Good morning and welcome to the Centene Corporation 2019 Fourth Quarter and Year End Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President, Finance and Investor Relations. Please go ahead.

Thank you, Brandon and good morning everyone. Thank you for joining us on our fourth quarter and full year 2019 earnings results conference call. Michael Neidorff, Chairman, President and Chief Executive Officer and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene will host this morning’s call, which can also be accessed through our website at centene.com. A replay will be available shortly after the call’s completion also at centene.com or by dialing 877-344-7529 in the U.S. and Canada or in other countries by dialing 412-317-0088. The playback number for both dial-ins is 10138090. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene’s most recent Form 10-Q and Form 10-K and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our fourth quarter and full year 2019 press release, which is available on the company’s website at centene.com under the Investors section. A reminder, that Centene will host its first quarter 2020 earnings call on Tuesday, April 28, 2020. And with that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning everyone and thank you for joining Centene’s fourth quarter and full year 2019 earnings call. I would like to apologize now for any residual cough you may hear as a result of some bronchitis I had a week or so ago. Before I go to our 2019 results, let me say how pleased we are to have closed the WellCare transaction on January 23. We are cautiously optimistic that the transaction would close early in the first half of 2020 and we are happy that this was the case. We are now a $100 billion plus enterprise providing healthcare services to more than 24 million members across all 50 states or 1 in 15 individuals across the nation. Having achieved this, we still have a long runway ahead of us with enhanced scale, further diversification of products and capabilities and greater opportunities for growth across portfolio. As we have previously disclosed, our planning assumption was to be ready to begin the integration by January 1. I am pleased to report that the integration process is well underway and teams were managing their various work streams. For example, we have begun to align 2021 bids for our Medicare business. In addition, we have activated integration plans in markets, where WellCare and Centene overlap, such as New York, Georgia and Florida. We remain on track to achieve our previously committed and communicated accretion and synergy targets. Most importantly, we are happy to welcome the WellCare team and colleagues to Centene. Let me now turn to a recap of Centene’s 2019 highlights. 2019 was another robust year for Centene. We delivered strong top and bottom line growth enabled by operational and commercial successes across our enterprise. We remain focused sticking to our business-as-usual approach. We were not distracted…

Thank you, Michael and good morning. This morning, we reported strong fourth quarter and full year 2019 results. Fourth quarter revenues were $18.9 billion, an increase of 14% over the fourth quarter of 2018. And adjusted diluted earnings per share were $0.73 this quarter compared to $0.69 last year. Now let me provide additional details for the fourth quarter. Total revenues grew by approximately $2.3 billion over the fourth quarter of 2018, primarily as a result of growth in the health insurance marketplace business, expansion in new programs in many of our states in 2019, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania, and our recent acquisitions in Spain, this growth was partially offset by the health insurer fee moratorium in 2019. Moving on to HBR, our health benefits ratio was 88.4% in the fourth quarter this year compared to 86.8% in last year’s fourth quarter and 88.2% in the third quarter of 2019. The year-over-year increase was attributable to the health insurance marketplace business where margins have normalized as expected from favorable performance in 2018. The increase was also due to the health insurer fee moratorium. Sequentially, the 20-basis-point increase in HBR from the third quarter of 2019 is primarily due to the normal seasonality in the health insurance marketplace business and a moderate increase in flu-related costs. The HBR for the fourth quarter was higher than our expectations, driven by higher-than-projected medical costs in our marketplace business and slightly higher than projected flu costs. The marketplace business continues to perform well and finished the year with pre-tax margins well within our targeted 5% to 10% range. Marketplace membership remains strong as we ended the year with approximately 1.8 million members. For 2020, we expect our peak enrollment to be approximately 2.2 million members, representing growth of over 10%…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Alright, great. Thanks. That WellCare commentary was helpful. But I guess I just want to see if there was anything else that you would highlight as far as the delay in the guidance, because I think you guys provided the guidance for Health Net before the transaction closed. So just wondering if there is anything else that kind of lowers your visibility or any other items that you really want to get color on before you provided maybe the proposed MA rates or anything like that, if you want to get a color on?

Yes, just a couple of things, Kevin. I think it’s just purely the timing of the closing the WellCare or the Health Net transaction closed around the end of March and their annual 10K audited financials were already out. And so, literally, I think, it’s just the timing of close. And I think you also have the fact that their audit is not complete, as well as the last step in the regulatory approval process in this transaction was the Department of Justice piece. So, again, we were operating as two independent companies until the time of closure.

