Molina Healthcare, Inc. (MOH) Q3 2021 Earnings Report, Transcript and Summary

Good day and welcome to the Molina Healthcare Third Quarter 2021 Earnings 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 Joe Krocheski. Please go ahead.

Good morning and welcome to Molina Healthcare's third 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 third quarter earnings was distributed after the market closed 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 are listening to the rebroadcast of this presentation, we remind you that remarks made are as of today, Thursday, October 28, 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 third quarter 2021 press release. During our call, we will be making certain forward-looking statements, including but not limited to, statements regarding the COVID-19 pandemic, the current environment, recent acquisitions, 2021 guidance, 2022 premium revenue outlook, our embedded earnings power, and our longer term outlook and expected EPS growth. 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 the risk factors listed in our Form 10-Q and our Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open up the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Joe and good morning. Today, we will provide you with updates on several topics: Our financial results for the third quarter of 2021; our 2021 guidance in the context of our third quarter results; our initial outlook for 2022 premium revenue and embedded earnings power; and lastly our growth initiatives and reaffirmation of our outlook for the future. Let me start with the third quarter highlights. Last night we reported adjusted earnings per diluted share for the third quarter of $2.83 with adjusted net income of $164 million and premium revenue of $6.8 billion. The 88.9% consolidated medical care ratio demonstrates solid performance while managing through pandemic-related challenges. The net effect of COVID increased our consolidated medical care ratio by 110 basis points and decreased net income per diluted share by approximately $1. We managed to a 7.3% adjusted G&A ratio reflecting continued discipline in cost management while making the appropriate investments in our business to fuel growth. We produced an after-tax margin of 2.3% meeting our third quarter expectations. Our year-to-date performance metrics highlighted by an 88% MCR, a 7.1% adjusted G&A ratio and a 3.1% adjusted after-tax margin were all squarely in line with our nine-month expectations, despite the significant COVID-related impacts we experienced, totaling $2 per share year-to-date. And we accomplished all of this as year-to-date, we generated approximately 50% year-over-year premium revenue growth, successfully integrated businesses, representing approximately $5 billion in annual revenue and continue to execute on our growth initiatives. In summary, we are very pleased with our third quarter and year-to-date performance. We executed well, delivered solid operating earnings and continued to drive our growth strategy. Let me provide some additional commentary, related to our third quarter performance. As we stated in the second quarter, year-over-year comparisons are less meaningful than they would be in a typical year, due to pandemic-related effects. Therefore, we will again focus our comments this morning on sequential comparisons. In the third quarter, we produced premium revenue of $6.8 billion a 3.3% increase over the second quarter of 2021, reflecting increased membership across our entire portfolio. We ended the quarter with approximately 4.8 million members, an increase of 142,000 members over the second quarter of 2021. We have now grown to serve approximately 800,000 additional members since the end of 2020 a 20% increase. Our Medicaid enrollment at the end of the quarter was approximately four million members, an increase of 53,000 over the second quarter of 2021. This increase was due primarily to the continuing suspension of Medicaid redeterminations, which has resulted in an increase of over 700,000 Medicaid members since the beginning of the pandemic. Our Medicare membership was 138,000 at the end of the quarter, an increase of 8,000 members driven primarily by organic growth as we follow our Medicaid footprint with an enhanced distribution strategy. Our Marketplace membership was 719,000 at the end of the quarter representing growth of 81,000 members over the second quarter of 2021, due to continued lower-than-expected attrition rates and membership additions during the special enrollment period which ended in mid-August. Turning now to our medical margin performance in the third quarter by line of business. Medicaid our flagship business, representing 77% of premium continues to drive premium revenue growth and stable earnings, as we execute on the underlying fundamentals. For the quarter, our Medicaid business achieved a medical care ratio of 89.6%, consistent with our expectations as the net effect of COVID was notable but manageable. Year-to-date our well-diversified portfolio of state contracts continues to perform well across all dimensions. Medical cost trend is stable and well controlled while we continue to deliver high-quality care particularly to high-acuity populations. The underlying rate environment is stable. Risk-sharing corridors continue to capture some of our outperformance, but many have been and continue to be eliminated. We are winning new state contracts and we are consistently finding attractive acquisition opportunities. Moving on to Medicare. Our Medicare results exceeded our expectations. For the quarter, our medical care ratio was 82.8%. Lower net effect of COVID including utilization curtailment and risk corridor true-ups combined with improved risk adjustment revenue served to drive a 490 basis point sequential improvement in the MCR. Our year-to-date Medicare MCR of 86.8% better reflects the underlying performance of this business and demonstrates our ability to clinically and financially manage the high-acuity lives in both our DSNP and MMP programs. Our Marketplace medical care ratio in the quarter was 91.3%. This reflects increased costs related to the net effect of COVID, the impact of the special enrollment period and the natural seasonality of the business. Recall