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Operator: Good day and welcome to the Molina Healthcare First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Geyer. Please go ahead.

Jeffrey Geyer: Good morning and welcome to Molina Healthcare's first quarter 2025 earnings call. Joining me today are Molina's President and CEO Joe Zubretsky, and our CFO, Mark Keim. A press release announcing our first quarter 2025 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 of you who listen to the rebroadcast of this presentation, we remind you that all of the remarks are made as of today, Thursday, April 24, 2025, and have not been updated subsequent to the initial earnings call. On 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 the first quarter 2025 earnings release. During the call, we will be making certain forward-looking statements, including but not limited to statements regarding our 2025 guidance, the estimated amount of our embedded earnings power, and future earnings realization, expected Medicaid rate adjustments and updates, our projected MCR, organic Medicaid and marketplace membership growth, our recent RFP awards, our acquisitions and M&A activity, revenue growth related to RFPs and M&A activity, potential Medicaid funding cuts or program changes, and our long-term growth strategy. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10K annual report filed with the SEC, as well as our risk factors listed in our Form 10Q and Form 8K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Joe Zubretsky: Thank you, Jeff, and good morning. Today, I will discuss several topics. Our reported financial results for the first quarter. Our growth initiatives and the related increase to embedded earnings, and our full-year 2025 guidance, which we reaffirm at $42 billion of premium revenue and at least $24.50 in earnings per share. Let me start with our first quarter performance. Last night, we reported adjusted earnings per share of $6.08 on $10.6 billion of premium revenue supported by strong operating metrics across all lines of business. Our 89.2% consolidated MCR reflects strong medical cost management and an improving rate environment. We produced a 3.9% adjusted pre-tax margin or 3% after tax, a very strong result. In Medicaid, the business produced an MCR of 90.3% in the quarter, which was in line with our expectations. As contemplated in our initial guidance, medical costs increased moderately due to continued utilization of LTSS, high-cost drugs, and behavioral health services, as well as seasonal illnesses, the impacts of which were mostly offset by updates in the new rate cycle. In Medicare, we reported a first quarter MCR of 88.3%, which was in line with our expectations. Medical cost trend was as expected and was adequately captured by rates and risk adjustment. Our strategy of leveraging our existing Medicaid footprint to serve high acuity, low-income Medicare beneficiaries is working well. In Marketplace, the first quarter MCR was 81.7% and was higher than expected. This was the result of prior year items related to final risk adjustment and membership reconciliations, as well as a higher new store MCR related to the first quarter results of our ConnectiCare acquisition. Excluding these items, the normalized MCR was approximately 77.7%, more in line with our expectations. Turning now to our growth initiatives, we continued our successful track record of winning RFPs in the quarter. In Medicaid, we successfully defended our position in Nevada, as we were awarded a contract to serve Medicaid beneficiaries in the 2 largest urban areas in the state. In our Medicare dual eligible business, we were awarded a contract in Illinois to provide a fully integrated dual eligible special needs plan. This win completes the full transition of our existing MMP members to an integrated D-SNP product in all of our MMP states for January 1, 2026. We project incremental annual premium revenue of approximately $800 million from this new contract and have added $0.50 per share to our embedded earnings. This contract win also moves us closer to achieving our premium revenue target of $46 billion in 2026 and at least $52 billion, which is the low end of our target range for 2027. With respect to M&A activity, our acquisition pipeline continues to contain many actionable opportunities as we remain opportunistic in deploying capital to accretive acquisitions. Embedded earnings have now increased from approximately $7.75 to $8.65 per share. This represents approximately one-third of our current EPS and serves to support our target future growth rate. Turning now to our 2025 guidance. Full-year 2025 premium revenue guidance remains unchanged at approximately $42 billion. We also reaffirm our full-year 2025 adjusted earnings per share guidance of at least $24.50 or 8% year-over-year growth. Mark will discuss a few of the changing components within our EPS guidance, a major point of which will be that full-year 2025 Medicaid rates are projected to be slightly higher than previously expected as states reflect recent cost trends in on and off cycle rate updates. Given that known fact, we also increased our outlook for cost trend, reflecting some conservatism at this early point in the year. Our 2025 guidance is a strong foundation off of which to grow and to realize the embedded earnings power of the opportunities we have already secured. Turning now to the political and legislative landscape. In Medicaid, we continue to believe that any changes to the Medicaid program in the near term will be marginal. The general perception is that Congress and the current administration will implement Medicaid program changes through possible combinations of various funding reduction approaches in order to meet federal spending targets. There are many credible estimates of the potential impact of these various approaches. We continue to believe that any impacts to membership volume or the acuity of the risk pool will be manageable and will not disrupt the earnings trajectory of our business. You are all well aware of the complex legislative process, which will ensue over the coming months to reconcile the Senate and House resolutions to a final bill. While we await a definitive legislative framework, we continue to believe that neither side of the aisle wants to see an increase in the number of uninsured, a significant reduction in benefits for those relying on government assistance or the inevitable related impact to providers. In Medicare, we are pleased with the recent CMS final rate notice for Medicare Advantage. In addition, the early read on states promoting the integration of Medicaid and Medicare bodes well for us having a significant Medicaid footprint and a competitive D-SNP offering. Finally, in marketplace, we remain confident in the stability of our membership and the outlook for the business, despite the various program integrity initiatives and a final decision on the enhanced subsidies, which would impact marketplace enrollment in 2026. Any impacts to membership have been contemplated in current year guidance and our future year revenue outlook. States have also communicated a willingness to allow market participants to update rates for 2026 based on the final resolution of the enhanced subsidies, which would substantially mitigate any related pricing risk. Our first quarter results and reaffirmed full-year 2025 guidance reflect our team's disciplined approach to medical cost management in an improving rate environment. Our revenue growth and pre-tax margin profiles across all segments remain consistent with our long-term targets, and we continue to harvest and replenish embedded earnings. As we take an early look into 2026, we are confident in the process for actuarial soundness and the adequacy of Medicaid rates. In reviewing publicly available information, state by state, we believe that the broad Medicaid market appears to need 200 to 300 basis points of rate in excess of trend to obtain some level of program equilibrium. If rate updates were to be made at that level, recognizing that all market participants obtain the same rate, Molina should be soon return to performing at 89% or better, perhaps also while paying into the corridors. Our businesses, while not immune to external forces, have been resilient in the face of many uncertainties over the past many years. The redetermination process is behind us. Any legislative changes to the Medicaid program are likely to be marginal and healthcare is generally less sensitive to economic cycles. Our 2025 earnings and growth profiles are solid and therefore we remain very confident in our ability to achieve our 13% to 15% long-term earnings per share growth target. With that, I will turn the call over to Mark for some additional color on the financials. Mark?

