy, I think there has been an absence because of replacing things on transparency there and we are working aggressively the move to net pricing on the pharmacy product.

Okay. And I’m sorry, just last – one last one, which is, do you think that that you’ll see a substantial impact from the – you’ve touched on the HRA, the ability of employers to use HRAs for employees to pay ACA premiums. Do you think that’s going to have significant follow through?

I think that there’s an opportunity there. But I have not quantified it yet, but team hasn’t, but I think we see it as potential upside, having no downside risk to us. It’s only good, but we have the risk to see how it’s reacted and hopefully, in future calls we’ll be able to do more guidance on it.

All right. Thank you.

The next question comes from Steve Tanal of Goldman Sachs. Please go ahead.

Good morning guys. Thanks for the question.

Good morning.

I just wanted to dig into some of the specifics as much as you’re willing to share on risk adjustments. So, in the queue, it sounds like $238 million favorable reduction in payables, but then a net pretax benefit of $131 million and so two questions. First, the offset sound like minimum MLRs and RADV. So, we’d love if you could quantify those. But then getting back to the $0.05, it sounds like that number could have been a lot higher and I want to understand if there’s any – if there’s been a change, that’s sort of permanent in nature and the way you’ll accrue for this going forward. Does this mean that the marketplace business is more profitable essentially now that than you had been occurring for it? Just that how should we think about all that? Thanks.

I’m going to turn that over to our resident expert of risk adjustment. Jeff?

Yes, thanks. Yes, thanks. So, we previewed this obviously at the Investor Day said, we thought at the time, it was going to be more than $200 million, so $238 million is the number. I would say I would size the minimum MLR and the RADV as the two largest components of the offsets and primarily of equal magnitude. One thing to highlight just about RADV specifically is it gets finalized in August of this year, and this is the first year that they’re doing the RADV adjustment for the marketplace. And they’ve decided not to collect the funds with the RADV adjustment until 2021. And as a result, there’s really, there was no ability for us to offset the RADV adjustment in our minimum MLR calculation. Meaning usually, the MLR calculations, the last, right, so you would have a RADV adjustment that would then be calculated into the minimum MLR, but as this was the first year for the RADV adjustment, we were unable to do that. So, some of the RADV adjustment would have been mitigated in our minimum MLR calculations. But it wasn’t for this quarter, because of the unique circumstance. But I guess what I would say is, the Centene Forward program delivered good value and continues to do that on the risk adjustment side and I think that’s a good thing long-term.

And I just want to add this, I want to remind everybody that there’s two elements to risk adjustment, one that we control that’s how well we do a medical expense in our risk. But if somebody else has a negative, has a different than expected result, that impacts us and that’s outside our control. So, when you look at this, it’s not just how we’re doing, but what the total market in a particular product is doing? I think I’m telling you what you already know.

Yes, absolutely. And I guess just the $238 million; it’s pretty sizable on a percentage basis. So just over the last sort of follow-up phases that you guys expect to make any changes to the way you occur or is it going to be consistent going forward?

Again, I mean, we were following GAAP, right? So, our job is to make the best estimate at the end of each quarter and at the end of each year. And that’s what we’ll continue to do. So, yes, if we have historical information that indicates that we’re performing better than we would absolutely include that information into our estimates.

Okay. Thanks a lot guys.

Thank you.

The next question comes from Dave Windley with Jefferies. Please go ahead.

Hi. Good morning.

Good morning.

Thanks for taking my question. I wanted to follow up on MLR just with a cadence question. I think the first half; MLR is up about 120 basis points year-over-year. The guidance implies as the second half would be up a little less than that. Your update on exchange sounds like that drags the back half of the year up a little bit. So, I wondered kind of what’s the offset that makes that year-over-year change smaller in the second half is it’s Fidelis, is that, is that it exclusively or are there other factors? Thanks.

Well, I think if you’re comparing year-over-year first half to second half, obviously, Fidelis is a change, meaning we did not have that in the first half of last year, right? And we do have Fidelis in the first half of this year. And as we’ve commented, they were running higher HBR than the Centene-based business when we did the acquisition. So that is definitely a driver.

And then just quick follow-up on a separate topic. There are, Michael, some enrollment moving parts sequentially in both your TANF/CHIP and ABD/LTSS categories. Could you describe what some of the moving parts are there, and then is the international line now just the change in the ownership base in Ribera Salud? Is that what drives that that addition? Thanks.

Yes. I’m going to – I’ll start and then Jeff pick up. Obviously, TANF are allowed aslong-term care et cetera. Now, we’ve got a new business in the east side of Pennsylvania and other things. So, there are moving parts affected by new businesses coming in and all these categories. And so that’s going move it to move it up, down around, but over time will smooth out. Jeff, do you want to pick up on the second part of that?

Yes. On the second piece, your spot on, when we took control of the Ribera Salud, we’ve included those members now, in our membership reporting tables. So that’s the change there.

Okay. Thank you.