that many of the new members we attracted were in regions disproportionately affected by COVID particularly in Texas. Moreover, we experienced higher non-COVID utilization by members enrolled to the special enrollment period, due to the relaxed eligibility guidelines. Our year-to-date Marketplace MCR was 84.8% and includes over 500 basis points of pressure from the net effect of COVID as well as 280 basis points of impact from the special enrollment period. We remain confident that we can achieve mid-single-digit pre-tax margins in 2022. We will accomplish this through actions already taken and changes to the environment that have already occurred. Specifically we priced to a higher medical cost trend. We redesigned our product offerings focusing on the silver tier in response to the increased premium subsidies and we note the conclusion of the 2021 special enrollment period and the more restrictive 2022 special enrollment eligibility rules. In summary, our third quarter and year-to-date enterprise results continued to demonstrate our ability to produce excellent margins while growing top-line revenue and successfully managing through the ongoing clinical and financial impacts of the pandemic. Turning to our 2021 guidance beginning with premium revenue. At our recent investor conference, we increased our 2021 premium revenue guidance to be more than $26 billion. With our third quarter results and the closing of Affinity, we are now projecting 2021 premium revenue of no less than $26.5 billion, which represents a 45% increase over the full year 2020. We are maintaining our full year 2021 earnings guidance of no less than $13.25 per share. This represents a $0.50 increase compared to the midpoint of our initial 2021 guidance despite absorbing an additional $1.50 per share from the net effect of COVID, revealing an improvement of $2 per share in underlying performance. Excluding the impact of the net effect of COVID, our 2021 guidance results in a 3.4% after-tax margin. This performance is consistent with our initial 2021 guidance and squarely in line with our long-term target margin expectations. We do, however, remain cautious in projecting our fourth quarter earnings due to a variety of exogenous factors, primarily related to the net effects of COVID across all of our businesses. Turning now to our 2022 revenue outlook. At our September investor conference, we provided the components of our initial 2022 premium revenue outlook that delivers premium revenue growth of more than $3 billion over 2021 guidance. Specifically $2.3 billion from already announced acquisitions including Affinity, which we just recently closed and the Cigna Texas Medicaid business, which we expect to close in January of 2022. Organic growth of $1 billion, representing approximately 4% growth across our current footprint. Approximately $400 million for our Nevada Medicaid launch, partially offset by a projected $500 million impact from redeterminations, which we expect to occur throughout 2022. Since then, we announced the AgeWell acquisition. Any incremental revenue from AgeWell in 2022 would likely be offset by pharmacy carve-outs in California and Ohio. A reminder, this 2022 outlook is prior to Marketplace membership changes and any additional strategic initiatives and acquisitions. Bear in mind that our Marketplace approach in 2022 emphasizes margin over membership growth. At this early stage, we expect 2022 Marketplace membership to be flat to down when compared to 2021. No matter where the Marketplace membership and revenue eventually lands, we expect the business to generate mid single digit pre-tax margins in 2022. Turning now to our longer term growth outlook. At our September investor conference, we laid out our strategy for sustaining profitable growth, a strategy that delivers 13% to 15% annual premium revenue growth off of our 2022 baseline. We expect approximately two-thirds of that growth to be organic, driven by a combination of underlying industry growth in a set of specific strategic initiatives that we described in detail. The remaining one-third will be derived from inorganic growth. The achievement, of which is supported by our current track record of M&A execution. Our profitable growth outlook as of sustaining our 4% to 5% pre-tax margins, harvesting the potential for operating leverage and accretively deploying excess capital to deliver a very attractive EPS growth rate of 15% to 18% on average overtime. The components of this growth engine are well established and working. Our year-to-date performance is testimony to the strength of that growth engine. Specifically, the Nevada Medicaid Contract Award speaks to our ability to win new state contracts to drive organic growth, and we continue to participate in additional RFPs we find attractive. And our M&A team continues to deliver. In addition to the Cigna Texas Medicaid business we announced earlier this year, this month we announced the acquisition of AgeWell managed long-term care business in New York for a purchase price of less than 20% of revenue. This acquisition complements our expanding New York footprint, serving high-acuity populations in the state. AgeWell serves approximately 13,000 members, with full year 2020 premium revenue of approximately $700 million. We expect AgeWell to deliver accretion of $0.15 to $0.20 per diluted share in the first full year of ownership. The M&A target pipeline is vibrant, and gives us confidence in continued execution. To recap our strategy, we remain committed to staying close to the core. We are a pure-play government managed care business. We believe the government managed care business has very attractive growth characteristics, demographically and politically. We aspire to provide high-quality care to our members, while driving to the lowest cost of delivery to produce attractive margins in this high-growth industry. We believe we have the right strategy and the right team to execute our sustaining profitable growth agenda. We remain extremely confident, that we can achieve our long-term targets of 13% to 15% premium revenue growth and 15% to 18% earnings per share growth. 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 continue to 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?