That is a considerably larger complex number of states and businesses they’re involved in. And we want to – as you know, Kevin, we would like to do it methodically and carefully, so taking an extra 30 days or so seemed to make sense.

Okay. And then just my last question, the MLR on the exchange is coming in higher than you expect in the quarter. Can you provide a little more color as to why that was the case and why we shouldn’t be worried that that’s going to impact your 2020 outlook? If costs are higher, why don’t you flow through into how you price for 2020 so it came in after you priced?

Yes, I might just start and let Jeff pick it up. We want to remind you what we have said historically. One, it is falling within our guided range of 5% to 10%. Two, we had commented how we are keeping the members longer, and so that could have an impact on the MLR in the fourth quarter. But because of keeping them longerthe total margin impact is unaffected by it. You may want to go a little bit beyond that, Jeff?

Yes. I would say a couple of things, Kevin. I would say, we did see some higher non-inflation costs in the fourth quarter than we anticipated. But also a little less than half of the fourth quarter costs in the exchange business that were higher than our expectations was associated with the reconciliation of outstanding claims items that were settled and resulted in more favorable reimbursement going forward. And the majority of these were in states where we have MLR rebates. So – and then, the other thing is, we have mentioned – we did mention in our December Investor Day that we did expect exchange margins to continue to moderate slightly in 2020. So, I guess, what I would say is, you combine all that together, we’re still comfortable with where our 2020 expectations are for the exchange business.

It is a very strong business. And as I commented, all the demographics continues and still on the growth. And basically what people expected additional competition, etcetera, we continue to do well and it’s – and these one-time things Jeff talks about can have an impact. But that’s – that has a benefit going forward.

So, I guess just to make sure, you’re saying that some of these settlements were going to also prospectively impact costs upward, but there are markets where you have rebates. I guess if you had a settlement like that in Q4 and you’re paying rebates why was that?

No, no. What I’m saying is that we had costs that we incurred in the fourth quarter that will provide better reimbursement going forward.

Better.

And those, yes – and the more favorable reimbursement going forward and those costs that we incurred in the fourth quarter happened to be in states where we have MLR rebates, so there is some mitigating effect. And it reduces those MLRs 3-year rolling calculations, so it reduces the effect of the MLR going forward.

Alright, great. Thanks.

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

Hi, thanks. Good morning.

Good morning.

Good morning, Michael. The first one, just on the difference between first year at least breakeven versus missing the first three weeks. Should we assume that that’s actually a favorable thing in terms of, I think, about PDP benefit design or should we think of it as 2020 no material difference than first year post-closing?

Well, I mean that’s why it’s one of the reasons why we’re waiting, Josh, is you have to actually close the month of January. And as you’re well aware, there could be variability on the medical cost side. I think on the revenue side, you kind of know your members and you know the premium, but the cost side is what you don’t know. And so, one of the reasons we’re waiting until the beginning of March to give the combined guidance is just to get the actual numbers for January and do the proration math.

Okay. And then, how are you guys thinking about PBM opportunity on the legacy WellCare book? I don’t think there was a formal announcement. I know they were talking about making some changes or at least going through the process there. Now, it’s part of Centene overall, and I assume you guys will be instrumental in that decision making process. So how are you thinking about that?

Yes, I think let me – I’ll let Jeff give you the more specifics. But we said earlier that the PBM will be based in Tampa and Drew is going to drive that process for us. And we see some real benefits in the total purchasing power without having a consolidation, you can give more specifics.

Yes, Josh. I think they were in process on an RFP. I think they have concluded that process. Right now what I would say is we are in flight on the synergy analysis, obviously looking at their contracts and our contracts and all the PBM capabilities. And I would say harmonizing those to achieve the value that we are trying for in the synergies. So I guess that’s where we are. We have begun the process and we are in process on that now more to come in March.

Okay. Thanks.

Our next question comes from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yes, hi. Good morning.

Good morning.

One follow-up on your answer on the PBM question, you mentioned that WellCare concluded the RFP process. Can you just clarify did they make a decision on that or did they just concluded the review of the RFP process?

No, no. They have made a decision in that. I think they extended their contract with CBS for a period of 3 years.