The next question comes from Peter Costa with Wells Fargo. Please go ahead.

Thanks for taking my question. Most of my questions are asked and answered. But I might like to understand a couple of details. First off, what are the incremental startup costs in the fourth quarter from Oregon? And second, what are the changes to your reported earnings, revenues, MLR, and minority interest line for Ribera Salud and the change in ownership there?

Yes. So, first question that there were – there are costs obviously associated with the Oregon startup and we had a placeholder in our original startup cost guidance. So, it fits well within what we’d already previously communicated. And then the second thing when you’re talking about the consolidation, now obviously, we would – the net earnings impact is in theory the same other than we have more share of those earnings. But now, we will include the revenue and we’d had that in the guidance, because we had a – we knew this was – acquisition was coming. So, we’d already had that the previous guidance.

Okay. Thank you.

The next question comes from A.J. Rice with Credit Suisse. Please go ahead.

Hi, everybody. First off just to ask about the – an update on the PBM side of the business. I think Mississippi and Nebraska, you’re rolling out RxAdvance. Any learnings from that? Maybe talk about the cadence of further roll outs there. And I know RxAdvance is talking about additional capabilities that they have care management help, operating efficiency help. Are you exploring any of that? And what kind of opportunity might that be?

I’ll ask Brandy and Kevin to pick up on that. Brandy?

Hi, A.J. It’s Brandy Burkhalter. So, we are currently live in six states with just over one million lives on the RxAdvance platform and very pleased with our progress in what we’re seeing today. And we look forward to, I guess, exploring the new things that RxAdvance platform allows us to do. And so we’ll have more to come in the future – our future calls, but very pleased with the progress today.

Yes. If I could just amplify a little bit with brandy had said. this is Kevin. I think one of the core learnings that we’ve had is the importance of engaging independent pharmacies, very early on in the process. So, we get out to the IPA, the independent pharmacy association early. We talk about what we’re doing, why we’re doing it, and what the new website is going to look like? Get in their newsletter, things of that sort. So that’s been a core learning.

Okay, great. Now, you’re coming up on a year with Fidelis. I know when that deal was originally struck, there was an expectation of improving the medical loss ratio or trend, but also may be, given a little bit back in the G&A area, but that positive. Can you talk, maybe as you look back over the last year, has it developed as you expected? Are you ahead of plan, but a little bit behind, and how much is there still further things to do once you anniversary this?

Yes. this is Jeff. And it’s – I think Michael has mentioned this previously, but it’s been a very good deal for the company. It’s performing in line with expectations. We’re capturing the synergies that we thought we would and I would see the initiatives and what we expected at the beginning where we were going to invest more G&A dollars to lower the medical costs have actually have occurred. And so we’re pleased with the performance and I think there’s still more opportunity for continued improvement and we’re working on those actions as we speak.

Okay.

Hey guys. As commented before that if we could find more Fidelis, I do one in the morning and one in the afternoon.

Okay, okay.

Yes. Absolutely.

Just the last question. This guy has raised by one of your larger competitors that already reported the question of a prior period development. You don’t specifically put that in the press release at least overtly. Any comment about relative to a normal quarter prior period development and that you realize this quarter relative to last year first quarter?

It’s been normal. Jeff, you think…

Yes. it’s been normal. I mean A.J., we’ve talked about this before. I mean what we really focus on is the consistency, right? Of development. Meaning, we have a consistent process, we use claims received, we use an impatient validation methodology. So, our methodology is a little unique compared to others in the industry, but we look for consistency and I think ours has been consistent for a long time.

Okay, great. Thanks a lot.

The next question comes from Gary Taylor with JPMorgan. Please go ahead.

Hi, good morning. Most of my questions answered. So, just two quick follow-ups. It sounds like from the commentary, this is correct, but I just wanted to confirm it still on, in Spain, it was 50% ownership before, but it was not consolidated in the financials and now at 19% or wherever you are – it will be, is that correct?

Yes, that’s correct.

That is correct, yes.

Okay. And then just my other one, just going back to the exchanges and certainly acknowledging your commentary that you thought, margins would normalize to some degree after 2018. we saw in the first quarter when we look at the stat filings that, that the loss ratios and exchanges up about 300 basis points. So, when we get a chance to see that again for the 2Q, is that going to be a pretty consistent trajectory or should we anticipate based on some of your retention comments that maybe that’s up a little more?

No. I guess what I would say is, I think it will be up. The other thing you have to realize is when you’re looking at there’s a difference between the statutory and the GAAP HBRs that we talk about. So, that’s all I would highlight. But yes, it will be up on a year-over-year basis.

Okay, thank you.

As expected – go ahead.

Go ahead. Sorry.

No. That’s it.

The next question comes from Justin Lake with Wolfe Research. Please go ahead.

Good morning.

Thanks. Good morning.

Good morning.