Thanks, Joe, and good morning everyone. This morning I will discuss some additional details of our third quarter performance, and then turn to the balance sheet and some thoughts on our 2021 guidance. Beginning with our third quarter results. The net effect of COVID negatively impacted third quarter results by $77 million or approximately 110 basis points of our reported 88.9% MCR. During the quarter, we experienced higher COVID-related inpatient costs that began to taper off late in September. While the total company net effect of COVID at about $1 per share was very similar to the prior quarter, the components and impacts vary greatly within our segments. Total company MCR is up 50 basis points on several segment-specific items. In Medicaid, the net effect of COVID was a cost of $49 million or approximately 80 basis points of our reported 89.6% MCR. Sequentially, the 60 basis point increase in our Medicaid MCR over second quarter was driven largely by this higher net effect of COVID in the quarter. Our year-to-date MCR is 88.8%. We continue to expect the full year Medicaid MCR to be in the high 80s. In Medicare, the net effect of COVID had a favorable impact of approximately $16 million or 180 basis points of our reported 82.8% MCR. Sequentially, the 490 basis point improvement in our Medicare MCR was driven by two items. Approximately 390 basis point improvement in net effect of COVID, which includes curtailment and corridor related true-ups; and approximately 100 basis points related to improved risk adjustment revenue. Our year-to-date Medicare MCR is 86.8%. We continue to expect the full year Medicare MCR in the high 80s. In Marketplace the net effect of COVID was a cost of approximately $44 million or 570 basis points of our 91.3% MCR in the quarter. Sequentially, our Marketplace MCR increased approximately 640 basis points reflecting several items. Approximately 90 basis points of higher net effect of COVID, roughly 250 basis points from normal third quarter seasonality associated with members reaching their policy deductible limits, and approximately 300 basis points from higher non-COVID utilization by members enrolled through the special enrollment period and higher expected risk adjustment expense. Our year-to-date Marketplace MCR of 84.8% includes over 500 basis points of the net effect of COVID, as well as 280 basis points from the impact of the special enrollment period. Due to the higher-than-expected impact we now expect Marketplace pretax margins for the full year 2021 to moderate to roughly breakeven. We expect our 2022 marketplace pretax margin will be squarely in line with our mid-single-digit pretax margin target. Turning now to our balance sheet. Our capital foundation remains strong. We harvested $127 million of subsidiary dividends in the quarter which brought our parent company cash balance to $703 million at the end of the quarter. We have ample capacity to fund the announced acquisitions and additional strategic initiatives. At our current margins, we generate significant excess cash and additional debt capacity. At our investor conference in September, we sized that recurring parent cash capacity at $1.4 billion annually. Importantly as we grow that cash capacity also grows. Turning to reserves. Our reserve approach remains consistent with prior quarters and we remain confident in our reserve position. Days in claims payable at the end of the quarter represented 49 days of medical cost expense, an increase of one day sequentially. Prior period reserve development in the third quarter was modestly favorable, but any P&L impact was mostly absorbed by the COVID-related risk corridors. Debt at the end of the quarter is 2.3x trailing 12-month EBITDA. Our debt-to-cap ratio was 48%. However, on a net debt basis net of parent company cash, these ratios fall to 1.6x and 40% respectively. These metrics reflect a conservative leverage position. A few additional comments related to our guidance. We increased our full year 2021 premium revenue guidance to no less than $26.5 billion reflecting the closing of Affinity and growth in all segments. Earnings per share guidance remains at no less than $13.25 per share which reflects the following: the net effect of COVID which we recently increased to approximately $3 per share for the full year, offset by our underlying outperformance and continued caution in forecasting utilization trends in the remaining months of the year due to the COVID pandemic. As previously conveyed, we continue to believe the incremental embedded earnings power of the company is in excess of $6 per share. This is composed of several items: the net effect of COVID of approximately $3 per share that should dissipate as the pandemic subsides; Medicare risk score disruption of approximately $1 per share; and as we obtain our target margins on the closed deals including Magellan Complete Care Passport and Affinity and the pending acquisitions of Cigna's Texas Medicaid business and AgeWell, we expect to achieve additional adjusted earnings per share well in excess of $2. As a reminder, this embedded earnings power does not represent 2022 guidance, but rather an accounting of the dynamic impacts that are temporarily suppressing our earnings profile. There are many other items that will affect our actual earnings guidance for 2022, including several possible scenarios for the impact of Marketplace membership, as well as the ongoing impact of the pandemic and ongoing strategic initiatives. In short, our 2021 earnings jumping off point into 2022 remains very strong. This concludes our prepared remarks. Operator we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Borsch from BMO Capital Markets. Please go ahead.

