Molina Healthcare, Inc. Q2 2026 Earnings Call

Good day, and welcome to the Molina Healthcare second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. We do ask that you please limit yourself to one question. Please also note today's event is being recorded. I would now like to turn the conference over to Jeff Geyer, Vice President, Investor Relations. Please go ahead. Good morning, and welcome to Molina Healthcare's second quarter 2026 earnings call.

Joining me today are Molina's President and CEO, Joe Zubretsky, and our CFO, Mark Keim. A press release announcing our second quarter 2026 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, July 23rd, 2026, 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 earnings release.

During the call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2026 guidance and the expected performance of each one of our business segments, rates and the medical cost trend, earnings seasonality, and our new Florida CMS contract, our preliminary 2027 financial outlook and earnings building blocks, our 2027 Marketplace pricing and business strategy, our longer-term outlook, including our 2029 premium revenue and EPS targets, our growth initiatives, the political and regulatory landscape, our M&A activity, the impact of Medicaid work requirements, our RFP awards, and the amount and realization of our embedded earnings.

We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC, as well as our risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. I will now turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe? Thank you, Jeff, and good morning.

Today, I will discuss several topics: our reported financial results for the second quarter, an update on our full year 2026 guidance, early commentary on our 2027 outlook for premium and earnings per share, our growth initiatives and strategy for sustaining profitable growth, and some commentary on the political and regulatory landscape. Let me start with our second quarter performance. Last night, we reported adjusted earnings per share of $1.51 on $10.2 billion of premium revenue. Our 92.2% consolidated MCR reflects solid operating performance as we continue to navigate a challenging medical cost environment. We produced a 1% adjusted pre-tax margin in the quarter and 1.3% year to date. In Medicaid, the business produced an MCR of 92.7% in the second quarter, which was in line with our expectations.

Medical cost trend in the quarter remained stable and was consistent with our full year guidance of 5%. In Medicare, we reported a second quarter MCR of 90.7%, very favorable to our expectations as our duals business performed much better than expected. Recall, with $2 billion of MMP premium being converted to new products and incremental premium from RFP wins, we were initially very cautious about margins in our duals business. These early results position us well to achieve target margins sooner than originally expected. In Marketplace, the second quarter MCR was 88.9%, higher than our expectations. We were again impacted by prior year items related to risk adjustment and member reconciliations. Our performance was also affected by unfavorable current year member acuity mix. Turning now to our 2026 guidance. Our full year 2026 premium revenue guidance is unchanged at approximately $42 billion.

We have increased our full year 2026 adjusted earnings guidance by $0.25 to at least $5.25 per share. This increase to our earnings guidance reflects first half performance in Medicaid. Excluding the downward revision in our Marketplace guidance, our full year guidance would have increased to $6.75 per share. Now some color on the segments. In Medicaid, our guidance assumes a full year MCR of 92.9% and is unchanged from prior guidance. Rate updates we received are consistent with our guidance of 4%. Full year medical cost trend is unchanged at 5%. The imbalance between rates and trend appears to have stabilized and is well positioned to be corrected with future rate increases. Medicaid is expected to produce a 1.2% pre-tax margin in 2026, or approximately $5.75 per share. This is up $0.25 from our prior guidance due to first half performance.

We continue to believe that 2026 represents a trough year for Medicaid margins, and we remain optimistic about the 2027 rate-setting process as state actuaries take account of more recent periods of observed medical cost trend. In Medicare, our full year MCR guidance is now 92.2%, a 180 basis point improvement from our previous guidance, reflecting lower medical cost trend in our duals products. Medicare is now expected to contribute $0.25 per share this year, anchored by stronger performance in our duals products, which will now yield $1.25 per share, offset by the $1 per share loss we expect in our discontinued MAPD product. In Marketplace, our full year MCR guidance is now 90%. We are reducing our Marketplace guidance by $1.50 per share from a gain of approximately $0.75 to a loss of $0.75 due to prior year items and current year unfavorable member acuity mix.

Looking forward, we plan to again reduce our footprint and volumes in 2027 to minimize our exposure to this segment. In summary, our updated 2026 earnings per share guidance of at least $5.25 includes the following elements and revisions from prior guidance. Medicaid is $0.25 better due to first half performance. Excluding the implementation of the new Florida CMS contract, Medicaid is projected to produce a 1.6% pre-tax margin and contribute $7.25 per share. Medicare guidance increases by $1.50 per share, with the increase driven by our duals products. Excluding MAPD, Medicare duals is projected to contribute a 1.4% pre-tax margin and $1.25 per share. However, Marketplace guidance decreases by $1.50 of earnings per share as our process of de-emphasizing and downsizing this business in the portfolio bears the cost of higher member acuity mix.