Okay. Thank you for that clarification. And then just as we think about the MLR obviously you talked about the moving parts in the fourth quarter that impact your initial thoughts. So, should we think about kind of like the flu is a 20 bps impact? Do you think it was kind of like the difference between the high-end of your initial range versus where you came in? And then when we think about the impact in the first quarter and I know that you don’t guide to the quarter, how should we think about the flu continuing to weigh on MLR?

Yes, I guess a couple of things. I just bifurcate the marketplace versus the flu. Again, this is versus our expectations. I would say the marketplace was two-thirds of the variance with the flu being a third. So I think that gets you close to 20 to 30 basis points on the quarter. So, I think, you are close on that. As far as the flu for Q1, we will have to wait and see, one month is not a quarter and so we will have to see how flu costs pan out for the entire quarter. As you are well aware, we did talk about the effect of Leap Year and the additional day on the first quarter’s performance and I think we discussed that ad nauseam at our December Investor Day.

Our next question comes from Charles Rhyee with Cowen. Please go ahead.

Got it. Thanks. Sorry. Maybe one more follow-up on the PBM question, if it’s an extension for 3 years with CVS, is there any change of control provisions that would allow you as you do the analysis to consolidate the PBM operations sooner or would you have to wait for the three years to be over to really kind of roll something altogether?

I think there is certain flexibility that built into the contract. So, obviously, they knew they were in the middle of a transaction. And so, I think there is some flexibility in that. But again, we are doing the full analysis as we speak and more to come in March.

It’s really – and pricing with the amount of purchasing power we have will be very important.

Understood. Thank you. And then just going back to individual a little bit, I think you said that for the year, you are sort of well within the target range of 5% to 10%, but when we think about margin normalization over the near and medium-term, where do you think we are in the process? Do you think we are going to – where do you think we kind of stabilize out over the next year or two? Thank you.

Yes, I will kind of go back to our – what we said at our December Investor Day. A couple of things to just highlight, remember, we have always talked about 2018 was a very good year for the marketplace business. And what we saw in ‘19 is a margin – a pre-tax margin that was very consistent with 2017, ‘16, ‘15. So, we have seen very consistent margins since the inception of the exchange business. For us, the outlier is really 2018, which had an exceptional year. And so as we close 2019, I would say, margins were exactly – they are roughly in line with that experience meaning consistent with ‘17 and ‘16. So, we are still comfortable that in the 5% to 10% range. And I think we mentioned at our Investor Day that we saw them moderating slightly, but it’s not substantial. We don’t see a material moderation in margin from ‘19 to ‘20.

Great. Thank you.

Our next question comes from Sarah James with Piper Sandler. Please go ahead.

Thank you. So 2020 is broadly expected to be a more competitive year for exchanges. And I am wondering if you can tell us if you have noticed any difference on the impact that it’s having on market share ramp in new markets compared to expansions in past years?

I think I heard the same thing last year. And we grew 10% in a market that shrank 1%. And I think we have strong networks. We saw the continuity of our members increase by 2%. We saw the effectuation increase. So at every level and I said all last year that we know how to be competitive. It makes us better. And I think there is – the product is strong and our consumers recognize it, like the networks we have and we expect to be more than competitive ongoing.

Got it. And maybe you could talk a little bit about the boost that ascension and some of the JVs could give to Medicare’s growth. So should we think about that as potentially providing an opportunity to grow above market rates for Medicare?

So I think we are still working through and now that we are able to work with WellCare and as I say, we are going to be consolidating that and we’ll also be headquartered in Tampa that might poll in. And so we are working through that. They are working with us on the joint ventures. Those are things that are unfolding very nicely. They will take time. And I think the time to talk about the impacts they will have will probably be when we give guidance for 2021. And the team has had the full look at it, but we really see our trajectory changing with the input of the marketing and other capabilities that WellCare has demonstrated.

Thank you.

Our next question comes from Steve Tanal with Goldman Sachs. Please go ahead.

Good morning, guys. I guess on the RxAdvance and WellCare, I am sort of curious did WellCare have full visibility into the cost and benefits of RxAdvance before renewing with CVS and what should we view as that?

Well, we were – I want to be very clear we were very careful prior to the approval from the Department of Justice to operate as two very separate companies. And as we had no insight into their contracts and we were careful they didn’t have any of ours, because the rules of that are very clear and it’s the old story. You normally have to be honest and we prepared to be honest. And so we – they would had no insight into it.

Got it. Okay, that’s helpful. And maybe just one other on Centene Forward, wanted to understand how you guys are sort of thinking about in the context of earnings, do you expect at any point to sort of commit to certain net number or contribution and is that not ‘20 or ‘21 like just any color on that?