Yes. I was just hoping we could revisit the topic of the redeterminations and how you see that playing out next year? I know you talked at the beginning of the call about 700,000 members that you estimate have an added as a result of redeterminations. So I'm curious, as said, how many of those you think will roll off if not perhaps potentially more and overall timeframe?

Matt, we are forecasting that when the public health emergency ends and all the redetermination activity is fulfilled that we will end up with half the members we gained during the pandemic. And we say that, because the low-wage service economy has been rapid. The stimulus money is still out there. And time has shown that over past recessions, when Medicaid rolls have swelled, they stay increased when the crisis abates. So we're pretty confident that, membership in Medicaid post-pandemic will exceed Medicaid membership pre-pandemic. Now, over what period is a matter of judgment as you know the PHE is now planned to extend into mid-January, which means the first members with notice periods and membership notification periods the first members are eligible to roll off the books on April 1. So we have forecasted that we will be down $500 million in revenue in 2022, an additional $800 million in revenue in 2023. So the $2.9 billion of revenue gained will result in $1.6 billion of permanent revenue gain, $500 million in 2022, an additional $800 million in 2023, $2.9 billion moving to $1.6 billion.

Fantastic. Thank you.

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

Thanks. Good morning. My question is just on that embedded earnings power that you guys speak to. I'm trying to figure out the cadence of realizing sort of those embedded earnings and COVID feels a little bit like a step function potentially next year. So I'm just curious if there's big sort of step function impacts, or if this is more a series of many, many incremental benefits, and maybe just rough ballparks of sort of how we think about 2022, 2023, 2024?

Sure, Josh. A few of them are a function of time as our acquisitions mature. And then, the wild card obviously is how much COVID will persist into 2022. And so I'll turn it to Mark to give you an accounting of how we see the $6 emerging overtime. Mark?

Hey, Josh. It's Mark. Just a reminder on the $6, its $3 of COVID $1 of Medicare risk scores and as Joe mentioned $2 of the M&A. So let me add a little color to each one of them. On the Medicare risk scores we should see that $1 next year. Our team can get out there has gotten out there in a meaningful way to produce that $1 next year. So we feel good about that one. On the M&A there's $2. We think about that $2 in two categories. The deals that are already in our P&L probably have another $1 of upside to get to the target margins. That's Magellan Kentucky stuff like that. The other dollar is deals that we've announced or in the case of Affinity just closed but they're not in our P&L yet. About half of that dollar, we should get in the first year -- next year and the other half thereafter. So that's some expectation on the M&A. So then, you're back to the net effect of COVID. And that's the wildcard a bunch of drivers there. Sitting here at the end of October, I don't know that we're ready to give a view on how COVID progresses through 2022. But there's, a couple of things you can think about there. Part of the $3 is in our Marketplace business. And we've had some headwinds this year. We've clearly priced for those headwinds next year. So, we should see some reversal on that within the $3. The rest is going to be a function of what does the pandemic actually do? Do we have another variant? What is the non-COVID utilization and of course the corridors. Everything we know about the corridor so far is quite positive. We have several states -- four states that have terminated the corridors for next year and many that haven't given a formal view yet, but it looks very encouraging. So, a number of drivers around that $3 will we see some of it? I'm pretty sure. But I think it's just a little early to hazard a guess on how much.

Perfectly fair. And just one quick follow-up on the risk adjusters. I know you said you're feeling good. I think in your prepared remarks Mark you actually mentioned that you're seeing some benefit already from risk adjuster improvement. And I was curious how does that happen intra-year?

In Medicare?

Yes.

In particular a couple of things. So, CMS actually extended the window for risk adjustment submission this year which gave everyone the ability to get more work done and more adjustment in. So, that's certainly a good guy. The other thing in Illinois. Illinois expanded their MMP coverage to the full state. They were just a few regions before. So we went in and picked up a number of new members who are coming in really positive on a risk adjustment basis. So two nice drivers for us there.

Thanks.

The next question comes from Stephen Baxter from Wells Fargo. Please go ahead.

Hi thanks. I wanted to ask about the exchanges in your comments on refocusing on the silver plans. It does look to us like you might be pulling back somewhat on the bronze offering in some states. If that's right I would love to understand the thinking there and why you think pulling back versus repricing is the right approach? And just as you think about the comments around maybe flat to down enrollment for next year how much of your exchange book today is coming from products that you will offer next year? Thanks.