Mark Keim: Thanks Joe and good morning everyone. Today I'll discuss additional details on our first quarter performance, the balance sheet, and our 2025 guidance. Beginning with our first quarter results. For the quarter, we reported approximately 11 billion in total revenue and 10.6 billion of premium revenue with adjusted EPS of $6.08. Our first quarter consolidated MCR was 89.2% and reflects strong medical cost management and an improving rate environment. In Medicaid, our first quarter reported MCR was 90.3% and in the line with our expectations. As we expected, medical costs increased moderately due to the continued utilization of LTSS, high-cost drugs and behavioral health services, as well as seasonal illness. These were largely offset by the first quarter rate cycle, which came in as expected. In Medicare, our first quarter reported MCR was 88.3%, in line with our expectations. We remain confident in the pricing and benefit adjustments we implemented for 2025. The reported MCR also reflects the improvement related to our decision to exit MAPD in 13 states. In Marketplace, our first quarter reported MCR was 81.7%. The MCR was higher than expected and driven by 2 prior year items. Lower final risk adjustment and member reconciliation adjustments. Also note that the initial new store, MCR of ConnectiCare is as expected, running higher than target early on. Altogether, these 3 non-recurring items accounted for approximately 400 basis points in the quarter. Excluding these items, the normalized marketplace MCR was approximately 77.7 and reflects seasonality that was more in line with our expectations. Our adjusted G&A ratio for the quarter was 6.8, driven by operating discipline and the continued benefit of operating leverage. Turning to the balance sheet. Our capital foundation remains strong. In the quarter, we harvested approximately 110 million of subsidiary dividends, and our parent company cash balance was approximately 190 million at the end of the quarter. Our operating cash flow for the first quarter was 190 million. During the quarter, we repurchased approximately 1.7 million shares at a total cost of 500 million. Debt at the end of the quarter was 2 times trailing 12-month EBITDA and our debt-to-cap ratio was about 47. We continue to have ample cash and access to capital to fuel our growth initiatives. Days in claims payable at the end of the quarter was 46%, lower than normal. While our reserving policies remain consistent, the timing of payments can have quarter-to-quarter impact on reported reserves, as it did this quarter, as we had 1 additional claim payment cycle. We remain confident in the strength of our reserves. Next, a few comments on our 2025 guidance. As Joe mentioned, we continue to expect full year premium revenue to be approximately $42 billion. Within that number are a few moving pieces. We expect higher organic growth in our marketplace and Medicaid segments to offset the mid-year loss of our Virginia contract. Recall, we previously guided for this contract to carry through year end, but now we expect our membership to be reallocated to other MCOs mid-year. Our full-year consolidated MCR is now 88.8%. Within Medicaid, the full year MCR is unchanged at 89.9%. We are seeing rate increases slightly higher than we had previously expected as our state partners continue to update their actuarial data. These rate increases are offset by our outlook on full-year trend, which is now slightly higher and reflects our conservatism at this point in the year. Together, full-year rates and trends are both higher by 50 basis points and result in no change to the MCR guidance. Our MCR guidance on Medicare also remains unchanged at 89%. We remain confident in the performance of our Medicare duals and integrated product business. In the marketplace, we are increasing our full-year MCR guidance from 79% to 80%, which is the upper end of our long-term target range. This 100 basis point increase reflects the unfavorable non-recurring impacts in the quarter I discussed earlier. The marketplace MCR trajectory for the rest of the year is largely unchanged from our prior view. We continue to expect the segment to produce mid single digit pre-tax margins. Effectuation rates remain strong through the first quarter, and we are encouraged by early performance of new members added through the open enrollment and special enrollment periods. Our year-end outlook on membership increases by 40,000 to approximately 620,000 members and includes the estimated impact from income verifications and program integrity initiatives. We now expect the full-year G&A ratio to be approximately 6.9%, better than previously guided by 10 basis points, as we continue to drive efficiencies in our operations. We reaffirm our full-year EPS guidance of at least $24.50 per share. Within that number are a few moving pieces. Our EPS guidance now includes a $0.40 benefit from share repurchases in the first quarter; $0.30 from higher volumes in our Medicaid and marketplace segments, and $0.30 commensurate with the improved G&A ratio. These favorable items offset a $0.60 headwind attributable to the higher marketplace MCR guidance and $0.40 loss from the mid-year termination of our Virginia contract. We continue to expect earnings to be evenly distributed throughout the year. Turning to embedded earnings. Our new store embedded earnings are now approximately $8.65 per share, up $0.90 from our prior outlook of $7.75. This increase includes $0.50 from the recent duals contract win in Illinois and an additional $0.40 as we are now recognizing half of the Virginia contract loss in current year guidance rather than next year as previously expected. We expect one-third of this new store embedded earnings to emerge in 2026, giving us high confidence in our 13% to 15% long-term growth rate. This concludes our prepared remarks. Operator, we are now ready to take questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Stephen Baxter with Wells Fargo. Please go ahead.