Yes, let me start. I think as we said from the beginning, we are really self-funding a lot of development in our systems and systems capability. And the name of the game going forward is that and that’s where our scale and size is $100 billion company is so important. We have – it gives us the resources to continue to focus on the systems that’s going to deliver the kind of performance and margin improvement in ‘21, ‘22 and going forward. And as we start to, let some of that fall to the bottom line, as such, we will be in a position to disclose that in a succinct way. But it’s – that so you have to cost a little bit like fingernails, you have to continually trim them. And we see this as incorporated in the company and it’s a continuous process of reducing costs, while improving the capabilities of the company and we couldn’t be more pleased with $500 million that we were able to achieve this past year and we see it continuing to grow in additional funding this year, which will just continue the next generation of systems work. And in fact, I am going to give just a little more color that we have – we were really bifurcating or trifurcating, I guess would be the word, our systems. We have that – we have a group that’s going to be maintaining the systems that work day-in and day-out. We have a group that’s going to be working on the transition, because there is a lot of transition with these systems, and I make no secret and they don’t either that WellCare knew they were going to be sold at some point. And so there’s a lot of little systems that’s going to take some time to transition. And that’s why we’ve said, it’s a two, three-year process to do it right and get it right, and we’re focused on that. And the third group are the advanced technology group. And these are the think-tank people, the people that have brought us things like Interpreta and others that give us real-time status for the physicians. They are going to take us to the next-generation. So that’s being funded by these savings.

Helpful. Thank you.

Our next question comes from Justin Lake with Wolfe Research please go ahead.

First, I just want to follow-up, one last question on the PBM. There was some talk by WellCare Group getting better economics potentially pulled forward into 2020 debt renewal, even though the contract doesn’t begin or doesn’t end to the end of the year, the original contract. So I am curious, if that is something we should consider that maybe 2020 could be - could have better PBM costs rather than 2021? And then, can you tell us if the strategy is to move Medicaid over to RxAdvance from WellCare Group early and then leave the Medicare PBM for CBS during the contract?

Yes, Justin, Jeff here. So, as I mentioned before, I mean, we are going through the process right now comparing the PBM contracts and all the capabilities that both companies have and rationalizing that for the synergy opportunity. And so, I am not going to comment today. I kicked that question to March when we provide full combined guidance, because then we will have the opportunity to have the benefit of visibility on both those contracts.

Yes and Justin, if I may. Just - if we think about, when you’re combining these two companies, we had multiple work streams that were developed during the period of time we are waiting for Justice approval, and that’s whether, its systems, and it is combining them. When you take the Florida and Georgia, they’re large companies, both sides combining them. And the things that we are doing there, and while we have divested some plants, we have obligations there to ensure a smooth transition of that membership. You put all that together, it’s very complex. So, we are just trying to take a - use the next few days to take a very careful view of it and get it right. We are not trying to duck anything, except, say, it just takes time when it’s as complex as this one. I keep telling people, it’s not how fast, it’s how well you do it.

Totally makes sense. I appreciate that. And then, just my follow-up is on the exchange medical costs in the fourth quarter. So, Jeff, if we think about the - you were above the high end of your range by about 20 basis points on MLR, so 80 basis points for the quarter. Can you give us some delineation in terms of how much of that was the exchange miss? Was it 50 or 60 out of the 80 basis points? Just trying to understand where exchange margins were in the quarter?

Yes, yes. I will kind of package everything that I’ve said together in one, maybe this will clarify everything. So, you’re right on the 80 bps. So, MLR for the quarter was higher than our expectations by 80 basis points. I said two-thirds of that was marketplace, one-third, I would say, is flu. And those are just rough right? That is - and then, of the marketplace piece, I said a little bit less than half was associated with these reconciliation of the outstanding claims where we effectively had medical costs in the fourth quarter that will provide a benefit going forward, right. And some of that was in states where we had MLR rebates. And so, there is an offsetting effect there, but it’s not a one to one because the MLR calculation is a three-year rolling calculation.