We are pleased that the Medicaid and Medicare duals businesses, which represent the flagship and the future of the enterprise, are producing strong results. Excluding the 2026 losses from our Florida CMS contract and MAPD product, the 2026 earnings power is $7.75 per share. Some updated commentary on the outlook for 2027 that we had provided at our Investor Day. While it is too early to provide full detailed guidance for 2027, we revisit a few of the building blocks that inform our early views. The reduction in our volume and footprint in Marketplace and California's decision to pull undocumented members into fee-for-service account for approximately a $1.5 billion reduction in premium. Our premium outlook for 2027 is now approximately $46.5 billion before capturing any remaining items. This is 11% growth year-over-year.

The earnings per share building blocks for 2027 sum to more than $10 per share before considering any MCR improvement in Medicaid. Mark will elaborate on the 2027 building blocks in a moment. Some comments on recent RFP wins and our growth initiative. We remain confident in achieving the $64 billion premium revenue mark in 2029 that was detailed at our Investor Day. During the second quarter, we re-procured two significant contracts. We retained our $2 billion Managed Medicaid contract in Illinois, a very large Medicaid state for us. We also renewed a regional contract in Wisconsin that provides additional opportunity to grow our integrated duals business. These wins continue our highly successful track record of retaining contracts, where our historical win rate on re-procurements has now increased to above 90%.

With respect to M&A activity, our acquisition pipeline contains many actionable opportunities, and we remain opportunistic in deploying capital to accretive acquisitions. This current challenging operating environment has been a catalyst for many smaller and less diverse health plans to consider their strategic options. Turning now to the political and legislative landscape. The interim final rule from CMS on Medicaid work requirements and biannual reverifications does not change our long-term view of enrollment reductions. We expect membership reductions will emerge gradually and result in only a minor acuity shift. There is still some ambiguity surrounding many of the features of the rule, including the definition of medical frailty and the use of self-attestation, not to mention legal challenges to the rule itself. We are working closely with our state partners on the administrative requirements needed to implement these new policies.

In Medicare, we do not expect the recent Stars court rulings to have a material impact on our business or product offerings. In summary, our second quarter results and full-year guidance reflect solid performance in our Medicaid business and strong performance in our Medicare dual products in a challenging environment. The imbalance between Medicaid rates and medical cost trend appears to have stabilized and is well-positioned to be corrected with future rate increases. This reinforces our belief that 2026 is the trough year for Medicaid pre-tax margins. We remain confident in our disciplined approach to medical cost management and believe the premium and earnings per share building blocks position us well for profitable growth in 2027. This year and next are the first steps to achieving the financial targets we outlined at our Investor Day.

The path to our $25 earnings per share target in 2029 is predicated on a few assumptions. First, we expect the MCRs on our current business to improve over three years. This is led by Medicaid, which assumes 90 basis points of MCR improvement over three years, which is a modest improvement in the current rate and trend imbalance. Second, future revenue growth from announced revenue wins, projected initiatives in M&A will achieve target margins as they have done in the past. Third, our operating discipline will help realize the benefit of operating leverage as we grow our business. These expected value-creating components underpin our 2029 financial targets, while continuing to refresh embedded earnings to support the long-term growth of our franchise. With that, I will turn the call over to Mark for some additional color on the financials. Mark? Thanks, Joe, and good morning, everyone.

Today, I'll discuss additional details on the second quarter performance, the balance sheet, and our 2026 guidance. Beginning with our second quarter results. For the quarter, we reported approximately $10.2 billion of premium revenue with adjusted EPS of $1.51. In Medicaid, our second quarter MCR was 92.7, which was in line with our expectations. Medical cost trend in the quarter remained stable and consistent with our full-year outlook for trend at 5%. High-trend categories such as behavioral health, professional office visits, and inpatient care are expected to remain stable in the second half of the year. In Medicare, our second quarter MCR was 90.7, favorable to our expectations. Our duals products performed better due to lower trend in several cost categories and the pricing we implemented for 2026. In Marketplace, our second quarter MCR was 88.9.