Stephen Baxter: Hey, good morning, just wanted to start on the exchanges. I was hoping first, if you could expand what you saw on risk adjustment and also this member reconciliation dynamic, I guess specifically with member reconciliation, what exactly are you describing there and trying to understand better, why we should think about that as a non-recurring item and then just thinking about the rest of the year guidance on the [indiscernible] exchanges, obviously you called out and kind of 400 basis points of variance in the first quarter you're taking up the full year, I think by now 100 basis points. So, rest of the year feels like it's relatively on impact and just trying to understand kind of the continuing elements of what you saw in the first quarter and how much of that we need to think about continuing for the rest of the year. Thank you.

Joe Zubretsky: Stephen, the marketplace story is a very positive one. We did have non-recurring items in the first quarter, which elevated the MCR by 400 basis points. I'll kick it to Mark in a minute for more detail. Membership reconciliations, members that were not authorized to be in the plan, but we were servicing last year because they were -- they were on the membership roles. That was a scrub by CMS to eliminate members who lacked authorization, a one-time item. The other one-time item was a true-up to 2024 risk adjustment. The final piece, as typical for an acquisition, the MCR will be operating at the inherited MCR, which for ConnectiCare is in the mid to high 80s. We're still confident in bringing that down to our target to produce the full $1 of earnings accretion that resides in our embedded earnings. The marketplace story is very positive. We're going to end the year with 620,000 members, mid single digit margins, and still operating. Within our long-term range, albeit an increase from our previous guidance of 79%, now to 80%. Mark, anything to add?