I want to restate it. Just if I may my simple non-financial, okay. In fact, when you look at what we did there, we had some states where balanced going things with issues because we didn’t have a contract with the hospital. We now have contracts with them. And we got those things settled, we got it right with them so we had the expense to settle those claims with those loops, but now going forward and these are larger states. Going forward in 2020, we are going to be in a stronger position because they’re now part of the network. And those kind of issues won’t be there. So it was really a onetime, get it right, and it could happen again just to be very candid. But I always view those things as that’s where the long-term comes in. We were in this and we continue to do very well in a long time. It will cost us a couple of bps here or there in the quarter. I am looking at 2020, and I am really pleased with what we see happening, particularly when I see the membership, the effectuation rate, the demographics, it is just a really great business for us.

Got it. Thanks.

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

Hi, everybody. Just on first, the comment about Medicaid rates, I think you came in, if I have got my notes right, into 2019 looking for a 1.5% increase. And I guess, today you are saying that you ended up with about a 2% all-in increase. And I am just wondering, is that mostly due to some true-ups around the research verifications or is it something else? And were there any reverifications of note in the fourth quarter? And you’re saying 1.5% for 2020, are there potential reverifications that can help you in the early part of 2020?

Well, I think – we said, the reveri – it is really moderating. And yes, we have had great success because of the real-time systems we have had in getting the states to recognize the membership mix and the acuity mix within it. We are never satisfied with the timing of how fast they make those adjustments, but part of it is, well, they say we have real-time systems, they have to wait and see what some others are doing that don’t have that real-time capability, and that can slow down the whole process. So, on balance, we were comfortable that the stage in the large states we are working with, we are going to get it right with us. And it is just a matter of timing. So, which quarter it fall was in, that’s a little more hard – that’s a little harder to forecast, but it is all coming together right there too.

No, I think Michael is exactly right. It is a timing perspective. We are not – there are some states that were still searching for rate adjustments heading into 2020. So, again, it is a timing issue, and we are still looking for additional rate adjustments in certain states for this effect.

Okay. But maybe, my other follow-up question would be, once you complete the WellCare deal, you said your pro forma, I think, debt to total cap would be at 39% as sort of your – where that’s within your target range, I believe. So, do you need some time to digest WellCare or are you back on the acquisition hunt if something comes available that’s attractive to you?

Let me comment. One, the 39%, we still determine the proceeds of sale, and we are looking at both stock buyback and retirement of debt. So that will help. But I guess, I have to respond to this and say, we are not going to look at anything serious in large. And so, we are really comfortable that the trade this transaction and the integration has taken place to a level that’s appropriate. But those people that know us know that we have an insatiable appetite. And so, I would say, as soon as – they also know we are balance sheet managers, and we look very carefully at that. So, I would say, as our balance sheet continues to strengthen, this gets integrated. And if we see opportunities, we will be back out there. But I have to emphasize what we said at our Investor Day, and I say it every chance, we are very driven by organic growth. And I remind people we had almost $7 billion of organic growth last year. So we are going to continue to focus on that and that’s our primary focus. And then, as we see new capabilities and things we can add, we’ll go in the M&A book. Does that help you?

Yes, that is helpful. Thanks a lot.

Our next question comes from Steve Valiquette with Barclays. Please go ahead.

Hi, good morning. This is Andrew Mok on for Steve. Just wanted to follow-up on the MLR and exchange commentary, it sounds like you’re attributing most of the MLR pressure to the exchange business. If we look back at full year 2019, how did Medicaid MLR perform relative to your expectations?

Medicaid in aggregate, I think Medicaid was within the range. It wasn’t – we would have called it out if it was a material one way or the other on the full year, when you look at year-over-year results.

And then, one clarification related to divestitures, you noted that the S-4 did not include divested business. That comment was referring purely to revenue, correct, your deal – your net deal synergies have always reflected synergies, correct?

Just specifically on the revenue line.

Okay, great. Thanks.

Our next question comes from Scott Fidel with Stephens. Please go ahead.

Hi. First question just on the new block grant proposal, I appreciate that you are still digesting that. And Michael, I know you gave some initial comments. Just interested – just that this sort of initial sort of stance here. How are you thinking about this in terms of this being more of a net sort of positive around the innovation opportunity that you mentioned or more of a net potential negative around the funding caps and potential risk to rates or do you think that there’s simply going to be some different moving pieces headwinds and tailwinds to this?