Sure. Yes our repositioning of the product portfolio is really a function of the enhanced subsidies. We can move and our brokers can move members from bronze to silver at zero premium and high subsidies with no additional cost to the member and they get a plan with a higher actuarial value. So, it's better for the member. From our perspective, silver is more flexible and easier to manage. It's easier to develop risk scores and there's more pricing flexibility in silver. So, we're going to emphasize more silver next year than we did this year. Our bronze/silver mix is about 55-45 this year and will be more skewed to silver next year. So that's sort of our mix currently. Clearly, the special enrollment period was another headwind this year. And with the change in the rules that now people eligible -- people that will be eligible are only below 150% of federal poverty means that the membership flows some special enrollment in the industry should be a lot lower. In our case, we estimate about half of what they were this year. We added 200,000 members in special enrollment this year. And with the cutoff at 150% of FPL that's likely to be at least cut half. So, we're forecasting that our membership will be flat to down off the 719,000 this year which means revenue will probably be flat to down. But no matter where revenue lands, it's going to be earnings accretive in 2022. We are very confident in hitting our mid-single-digit pretax margin target next year even on a membership base that's likely to be lower than this year.

Got it. And just as a follow-up to last one. I guess I assume that when you make comments about mid-single-digits that doesn't require the impact of COVID to go to zero. It doesn't require you to necessarily get back that entire 500 basis points. I'd love just to kind of hear about your thought process on how much of that you could continue to tolerate and still achieve the margins? Thank you.

On that clearly we're carrying 500 of COVID this year. I'm not going to get into our specific pricing assumptions but we clearly anticipate more of that headwind next year as well as just a little bit of what Joe mentioned about on the SEP, but we're pricing in a manner to hit that mid-single-digit pretax.

The next question comes from Michael Hall from Morgan Stanley. Please go ahead.

Hey, thank you guys. So, just a quick question on the 2022 embedded earnings. More of a clarification. It sounds like you mentioned greater than $6 EPS, which it feels like a little bit of an increase in prior activity, which may be coming from pending acquisition margins now well in excess of $2. Is that true? And are you guys seeing better margin performance on acquisitions?

I think, I'll turn it over to Mark, but yes as we add the acquisitions they're going to be accretive. We're buying them very efficiently. Many of these properties are underperforming. Our integration teams are hitting if not exceeding our accretion targets. So as we add these acquisitions they're going to be accretive. We wouldn't do them if they aren't. But yes, the AgeWell acquisition now that affinity is in the fold has served to sort of increase our forward look on embedded earnings. We still say it's $6 plus. And again how much of that emerges next year and into 2023. We'll wait until we give specific guidance on 2022 in February.

Got it. And just one more question if I can. On exchanges it sounds like back in your Investor Day you picked up 50,000 lives in line in August. It looks like you gained another 30,000 on top. Could you talk about what you're kind of seeing with special on loan period now having ended? And then just typical exchange attrition with the premium tax credit and maybe some membership recapture from redeterminations do you anticipate at some point returning back to normal attrition level?

Well, the special enrollment period ended in August. We believe that we'll see attrition between now and the end of the year. It will likely be lower than it was pre-pandemic, but we have 719,000 members now. We'll lose some and probably end the year maybe slightly below 700,000.

And remember normal attrition for us is about 2% a month. As Joe mentioned this should be a little bit less than that going through the rest of the year, but I think that's a fair outlook.

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

Thanks. A couple of questions. First, can you talk a little bit about the difference in COVID spread for the exchanges versus Medicaid. Obviously you've given a lot on the exchanges, but we think these membership populations is somewhat fungible I guess outside of the duals. But is -- I'm curious why you think that the exchange population is such have to be COVID cause versus the Medicaid population really not being there? And then my second question is just on California Medicaid with the potential we're going to see an RFP here soon. I was hoping you can give us a little bit of an update. I know on your business there in terms of -- I know -- I think you have some business that's direct and then some that's partnered. And how you think this RFP is going to shake out in terms of what the state is looking for? Thanks.

Sure. Justin on the marketplace and the COVID impacts there are really two factors. One is geography. Our marketplace business just happens to be in places that were hit hard particularly by the Delta variant Florida, Texas, California, Washington. So it follows the geography and follows our Marketplace footprint. The second, we believe is our marketplace population skews younger. Unvaccinated people that are being infected, but the cost of care on an episode basis is actually a bit lower. But the infection rate is high and the younger population that tends to be unvaccinated. So those are the two factors that we cite that seems to disproportionately affect our Marketplace business. On the California RFP, we believe we're very, very optimistic about our ability not only to hold on the business we have but to grow it. As you know we're very strong in L.A. We're very strong at Sacramento and San Diego. We have a nice business in the Inland Empire. We have a great reputation with the state. We perform well. We do all the hard work we need to do with respect to community involvement and charitable giving. We're in really good shape for the California RFP which supposedly at least the latest announcement will come in early 2022 for a contract date for 1/1/24. So we're in good shape in California. We're very optimistic about our prospects not only to maintain what we have but to grow.