Thanks. Good morning. First, just a question on exchanges, I appreciate the comment on the 2020 membership growth; I wanted to ask about margins. Should we expect margins to normalize lower again in 2020 or do you see the current margin is sustainable into next year?

I think when you look at margins; it’s going to be a puncture of the business you continue to attract, how long you retain your existing membership? There’s multiple variables there. And what’s important to me, and I said this though, we talk about a 5% to 10% range. We see nothing that’s going to change that. It’s going to move up and down within that range based on retention, on the membership, you attract, a series of things and that’s to be expected in any insurance business. Now as it grows and as you keep people longer, you’ll see some leveling off of it. because they’re being managed or under control, but – in the law of larger numbers, such as price. So, I guess going into as we look at 2020, we’ll give more guidance in December, which is our standard factors versus try and get into too much at this stage and we’ll have one more history at that point to understand what our retention is? What the membership is? I remind you every year, we’ve retained 80% of the previous year’s membership. So, all those factors come into play, Justin.

Sure, that makes sense. Maybe, another way to ask it, if you’re saying 5% to 10% is a reasonable range or margins, and obviously, we could pick the midpoint of 7.5%, because this year, if we think about 7.5% is the kind of midpoint of normal? Would this year be below or above that midpoint?

Well, we don’t, we don’t – I’m not going to get into that to that level of detail, because once again, it’s a very large business and it’s a growing business, it is – and we started getting that by night. We’re losing sight of what this total $75 billion, soon to be a $100 billion company. So, you have to look at it in a totality and we don’t look at it and say is it going to be 8%, 8.2%, 8.1%. We look at the totality of all our businesses and we beat from operations by $0.02 and that’s kind of the way we look at it, Justin.

Totally reasonable. Okay. And if I could just ask a quick follow-up on the MLR, you took up the guidance as we – as you mentioned by 10 basis points, just trying to figure out where that is coming from, the consensus was 86.3% this quarter, but I know you don’t buy quarterly. So, we could have clearly gotten it wrong. I’m just curious how the quarter that MLR looked versus your internal expectations. Was it – it was the 86.7% in line or was it a little bit higher or are you taking off the back half of the year, because of the higher retention rate? And really, the second quarter was fine relatively…

No, it was – yes, I mean versus our expectations, it was in line. I mean the marketplace business was in line. I mean I that’s our view.

So, 86.7% is pretty much where you had expected it. And the 10 basis point guide up for the year is really just taken up the back half of the year for higher retention. Is that the way we should think about this?

Yes. that’s correct.

Okay.

Because remember, I mean Michael explained this at the beginning. Remember, there’s deductibles and maximum amount of pockets, right? So the longer – you can do the math there.

Sure. Maybe you could just tell us what is – like, the member that drops off in the middle of the year that you typically see, what’s the MLR on that member versus the MLR of someone else?

Justin, we have 1.9 million members. You want to tell me which one you’re thinking about? I mean, seriously, [indiscernible] but I mean, you think about it, 1.9 million members. One could have an MLR of 72%. One could have an MLR of 85%. I mean, it’s just – there’s no way of doing that.

All right. I leave it there. Thanks guys.

Thank you.

The next question comes from Ralph Giacobbe with Citi. Please go ahead.

Thanks. Good morning. Just wanted to clarify quickly. The incremental benefit from risk adjustment comes through the MLR, right? So it benefit ratio by about 20 basis points this quarter, is that fair?

You’re correct. It does come through the MLR as a component of revenue, right? It’s a revenue adjustment.

Right. Okay. And then second question, maybe just – or back to the exchanges here, but a little bit of a different angle. Can you talk about the provider networks on the exchange at this point, how that’s kind of evolved over time of you sort of adding or narrowing offerings? And then, I guess more importantly, can you help us in terms of the annual rate bump to providers? Is that similar to kind of a composite Medicaid rate that you typically see in that low-single digit range? Or is it more like a pure commercial rate bump that maybe more in the CPI plus level? And maybe more importantly how that trended overtime? Can you give us a sense for that as you’ve obviously entered into new markets? Thanks.

Yes. That’s a lot there. So first, we’re not going to get into the provider specific rate increases for providers, right? But the other thing as I would say is, we continue to manage our provider network to offer competitive product and be successful and grow the business. And so that’s what we continue to focus on, and that’s what we continue to do, and make sure that our members have access to the highest quality care.

And I just might add. I’ve commented we’re moving more and more to these risk-based contracts and providers have managed the business. And it goes back to the old fashion managing your patient and do incredibly well with that because it puts in control how they’re practicing medicine. So we think there’s real opportunities, where providers will do very well in our business.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Neidorff for any closing remarks.

Thank you. And I want to – I just wanted to emphasize that as we sit here as a group today, we really feel very good about the business on where it is. It’s performing well. It’s firing on all 12 cylinders, and on balance, as you can see, there’s a growth, there’s people operations. We’re dealing with all the issues. And so we look forward to continuing to report what we consider to be very successful quarters. Thank you for your time and look forward to seeing you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.