Let me – I don’t want to be very general on it because it is so early in it. But as we said, this is – this involves expansion, not the current businesses, is key and focused on the expansion of the area. Caps – block plans work really well in states that are not growing – and state of Oregon, it can have an impact, so various states will have various impacts. But as we look at it, we think – I am going to say that I tilt toward a net positive on it because it is giving the states some opportunities to be innovative. And as you know, we are very decentralized and our local plans have strong relationships with those states. And I think they will be in a position to be able to help the states with that and use some of our assistance capabilities and tests and model things, but it is limited to the expansion aspect of the business. So that’s key. So I think going forward, I am going to tilt to the positive side, but we are going to continue to work with it and help to make it better.

Okay. And then, for my follow-up question, I know there are bunch of different MLR dynamics discussed in the exchanges. Jeff, just interested in sort of where the thinking is right now on the risk adjuster payable, ending the year really two things in particular I just wanted to ask about one? One of – one of your peers had cited the weekly report that came out at the end of the year, and that had led them to make some adjustments to their risk adjuster assumptions. And then also just interested just in terms of those higher 4Q costs that you had in the exchange business, does any of that sort of flow through to the estimated acuity profile of your population relative to the market or were those just sort of other factors that don’t play into the risk adjuster assumptions? Thanks.

Yes, a couple of things. I guess, our risk adjustment was in line with our expectations. And when the 10-K comes out, you’ll see the total number. We have got roughly $1 billion of payable to the government on the books. So, it wasn’t –really a risk adjuster phenomenon for us. It was really just higher non-inpatient costs. And as you’re aware, we have to get those – we are estimating a significant portion of our medical costs. And so, we’ll have to wait for those claims to come in and look at the diagnosis codes and submit those for risk adjustment. And so, there may be an effect there, but it is too early to tell.

Okay. Thank you.

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

Yes. A question on how you are going to manage the company going forward. And I was interested in both what is the org structure you have got in place right now as far as, Michael, to you the direct reports? And then, as you think of management process, what’s the process you’ve got in place now for legacy Centene, legacy WellCare and integration and how do those differ?

Yes. I think, let me – from a management perspective, we laid out at our June Investor Day, the organization chart that we were working with us initially. And Drew is going to report to me to become part of my senior management team because of the increased focus on pharmacy at this point in time. Ken, in fact he should be here later today in his new role of markets and products he will help me to do that and bring that in place. But that is all been laid out. And we operate in what I call a partnership. And people have clear responsibility, accountability, the responsibility and the authority to manage their businesses. When you add a scale, we are – this enterprise is now international in scope, you have to do that. So it is very – the accountability is just – is very, very clear. So, going forward, in terms of the integration, as you raise it there is different work streams. The systems and I have commented on that, that’s going to take time and there is a group working on the transition of systems. WellCare was in the middle of transitioning some of their systems. We are bidding in another. So, that all has to be brought into play. The general measure, I think, Jeff explained to be on a general measure by July 1. So, that will all be in place and that’s in place. They will be moving to our form of – we have reserved calculations as that occurs and we are doing some of that now. We use date receipt. So all those things is different work streams for it, it’s coming together. We know who will be managing what markets and then control that and that’s moving through.…

Yes, yes, it does. And just as a follow-up as you spoke about, maybe not doing large scale M&A right now until this is digested, but obviously having an ongoing appetite for M&A in general. Could you talk a little bit about the priorities and talk to whether there are regions or particular capabilities in light of having the combination of both companies?

Okay. Well, I think it’s going to – once again, it’s we talk about capabilities. Some of that maybe systems and there are some smaller acquisitions we can make, because of our size and scale, we don’t have to disclose it. I have jokingly told people that we did one deal and the person we say, we don’t have to disclose him, because he said now my family is not going to be chasing me for some of this money. So I mean, there is some benefit there, but we do that type of thing. Two is the capability to see if some other opportunities come up nationally and internationally, we will do it, but when I say scale and size, when you are now a $100 billion plus enterprise, with $5 billion of EBITDA to bottom and the balance sheet that we have and the improved credit rating that we have. And what we are able to sell our bonds at and what our bonds are trading at it says that what’s relative and what can be done has changed a little bit from several years ago, but we will once again just focus on what’s the strategic value and it has to make financial sense first then strategic value and then we will look at the capabilities it brings. And I can’t go beyond that, because then I would be starting to tell you who we are looking at.

Okay, thanks a lot.