The next question comes from Steven Valiquette from Barclays. Please go ahead.

Great. Thanks. Good morning, everybody. So with the list of action items you're taking to get the Marketplace MLR and the pre-tax margins back on track for 2022 versus 2021, among those pricing probably is the biggest lever. But for the other ones you mentioned, such as, just redesigning the plan offerings and the more restrictive eligibility rules is there any color just on the range of how much those might move the needle on margins? Like could those move margins in the hundreds of basis points, or is it mainly really about the pricing to move your margins by let's call it 500 basis points or so in 2022 versus 2021 in the Marketplace business? Thanks.

A little bit of both. I mean, we priced to a medical cost trend in Marketplace that was somewhat reflective of the increased baseline that we experienced this year impacted by COVID. Second, so we priced to an increased medical cost trend. Second, the special enrollment members were experiencing a loss ratio in the mid-90s. And if that membership – some of that membership will renew, some of it will go away. And then of course, next year, the special enrollment period will be targeted at folks with 150% of federal property level incomes are down. So we believe that, the special enrollment period membership will be half or less than half of what it was this year. So all of those factors combined put us in really good shape and producing our mid-single-digit pre-tax margin target for next year, but as I said, likely on membership that is flat to down over 2021.

And the only thing, I'd add there Steven is, with a big focus on margin rather than membership, we'll have a much higher component in our book of renewals. And the way risk adjustment works is we get much better scores on those renewals, once we've lived with the member for a year or two. So we derive better risk adjustment revenue, and certainly more confidence in the outlook of that revenue.

Okay. That's helpful. Thanks.

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

Hi, everybody. Two quick questions. One sort of talk around it on the Marketplace, but a lot of people came on board this year. You said and others have said it, during the extended SEP and it sounds like there may have been some adverse selection there. Do you think these people will re-up next year? Are you assuming the aggregate enrollment on the exchanges is actually down because some of these people won't renew proactively? And then my other question was I know you said, you're up 300 basis points sequentially in non-COVID utilization in marketplace. Can you comment on where you are in the non-COVID utilization relative to 2019 or pre-pandemic or baseline whatever you want to do? And Medicaid, Medicare and I guess even that basis in Marketplace, if you don't mind?

Sure. I'll try to parse through the various questions. On the first one, we did assume in our pricing that some of the SEP membership would renew, and therefore increased the cost trend that we included in pricing to accommodate that. Now, how many actually do renew and how many just joined because of an episodic health care condition and will leave, we'll have to wait and see. But we did price as though some of those renewal members – some of those SEP members would renew, and we think we've captured that in the medical cost trend we've included in our pricing.

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

Hi. Great. Thanks. I just wanted to go back to $3 COVID impact. I just – I've heard a lot of companies initially sized the COVID Impact number, and then slowly walk back kind of how we should expect it to come back or when we should expect it to come back or almost, if we should expect it to come back. And I just wanted to hear how you guys are thinking. It sounds like the Medicare risk assessment number is relatively clear, but I just want to make sure there's no issues about reinvesting some of that or something like that, so that the net number might be lower. And then, if we should expect you guys to continue to kind of that number for us as we head into next year, and give us an update on where we are versus that $3 number, or does that just get hard to do and you're not going to be breaking that out for us?

It's – I'll answer the first part of that Kevin, and then I'll turn it to Mark. It's really difficult, because even though our COVID results quarter-to-quarter costing us $77 million and $1 per share seem like it was stable. The stories are quite different. In the second quarter the COVID direct cost of care were less than $100 million and it's twice that in the third quarter. And what ends up happening is when the COVID infection rates are really, really high and it's really intense, you get this counterbalancing impact of utilization curtailment. People fear of contagion of going in for services, hospitals and treating these COVID patients and can't accept discretionary and elective procedures and the like. So the third quarter, actually was one of our highest quarters, if not the highest quarter for the COVID, the direct cost of COVID-related care, but significantly offset with utilization curtailment. And then the corridors the risk-sharing quarters just kind of title through on a very stable basis. It's going to follow the infection rate, which makes it very hard to forecast. As we sit here today, we hope that Delta variant is over. We hope there are no additional variant, but we just don't know that yet. And so as we get closer to February, when we announce our fourth quarter results, we'll probably have a better handle. We will have a better handle on what we think COVID will do in 2022 and we'll announce it then. But the quarter-to-quarter results seem stable on a net basis, but the components are quite volatile, and it just follows the infection rate.