Mark Keim: Yeah Joe, I think you got it. Let me just break that down a little further. The 400 basis points is about 40 million, and that breaks down pretty much a third, a third, a third on the things that Joe talked about. I'll add a little color to them. On the final prior year risk adjustment, I'm sure you're aware in marketplace, risk adjustment is on a relative basis, not an absolute basis like Medicare. So, it's right about now that we find relative to the other players exactly how we scored last year, and we were just a little bit less than we thought on risk adjustment when the final numbers came in. These are the weeklies. So that's a non-recurring, normal function of how we settle up risk adjustment. On member reconciliation, this is not FTR. This is members that were on the books last year that when they get their tax filings realized they had a policy and didn't know it. Sometimes that's administration issues, sometimes it's broker issues, but right about now is when we see those, because that's when the tax filings come due, we're pretty confident in that number, and that's a pretty final number for last year; you know, the good news is with all the integrity stuff going on, you're going to see a lot less of that going forward. And then lastly, as Joe mentioned on the new store impact of ConnectiCare that ran in the high 80s initially. We'll pull that down quick with the Molina playbook, but there's a little bit of noise in there that certainly pulls our reported MCR up. Roll those together, that's the 400 [indiscernible] we talked about.

Operator: And the next question comes from Andrew Mok with Barclays. Please go ahead.

Andrew Mok: Hi, good morning. In the prepared remarks, you called out higher assumptions for both rates and cost trends. Cost trend, it sounds like the rates is, on the Medicaid side sounds like the cost trend is on the ACA side. Do I have that right? And what exactly are you seeing on each of those items that is informing that updated assumption? Thanks.

Joe Zubretsky: Andrew, I'll give you a high level answer, then kick it to Mark. [indiscernible] clear on what we forecasted for the Medicaid business. We received rate updates in the first quarter, $150 million, which equates to 50 basis points on a full year basis. Those will nearly entirely impact Q2, Q3, and Q4 and did not have an impact in Q1. So, states are obviously recognizing certain cost pressures and updating rates both on-cycle and off-cycle to -- to compensate for it. The only reason we increased our trend estimate for the year is at this early stage in the year reflecting appropriate conservatism, we were not going to improve our Medicaid MCR by 50 basis points at this early stage. So, rather than let those rate increases drop through to our guidance, we offset them with a top side adjustment, if you want to call it, to medical cost trend until we see more in the second quarter. So, still holding serve on our 89.9% MCR estimate in Medicaid for the year, but the rates are moving in the right direction. Mark, anything to add?

Mark Keim: That's exactly right, Joe. So, on a full year basis, Medicaid guidance unchanged at 89.9%. The only thing that's different is our rate assumption is now 5% versus [indiscernible] for the full year, and our trend assumption is 5% versus 4.5% for the full year. And again, this is all a function of the known rates we've received going forward.

Andrew Mok: Got it. Okay, so it sounds like your forward expectations on forward rates has remained unchanged, is that right?

Mark Keim: No, our forward rates are slightly better, so we're raising our full-year guidance from 4.5% to 5%.

Andrew Mok: Right, but that's the rates you've already received and have visibility into. So are the forward rate expectations also higher? The ones that haven't been finalized.

Joe Zubretsky: We know rates on 85% of our -- when we gave initial guidance, we knew about rates on about 75% of our revenue. That's now 85%. So yes, there is an estimate in for -- September and October rate adjustments that we still have them at a very modest level. So, the 5% annual rate increase includes 85% known rates for the year.

Andrew Mok: Got it. Understood. And you called out seasonal illness in Medicaid, which sounds like flu. Can you tell us the impact that that had on the quarter? Thanks.

Joe Zubretsky: Yeah, we've sort of moved to the ILI definition that a lot of people have, which is largely flu at this point. We've not really given a normalized number, but I think the more helpful thing for you is we probably ran 10 million to 15 million hot versus what we might call normal. But again, we had that in our guidance, so that really wasn't a surprise to us.

Operator: And your next question will be from Josh Raskin with Nephron Research. Please go ahead.

Josh Raskin: Hi, thanks. I just want to ask on the exchanges, so just taking a step back, can you help us understand where the marketplace fits in your long-term strategies? I know you went through this with the Investor Day, but are there synergies or other, with the other 2 segments or value that comes beyond the gross margin contribution? And I understand medical margin dollars were actually up 20% in 1Q, but is there a desire to sort of bid to think differently about the annual volatility in that book at some point?