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

Thanks for squeezing me in here. Just want to belabor the point on the MLR guidance for the HICS business one more time just to make sure I fully understand what you are saying. You have talked about being in the range of 5% to 10%, but you have trimmed back that guidance into that range a couple of times now, so it seems like you are probably in the mid to the lower half of that range. You talked about for next year still some non-material moderation of that. So does that really imply that next year you are going to be in the lower half of that range that you have talked about for sure? Presumably the tailwind that you picked up from the risk adjusters being a little better as of the fourth quarter reconciliations doesn’t help you that much? And then finally, does this have anything to do with the Iowa Medicaid claim payments that you were delayed?

The Iowa we all know had some issues. We were culpable as some of those, they got our attention, it’s being fixed and we made all the progress you made and that’s kind of historic. And it’s not material we are going to get the funding. Is that a question there? On the medical loss ratio, I want to remind you that it will vary from quarter-to-quarter based on out-of-pockets, maximum out-of-pockets, a lot of different things. So what we are seeing is that on any given quarter, you will see some variation. Now, we also know that the last quarter, the year tends to be higher, because the maximum out-of-pockets have been met and sometimes people try to get some services and other things done. And Jeff commented that the inpatient was a little bit higher, but I expect some of that on balance, the 5% to 10% is a solid range. We are very comfortable with it. And in the first quarter, it’s going to be in the higher part of that range. In the last quarter, it could be in the lower part of that range, but on balance and we tend to – we love to be conservative. We love to under-promise and over-deliver where we can. And so we are saying, it’s realistic to say that as the business grows, there maybe a little moderation, but it’s still solid and it’s solidly in the 5% to 10% range, but if I say where then I am giving you more than we have historically – it serves no purpose. It’s great business.

Thank you.

Our next question comes from Matthew Borsch with BMO Capital Markets. Please go ahead.

Thank you for squeezing me in. Just a quick question about the group commercial business, I know it hasn’t been front and center for a while and I am curious what your thoughts are on the state of that business as you come into 2020, the intensity of competition there?

Yes, we have some of it in California. We have said we will maintain it. It’s good business for us. And I would say that all that’s under a strategic review.

Okay.

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

Alright, alright. Thank you.

Our next question comes from Michael Newshel with Evercore ISI. Please go ahead.

Thanks. Maybe just going back to the divestitures, thanks for the revenue number, but can you also make any comments relative to profitability and size of the proceeds and have you actually decided whether you are going to redeploy on buybacks or debt pay-down or is that still to be determined as you put the consolidated guidance together?

Yes, we were going through right now that analysis and that’s going to be a function of stock price as much as anything. And so stay tuned, that’s something will resolve probably Jeff over the next 30 days or so?

Yes, yes, absolutely. And then the other thing on the size of proceeds, $1 billion pre-tax, so $1 billion pre-tax is the proceeds and that – by the way that also includes statutory capital as well.

Yes, got it.

I think it was a fair transaction for everybody.

Maybe one more just sorry if I missed it, but do you have any update to marketplace enrollment expectations for 2020 now that open enrollment is over?

Yes, we said 2.2 million members peak.

Got it. Thanks.

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

Thanks. Good morning. First just a quick clarification, did you say the higher MLR was it non-inpatient? I think Jeff that’s what you said, I thought Michael, in my recollection said inpatient?

Yes, non-inpatient.

Yes, it was non-inpatient side.

And if you could just flush out when you say non-inpatient is that just elective outpatient, is it drug, just help us in terms of what areas popped to that magnitude to drive the MLR?

I think we just saw normal PCP visits. So, it wasn’t necessarily in the specialist category, so just higher doctor visits, is what I would say.

Okay, alright. Fair enough. And then just my quick follow-up here, any initial comments around some of the proposed changes for HICS in 2021? And I guess specifically around pulling tax credits for those who pay zero premiums if they don’t enroll and don’t update their income. I guess just trying to understand logistically do most update each year? So it’s a non-issue or how easy would it be for you all to sort of aim in making sure this sort of gets done and if you could just what percentage of your HICS enrollees pay zero premiums? Thanks.

Hi, this is – it’s Kevin Counihan. So, the payment notice just came out Friday as you know. We are still digesting a lot of those issues that you speak to. We have got broad diversity of folks within the FPL range. I think as you know though we tend to have the majority under 250, so again not trying to be evasive, but we still are just working through the payment notice.

Okay, fair enough. Thank you.

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

Thanks. Thanks for squeezing me in. So I wanted to ask a question on revenue, may seem trivial, but you were outside of your revenue range by about $400 million. It doesn’t seem like exchange retention is enough to account for all of that. I just wanted to make sure they weren’t any one-time benefits flowing through the revenue line?