And just to build on that Kevin, then what you have within what we call the net effect of COVID is the curtailment and the direct cost of COVID that Joe talked about. As a company, those two have worked in tandem so far, but you'll have to take a view on that next year on how this COVID evolved. And do we continue to see curtailment as the offset to that. We all need to take a view on that going into the new year. And then lastly on corridors, that is a component of our total net effect of COVID as well. As I mentioned earlier, we're optimistic that many states have already announced they won't have corridors in the new year, but how much of a continued drag will we have in some of the other states, remains to be seen but we're optimistic on that one. So that was $3 of the embedded earnings around the net effect of COVID. $1 you mentioned, on Medicare risk adjustment. As I mentioned, we continue to be very, very positive on the development of that $1. Remember, the pieces that we gave, aren't guidance. They're embedded earnings, which along with other headwinds or tailwinds can emerge. Medicare is looking pretty good. We'll see that dollar emerge, but don't forget we'll have things like sequestration next year and a few other factors that could add additional headwinds and tailwinds, but we feel good about that dollar.

The next question comes from Scott Fidel from Stephens. Please go ahead.

Hi. Thanks. Good morning. Interested if you can give us some of your initial observations on how the 2022 Medicare AEP is progressing so far? And just interested in particular with a bunch of those new non-DSNP products that you rolled out for 2022, how those seem to be resonating in the market?

We think we're in good shape for growth next year. We're not giving a growth expectation on Medicare at this stage. But you're absolutely right, we launched some traditional Medicare Advantage products in some of our DSNP footprint to capture folks who had incomes that didn't allow them to be eligible for DSNP but were low income, using the same network, the same facilities and access to the same type of brokers who operate in those various areas. So, we're really optimistic about our growth prospects as we launched our MAPD products to low-income individuals and our expanded DSNP footprint and additional penetration in our existing footprint. We still do not have the market share that we think we can ultimately obtain in our DSNP footprint. So we're really bullish on the prospects during AEP this year, bearing in mind that we do get to enroll certain people throughout the year as well.

Got it. And then just as a follow-up, just interested if we can go back to the Marketplace, and just how you're thinking about the overall market environment for 2022, now that we have all the landscape data out, et cetera. I mean we can certainly see that your pricing is firm certainly relative to the market, as you've been talking about looking to regain margin. Clearly, from the market overall, a lot more issuers right in the market. Benchmark premiums are lower again next year. So, just interested in how you're thinking about the competitive environment and sort of the level of rationality for the marketplace next year? Thanks.

Sure, Scott. Our strategy is somewhat different than many of our competitors' strategies. What we're targeting are the working poor. We leverage our Medicaid network. We leverage our Medicaid network pricing, and our target market is fully or highly subsidized members. We are not targeting the mass affluent. That's number one. Number two, we did price this year to make sure that we hit our target margins of mid single-digit pre-tax. The way we look at this business is the revenue is going to float up and down with a fixed target margin at mid single digits. We will price for mid single-digit margins, and we'll let the revenue float up and down. The marketplace is a residual market. It flexes up and down with Medicaid eligibility. It's 15 million members nationally strong. We're in great shape in the markets that we choose to play in and our target market is somewhat different than the target markets for many of these new competitors. So, wherever revenue and membership plans for next year, it will be earnings accretive in 2022.

The next question comes from David Windley from Jefferies. Please go ahead.

Hi. Thanks. Good morning. Thanks for taking my question. Joe, I wanted to just kind of marry a couple of 4% together. Your -- in your Investor Day, you talked about in your long-term growth expectations for Medicaid kind of 4% growth on the like-for-like base presuming -- I don't think you talked in detail, but presuming some of that enrollment some of that's a little bit of rate. When we look at your assumptions around retention of the redetermination, you're kind of assuming the 375 on your base at the beginning of the pandemic. Also works out to be about 4% per year growth if the pandemic weren't to have happened. I guess, I'm wondering if the elevated retention of these pandemic lives, the redetermination lives is not a little bit of a pull forward on the future or a double dip. And just wondering if you could elaborate on your thoughts around the ability to continue to grow the base 4% even if you retain this higher level of redetermined lives.