Joe Zubretsky: Josh, as we said in Investor Day, the product line is completely synergistic with our pure play, government sponsored managed care theme to our strategy as people income up and down from Medicaid into Medicaid expansion into highly subsidized marketplace, people are moving in and out of life circumstances often frequently, and having a product where we can capture the member for their lifetime or as long as they're in government assistance across a broad range of products is totally synergistic. In fact, when they turn 65, which 50,000 members of ours due every single year, we have a D-SNP offering that captures the agents. So very, very synergistic and attractive contributor to the profile of the business. We were earning nearly double digit pre-tax margins in the last 2 prior years. We consciously invested that excess margin in membership growth, while still targeting mid single digit pre-tax margins. We will grow the business at a rate that allows us to hit mid single digit pre-tax margins for the reason you articulated that it can be volatile when you bring on new membership, not knowing their cost profile and not having the benefit of risk adjustment means there is a cost to growth, and we want to manage that volatility. Mark, anything to add?

Mark Keim: No, I think that's well summarized Joe, you've sometimes referred to it as a residual market, because when other things in the economy go up and down, it sort of captures the excess. Therefore, there is more volatility, Josh, and what we've always been very clear about is it's a relatively small part of our portfolio. We will price for margin and let the volume fall where it does.

Operator: And your next question will come from A.J. Rice with UBS. Please go ahead.

A.J. Rice: Hi everybody. Thanks for the question. When you step back, you mentioned a nod to the Washington backdrop of all this chatter about Medicaid cuts adjustments, whatever. I wonder, is that -- are you seeing that in any way impact the discussions with states around rate updates or RFP processes or is what's going on in Washington and any uncertainty that creates having any impact on any of that.

Joe Zubretsky: No, A.J., I would say not. The rate discussions are pure, actuary to actuary looking at the actuarial data, and the real positive news about rates is the cost pressure are coming from cost categories that are very discrete and prominent in the rate models. LTSS rated separately, behavioral usually viewed separately, as well as high-cost drugs including GLP-1s. So, the cost pressures that the industry is experiencing are very highly profiled in the rate development environment. That is, it's a debate about cost trends, it's a debate about what's a credible baseline and a trend off that baseline purely has nothing to do with the -- the Washington debate about how far to pull back Medicaid. Same thing with the RFP cycle. The RFP cycle right now is actually at a low point. It was at a high point in the last 2 years where we did really, really well as advertised. It is $50 billion from 2025 to 2028 in total contract value. We have our eyes on a couple of very attractive opportunities, and the re-procurement cycle is actually at a low point as well, where we don't have a lot of re-procurements coming up in the next 24 months. But no, the dialogue in Washington is not causing any state to really rethink either the rate development process or when they re-procure their program.

Operator: And your next question comes from Justin Lake with Wolfe Research. Please go ahead.

Justin Lake: Thanks. Good morning. Question on effectuation rates, Joe, can you remind us what you're seeing there and then can you give us a ballpark on what the MLR looks like for those members versus the overall book?

Joe Zubretsky: Sure, I'll give you a high level answer and then hand it to Mark, but we've had a very successful open enrollment period in Marketplace, a very successful special enrollment period early on where we're sitting here with 660,000 members having ended last year at [400] [ph]. Our effectuation rates seem to be better or higher than many of our competitors for a variety of reasons. Mark, do you want to elaborate?

Mark Keim: Yeah, good morning, Justin. We are actually seeing pretty good effectuation rates, and you might be comparing that to what others have said in the market, and I can't really talk to their results, but I think we mentioned last time around we're either number 1 or number 2 in about 50% of our footprint. And part of effectuation is people rolling into the new cycle and seeing that their payments are maybe different than they were last year, which is a function of pricing. So, some of the folks that might be losing might be at different points on the pricing scale, and I think people through effectuation are staying with Molina or in the case of SEP coming to Molina. So, we're seeing good results on both SEP and effectuation. Now on the MLR, it's really too soon this early in the year to get a handle on that because 50% of the book is new, which is not an unusual phenomenon, but we'll have to see how that develops. And if you ask that question in the second quarter, I'll be able to give you a pretty specific view.

Operator: And your next question comes from John Stansel with JP Morgan. Please go ahead.

John Stansel: Great, thanks for taking my question. Last quarter you spoke to G&A being a little bit more front-loaded as you take on the IT costs for the $1 implementation cost in 2025. I think G&A came in nicely in the quarter, I guess. How are we thinking about progression for G&A this year and how we get to kind of 10 basis points lower than your initial expectation.

Joe Zubretsky: John, the G&A story is a very positive one for us. We focus on it with the same discipline and rigor that we focus on every dollar of medical costs. We've broken through the 7.0% barrier. We've broken through that, and I'm going to talk on a mixed equivalent basis because obviously mixed matters to the G&A ratio, but on a mixed equivalent basis we're comfortably in the high 6s. We think over time as we grow to the $55 billion of 2027 revenue target with our discipline or fixed cost leverage, we can move that down on a mixed equivalent basis into the mid 6s, perhaps even the low 6s. It's a very positive part of the story that's either going to improve margins over time in our investment thesis or serve to act as a hedge to any MCR pressure we might see over the long term. Mark, on the short term?