No, I think – Dave I think, we mentioned in the – I guess in our December Investor Day that we thought of the Q3 call or December Investor Day that our fourth quarter revenue would be lower than our third, because of the size of the pass-through payments. And I think we did get a few pass-through payments in the quarter that kind of helped revenue. We don’t have great visibility on these from states and so they just show up. So I think our – we expected a bigger drop in revenue from Q3 to Q4, but we had $100 million or so in payments.

Okay. And then second question just again to go back to your headwind and tailwind commentary, I want to make sure I understand that, that is relative to S-4, but that your guidance both on to the earlier question about divestitures, but also in terms of timing of close that it would seem that those two items relative to what you would have baked into your neutral in year one and mid to high single-digit accretion in year two, that particularly the year one element of that, that those two things probably came out better than we expected, is that a fair conclusion, timing of close in divestitures?

Which two items came out better than we expected?

Timing of close and the magnitude of divestitures?

Yes, yes, but the timing of close, I mean, when we gave our numbers we are – the accretion target is a full year, right. So it doesn’t really matter when it starts, it’s a full year. And my point on the guidance is we are going to have to pro-rate January and that’s going to have an effect, right. And then if you just take the WellCare top line number that they were expected to hit for 2019 and you take 22 days out of that, that’s a sizable number.

Okay, fair enough.

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

Hey, good morning.

Good morning, Gary.

Hi. I wanted to – I had a clarification on that last point as well. So maybe I will try to put it a little clear, because I have had a few questions. So Jeff, when you had laid out some of the headwinds around WellCare, those are relative to ultimately the 2020 consolidated pro forma guidance you are going to give, those are not headwinds to the year one at least neutral accretion guidance?

Yes, yes – yes, that is correct, yes, yes, you’re correct on that.

Okay. I just had a couple of questions. My last one I wanted to go back to the exchange question just one more time and make sure I understood about – you had mentioned that some of the increased costs were in states where you were already up against the minimum MLRs that had some accruals. So effectively costs – additional costs you would have incurred in those states, I guess might have – would not have impacted earnings, because you had already – your margin is essentially already capped – your MLR is already capped and then consequently, moving into next year any improvement wouldn’t flow through to earnings, because again, your MLR at least is already essentially capped, if you are into the minimum MLRs. Am I understanding that correctly or is there a different point you were trying to convey on that part?

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

Right.

So to the extent we had cost in the fourth quarter and you are in a minimum MLR rebate, it’s not a 1:1, right and it depends on the magnitude of the prior year MLR rebates. And so when you go forward, if I had lower MLR rebate in 2019 that is a lower amount that I have to deal with in the future, right. So it’s not a 1:1. I mean, you could – if everything was equal per year, you could say it’s a one-third benefit. So, if we had costs in the fourth quarter, we would get a third of that back, but the math isn’t that simple, because every year is a different MLR number.

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

Yes. Well, I would say there is two things. Number one it’s better reimbursement, more favorable reimbursement for us going forward as a contracted provider, right. So that helps. And then yes, it reduces the aggregate level of MLR payable that you have and so thereby provides a benefit going forward.

Okay. Thank you very much.

Yes.

Our next question comes from George Hill with Deutsche Bank. Please go ahead.

Hey, good morning, guys and thanks for squeezing me in. A lot of my questions have been answered. I guess, I would ask one kind of philosophically on the Medicaid demonstration projects around the block grants. Do you guys in the pharmacy business feel like you are better off with the statutory rebate on the drug side or do you feel these guys feel like the business would be better served taking a formulary approach in being able to negotiate your own discounts and rebates? Thanks.

Well, I mean, I always – I’ve always liked the idea we are more masters of our destiny, right, but I think, when you have the systems we have and the capabilities where we are going, we have the flexibility to work either way. So, we will make our decisions as I have always said, based on the facts of what they are at the time and these are still issues under discussion and there is opportunities to influence some aspects of that we believe and that’s what we will do and it’s – we just take a very open-ended approach to it. And I am comfortable we will end up in a strong position at the end of the day.

Thanks. I appreciate the color.

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

Well, we thank you for your comments and thoughts today and the chance to clarify some of these things and we are looking forward to the March 4, as I recall that’s the date, Jeff, where we are going to be able to give you the full guidance and kind of set the baseline on what this combined company will be doing going forward. We believe it will be very significant. So, thank you and we will be talking to you again in March.

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