Hey, it's Mark. I'll take that one. So, you're right. On Medicaid, we talked about the base growing at 4%, which is as you mentioned probably half and half between rate and membership growth. That's the market continuing to grow. Now what we stacked on top of that was the headwinds of redetermination. Joe talked through earlier how that was $0.5 billion in 2022 and another 800 million in 2023. So your question gets back to, does that dampen the 2% membership growth? I think it's where you're going. And we don't think it does, because at the end of the day the pool of Medicaid eligible population continues to grow. So yes, you have redetermination, which is addressing people over the last two years, which maybe have lost eligibility. But if the overall pool is growing and we believe it is, we showed a chart at Investor Day that shows every time the country goes through a crisis of one kind or another, these Medicaid roles increase, but they don't go back to where they were. They're sticky at maybe half the growth quite frequently. So we think that overall pool is growing. So we'll have a little bit of a headwind of people from the past losing eligibility, but the pool of new folks coming in and newly eligible continues to grow. So, we feel pretty confident in that outlook.

David I always say that whether redetermination is a headwind or a tailwind depends on where you're measuring it from. We like to think of it as a value creator, because we measure it from pre-pandemic. The Medicaid roles will be higher post pandemic that may work pre even though year-over-year there might be some choppiness.

Got it. Thanks. And just one more question on non-COVID utilization. Are you seeing signs of changing acuity as non-COVID utilization comes back? It's not a topic that's gotten discussed very much.

No. We -- in many of our markets and in many of our products, it appears to be business as usual, particularly as the Delta variant started to dissipate in late September into October. In August, the Delta variant was really intense and August utilization was very high and we saw some curtailment there. But again, it flexes up and down -- almost routinely flexes up and down with the intensity of COVID infection rate. So in many of our states and many of our products, the curtailment is no longer, but it flexes up and down with the COVID infection rate.

Got it. Thank you.

The next question comes from Gary Taylor from Cowen. Please go ahead.

Hi, good morning. Just a couple of quick questions. As you were talking about 2022, you laid out some nice potential tailwinds. Wondering if there's anything notable on the headwind side to talk about now? I know you suggested COVID's obviously an unknown. You talked about a couple pharmacy carve-outs that I wouldn't imagine are material to earnings. Otherwise, you would have mentioned it, but any notable potential headwinds we should be thinking about as we're updating models?

No, I think -- yeah, I would say we've made some judgments around redetermination. Certainly, how much COVID persists into next year that you've identified and then there's just the puts and takes of managed care. Are you capturing -- are you managing medical cost to your trend. But I can't think of an event-driven -- a headwind that is kind of event driven or situationally driven. Just managing managed care, but we have a proven ability to always manage our medical costs to the trend that is embedded in our products and the pricing of our products. So we're pretty comfortable that 2022 could shape up to be a very attractive year for us.

Thanks. And then my other question would just be how do we think about the roll-off of the COVID risk corridors impacting seasonality of margins and earnings in 2022? Should we think the earnings become a little more back-end loaded than perhaps they had been pre-COVID?

Well, four states have eliminated them. Many of the states that are on January one rating cycles have not yet declared whether they will continue them or not. The only one that actually is formally continued into next year is in Mississippi. So it's hard to say. As they're announced either to be eliminated or to persist and whether they persist for a full-year or half year is just largely unknown at this time. So I think your point, is a correct one. It -- whatever happens we'll likely expect our quarter-to-quarter results next year. Whether it's back-ended or front-end loaded, I don't know yet, but the only corridor that actually has been announced that persists into 2022 because their state fiscal year straddles the calendar year is Mississippi.

Okay. Thanks, Joe.

And our last question comes from Mike Newshel from Evercore ISI. Please go ahead.

Thanks. So you talked about the adverse selection especially in rolling period this year. Are you worried at all that you might see some similar adverse selection maybe to a lesser degree from the monthly special moment periods for low incomes? And I guess, in the same vein for the Medicaid lives subject to redetermination that you mentioned, would you expect differences in the acuity and margin profile of the half you expect to keep versus the half it goes?

No. On the Medicaid, I'll answer the Medicaid question, first. On the Medicaid side we're pretty comfortable that wherever membership goes, how much reduced membership there is because of redetermination, the margins that we're experiencing on the population should be thought of as our portfolio averages. There's actually very little evidence that the acuity of the population shifted all that much. And if it did, some of the states enacted retroactive acuity adjustments that are already embedded in our earnings and then of course, there's the corridors where any favorable experience is given back through the corridor and not through your rates. So we're pretty comfortable saying when you think about membership increases and decreases in Medicaid, due to redetermination we think of it in terms of portfolio averages. On the Marketplace side, we really increased the trend we embedded in the pricing of our product, which I think is demonstrated through some of the filings, you've seen where we really tried to capture not only the higher baseline due to COVID but the higher acuity on what we are experiencing very early in the special enrollment process. And that coupled with the fact that we should have fewer members coming into our membership roles in special enrollment next year. Again gives us great confidence that that mid-single-digit pre-tax margin is attainable. Operator?

There are no more questions in the queue. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.