Mark Keim: Yeah, John, if you look at the model for the rest of the year, expect a pretty flat G&A trajectory across the year. We had a 6.8% in the first quarter. We'll have a 6.9% in our guidance, which implies pretty flat across the full year. What's maybe driving that we talked about more of the implementation costs up-front in the year, and that's true. It's a little more front-end loaded, but the back-end loaded part is always some of the marketing costs around the OEP within Medicare and marketplace that usually drive up G&A. So, you've got some different things going on, but I think a pretty flat G&A story through the year.

Operator: And your next question comes from Sarah James with Cantor Fitzgerald. Please go ahead.

Sarah James: Thank you. One clarification and then a HIX question. So just to clarify, when you moved up the Medicaid cost trend 50 basis points, was that pure conservatism or did you see trend data above your prior expectations? And then on exchanges, do you think that the pricing and benefit design changes or the new member mix could change your MLR seasonality on the HIX business?

Joe Zubretsky: Sarah, you heard my prepared remarks correctly. In the Medicaid business, we absolutely received rate updates of $150 million, which caused us to increase our full-year rate update from previous guidance of 4.5% to 5%. As I said, in our member month mix 85% of rates on our member months are known at this point in time, only 15% is an estimate, those rate updates will impact quarters 2, 3, and 4. Having known that, we then said, do we let that drop through to our guidance and drop our MCR guidance by 50 basis points, at this early stage and in this environment we decided not to. We saw no empirical evidence in the first quarter, which caused us to increase trend, the increase in trend from 4.5 to 5 to be commensurate with rates was entirely due to early in the year conservatism. We'd like to see how the second quarter experience emerges before making a final call on updating the Medicaid MCR for the full year. Your second question on HIX, can you repeat it, please? Do you have it Mark?

Mark Keim: I'll take that one. Hey Sarah, on the full-year trajectory of Marketplace MLR, we're a little flatter than normal this year or at least in prior years. First of all, we've got more new membership in SEP this year, so we're a little more conservative in our initial picks. But the other thing is, you'll see ConnectiCare improving through the year as new stores typically do. And then lastly, we've got a lower bronze mix this year and bronze tends to be a much more seasonal product, so a little bit flatter on the trajectory if you're modeling it.

Operator: And your next question will come from Joanna Gajuk with Bank of America. Please go ahead.

Joanna Gajuk: Hey, good morning. Thanks so much for taking the question. So if I may, given the discussions around trend by product, I don't think I heard you talk about, MA. I know you said that in the quarter sounds like MLR was in line with expectations. So, can you talk about anything that's maybe happening in your Medicare Advantage book and are you still expecting same trend for the year? I think you had said on the last quarter, an increase of 2.7% for the year. Thank you.

Mark Keim: Yeah, I'll take that one. So far, Medicare playing out much like we expected. We had guided to an 89% and we're still quite confident in an 89%. You're right in remembering the build trend was about 2.7% in our original number, and rates were just a little bit less than that. So far, I'm seeing utilization [indiscernible], all of those matters, as well as the Part D under the IRA, all of those matters pretty much coming in as we anticipated. And remember, that's a much smaller part of our book.

Operator: And your next question will come from Ryan Langston with TD Cowen. Please go ahead.

Ryan Langston: Thanks. I want to go back to A.J.'s question. I guess on M&A with sort of the backdrop uncertainty, reconciliation, enhanced subsidies, etc. I guess is that impacting the willingness of potential M&A targets to engage on a potential deal, or is it having any impact on the potential multiples just given we don't know where everything's going to shake out? Thanks.

Joe Zubretsky: On the M&A front, the pipeline is still replete with opportunities. Obviously the last one we announced was the ConnectiCare acquisition, but the pipeline is full. Our M&A team is actively engaged in analyzing core products, core markets, and attractive prices if the businesses are underperforming and in this environment, as you know, performance is a challenge in this environment. Some of these smaller single state single geography companies are struggling. So no, I would say that it's not casting a pall over the M&A activity. In fact, it might even be increasing some of the flow as some of these single state operators have seen how difficult it is to run a business. We have the benefit of 22 state diversification. Single state, single geography companies don't, so I would say it's almost quite the opposite. The pipeline is full of opportunities, and we hope to fulfill the commitment we've made that one-third of our forward growth rate as we said at Investor Day, is likely coming from M&A, bearing in mind that we're already at our $52 billion estimate for 2027, which is the low end of our range. We've got 18 to 24 months to fill that other $3 billion and while nothing's a lay up in this business, highly confident we're going to do it.

Operator: And your next question will come from Lance Wilkes with Bernstein. Please go ahead.

Lance Wilkes: Great, thanks. Can you talk a little bit about network contracting, interested in how supplemental payments have been impacting hospitals and whether that's impacted kind of the growth and access with hospitals in your network and then also, what are you seeing as far as and what are you doing in the form of value-based care contracting? Do you see any subcomponents of that? Do you feel you're going to need to owner partner? And maybe as you're doing that, if you can just kind of clarify and utilization, if there are any unusual puts and takes between categories of like hospital, behavioral, drugs, etc. Thanks.

Joe Zubretsky: Lance, let me take the second part of your question first on value-based care and value-based contracting. As you know, in the past 5 years, most of the activity on VBC has been aimed at Medicare Advantage. That's where the lives are. That's where the premium was, and that's where a lot of the activity, it is coming to Medicaid. It is coming to Medicaid more slowly. There are regulatory definitions of how much of your medical cost needs to go through a VBC arrangement. We are fully compliant with the minimum requirements. Now, it's about can you manage your cost structure and risk adjustment based on your relationships. We're getting there. We have our national networking unit has a VBC arm. They are actively engaged in working with our major provider partners where we have membership density to work on value-based care arrangements, Again, over the next 2 or 3 years we will increase our penetration. Right now we are fully compliant with the regulatory rules. On your other question about supplemental payments, let me kick it to Mark and let him take that one.

Mark Keim: Right. What you're calling supplemental payments, I think we call directed payments, and they're certainly a very big part of the formula. They're getting a little bit more attention it seems these days, but that business is usual for us. We don't run them for the most part through the P&L, so they're not an aberration in our economics. We sometimes refer to them as pass-throughs, because they come from us, from the government, and go right to providers, and they're targeted for situations where providers need enhanced funding.

Joe Zubretsky: And the policy question you're getting to with that question has to do with one of the situations that we've profiled. When you're talking about cuts to the Medicaid budget, you're really talking about enrollment reductions, benefit reductions, or payments to providers, and this is one source of payment to providers, and a provider would tell you that they're not supplemental, meaning they're enhancing their margins. They're helping them make their margins. So, this is a big policy question in terms of whether the providers can bear Medicaid-related cuts of any type, either in the fee schedule or supplemental payments. I don't have a point of view on that, but that is a much of a raging debate in the policy discussions.

Operator: And your next question will come from Michael Ha with Baird. Please go ahead.

Michael Ha: Alright, thank you. On the exchange MLR pressure, I understand you're confident into next year these issues are non-recurring, but as you continue to press the gas pedal and exchange growth and thinking about risk adjustment specifically, have you implemented any new internal work streams to sort of help bolster this process for this year? And yeah, what gives you confidence on that? And then Joe, I believe you mentioned the early read on MA Medicaid integration is boding well so far. Are you hearing or I guess seeing anything new from states that gives you this incremental confidence, any early behavior change from states at all about how they might approach future Medicaid RFPs? And just for context, I've heard some speculation that, states might even open up Medicaid RFPs to include more plans because of this. So, just curious to hear what you're seeing or hearing that gives you more confidence. Thank you.

Joe Zubretsky: Well, we've heard some of those same things, but here are the facts as we know them sitting here today. Three very large states in the MMP program, which is really the only true integration program that existed, Ohio, Illinois, and Michigan. We just ran the table, very, very complex RFP submissions, intensity around true integration, one membership card, one phone number, one set of integrated benefits. You can't run one side off your Medicare platform and the other side off your Medicaid platform. And we're investing heavily, and making sure that we're able to handle those populations. The discussion around exclusively aligned enrollment is there. Whether most of the states settled there or not and allow D-SNP only plans in, we'll see. But the early discussions bode well for a company that has a very broad and deep Medicaid footprint like Molina and also has a competitive D-SNP offering. We're situated quite well and yes, we've heard the chatter that you're referencing about allowing more plans in. We'll see. We continue to believe that our integrated offering will be highly competitive. Our broker relationships are great, and the platform being truly integrated from a clinical and operational perspective is key, and we're well on our way to being there. Mark?

Mark Keim: On the marketplace question Michael, just so we're sending the right message, it's not growth for the sake of growth in marketplace, as I said earlier, marketplace is given a little bit of volatility in the space is first on margin and the volume will fall where it does. So, we've enjoyed a nice run of growth here, but that's because we believe the market has allowed that given what's going on as we move forward, if the cycle changes, we won't necessarily grow in a meaningful way. Separately, as you well know, the subsidies are potentially a headwind in the new year. So again, we'll price for margin and the volume's going to fall where it does.

Operator: And your next question will come from George Hill with Deutsche Bank. Please go ahead.

George Hill: Yeah, good morning, Joe. I have kind of a big picture question, and if I heard your comments, right, you said that like state Medicaid needs 200 to 300 basis points in advance of trend. I imagine you guys are seeing mid to high single digit trend like everybody else. So that's basically telling the states that you need a high single digit or better rate increase. Like what's the conversation at the macro level given that 45 or 50 states are in a budget deficit situation, and I imagine they can't look around, but the answer is, Medicaid costs are going to be up 8.5% or 9% in the next couple of years. Like, what is the ask of the plans as it relates to keeping a cap on costs and like, I'm interested in like the state perspective. I understand all the actuarial sound and stuff, but like the states just can't afford high single digit spending increases in Medicaid. I'd kind of love to hear the big picture of conversations that you guys are having at the state level.

Joe Zubretsky: Yeah, certainly the strength of state budgets is a concern, but we've actually analyzed this over very long periods of time. There is very little correlation between the strength of rates and whether a state is deep red, deep blue, or purple. There is very little correlation between the strength of rates and whether there's a rainy day fund or not, or whether the budget is running a surplus or a deficit. Those are just the facts. Agreed that the more stressed the state budget becomes, logic would tell you that the rate conversation might be more difficult, not from an actuarial soundness perspective, but from an affordability perspective. We are confident that based on our analysis, the broad market, and as you know, the market sets the rate with its cost structure. We appear to be operating 200 to 300 basis -- even though we're 100 basis points off the top end of our long term range, we appear to be operating 200 to 300 basis points better than the broad market. The broad market needs that to come back to some semblance of program equilibrium. When that occurs and we're confident it will, we should be comfortably back at 89% or better and paying into the corridors once again. So yes, should that be kind of a big picture of concern? Absolutely. But history has shown us that the actuarial soundness concept works, particularly over the intermediate term, not necessarily in any one quarter, but it works over time and we're confident that the market will get what it needs and therefore would be comfortably back into our long term range at 89% or better here in the foreseeable future.

Operator: And the next question will come from Dave Windley with Jefferies. Please go ahead.

Dave Windley: Hi, good morning. Thanks for taking my questions. I wanted to ask another one on exchange. On the member reconciliations, if I understand Mark what you described, these are essentially the people that were unknowingly enrolled in a product, so several questions, sorry for this, but several questions, were the – so these are 100% subsidized people, were the subsidies clawed back to the beginning of their enrollment. Second, how -- you mentioned you think this is over. How comprehensive was CMS's review of this such that we should think that this wouldn't bleed over into 2025. And then as these low risk people, low utilizer people are coming out of the pool, how does this thing -- how does this make you think about your risk adjustment assumptions for 2025? Thank you.

Mark Keim: Great. Dave, thanks for all that. So, as you described it, that's largely the case. In some cases, there is broker fraud, and in some cases it's just people signing up for things and not being aware they did it. The way they find out about it generally is in their 2024 tax filing, they hear from the government that they made too much money to qualify for whatever subsidies they got. Therefore, they owe the government back some money. They say, “Well, gee, I never signed up for that product.” We look and there were no claims, so they didn't use the product. So, the government will claw back the subsidized premiums that they gave us. So, those are revenue headwinds. Now to size that, I told you there was about [indiscernible] $40 million of adjustment in marketplace from prior year, one-third of that is this phenomenon we're talking about. Now, we're pretty much at the end of the tax season. Could we see a little bit more? Sure, but it would be a fraction of what we saw in the first quarter, which is becoming de minimis. Now on a go forward basis, you might recall that the integrity rules increased quite a bit for OEP just a few months ago. And one of the biggest things was the agent of record lock, which made it a whole lot harder for brokers to switch people, and actually made the market a lot more sticky. You didn't see the churn that you normally see. So, will these kind of situations go away 100%? Of course not. But do the new integrity rules go a long way to stop churn and maybe some fraudulent activity? I think so. So, we really consider this a one time, and I think it's largely behind us.

Joe Zubretsky: And to be very clear, when we receive a membership file that has a member on it, we have no reason to believe they're either not authorized or authorized. We have to service them as informed by CMS.

Operator: This concludes our question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.