We continue to be impacted by unfavorable prior year risk adjustment and program integrity items. Excluding these prior year items, the normalized MCR was 87.3 and reflects the unfavorable member acuity mix in our current book of business. Our adjusted G&A ratio for the quarter was 6.5% and reflects continued operating cost discipline. 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 $290 million at the end of the quarter. Our operating cash flow for the first six months of 2026 was $788 million and was driven by the timing of government payments in Medicaid and Marketplace. At the end of the quarter, our debt-to-cap ratio was about 47%. We have ample cash and access to capital to fuel our growth initiatives.

At the end of the year, we project parent company cash of approximately $600 million and a debt-to-cap ratio of 44%. Days in claims payable at the end of the quarter was 44 and consistent with the first quarter. We remain confident in the strength and consistency of our actuarial process and our reserve position. Next, a few comments on our 2026 guidance. We continue to expect year-end membership of 5 million members and a full-year premium revenue of approximately $42 billion, with no changes within the segments. Our full-year consolidated MCR of 92.6 is unchanged. We increased our full-year EPS guidance by $0.25 from at least $5 to at least $5.25. The increase reflects first half performance in Medicaid. Second half earnings are expected to be fairly evenly split between the quarters. Some additional color on our guidance in the segments.

In Medicaid, we reaffirm the full-year MCR of 92.9. Our full-year guidance on rates of 4% and trend of 5% are unchanged. Rate updates received are in line with our expectations and consistent with our full year guidance. Full year medical cost trend is expected to remain stable. In the second half of the year, normal seasonality and the implementation of the Florida CMS contract will increase the first half Medicaid MCR of 92.4 to 93.3. Any further off-cycle rate updates or initial outperformance in our Florida CMS contract represent upsides to our 2026 guidance. In Medicare, we are lowering our full year MCR guidance from 94 to 92.2. We expect our first half total Medicare MCR of 90.3 to increase to 93.8 in the second half of the year, driven by normal seasonality.

Excluding the MAPD product, which we will exit for 2027, our full year Medicare Duals MCR is approximately 92%. The Medicare segment improved $1.50 versus our prior guidance, is expected to earn $0.25 per share this year. Within the segment, Medicare Duals is $1.50 better than our prior guidance and will produce $1.25 per share this year, while MAPD is unchanged and still expected to lose $1 per share. In Marketplace, we are increasing our full year MCR guidance from 85.5% to 90% due to current year member acuity mix and prior year items. Without those prior year items, MCR guidance is 88%. The latest weekly files indicate the total market membership declines and acuity mix shift were not as severe as we anticipated in our pricing. However, current year performance reflects unfavorable member acuity mix.

Our full year Marketplace guidance is a loss of $0.75 per share. This is $1.50 per share less than our prior guidance due to unfavorable prior year items and current year member mix. We expect to reduce our Marketplace exposure for 2027 by approximately $1 billion. Full year G&A ratio guidance is unchanged at 6.4% as we drive efficiencies in our operations. Our 2026 EPS guidance of at least $5.25 includes $2.50 of losses in our segments that we expect will not recur in 2027. The implementation of the Florida CMS contract in the fourth quarter will impact Medicaid by $1.50. The MAPD product is projected to lose $1 before we discontinue it for 2027. Excluding those items, our 2026 earnings power is at least $7.75 per share and represents a strong foundation of which to grow earnings in 2027. Turning to embedded earnings. Our new store embedded earnings remain at $9 per share.

We anticipate approximately half to emerge in 2027. Embedded earnings will remain a highly transparent driver of value in the future, and we remain confident in achieving our 2029 financial targets. As Joe discussed, our 2027 premium outlook is now $46.5 billion, a decline from the $48 billion we outlined at our Investor Day. First, we expect to reduce our Marketplace footprint, which will decrease premium by approximately $1 billion. Second, California plans to transition members with undocumented immigration status from Managed Medicaid to fee for service, yielding a premium headwind of approximately $500 million for 2027. The EPS building blocks for 2027 sum to more than $10 a share. We start with our revised 2026 guidance of at least $5.25 per share.

First, we expect to realize known items from embedded earnings that account for approximately $4.50 per share. This includes the reversal of Florida CMS implementation costs, the non-recurring MAPD losses from 2026 as we exit the product for 2027, and the benefit of operating leverage and efficiency as we grow. Second, Marketplace is expected to produce a loss of $0.75 per share in 2026. We assume pre-tax margins in 2027 will be at least break even as we reduce our footprint, adding $0.75 to next year's outlook. Third, we expect a de minimis impact from California's undocumented immigration status members moving out of Managed Medicaid. Recall, we are subject to a risk corridor in this population, which greatly limits margin. Fourth, we remain optimistic about Medicaid margin improvement in 2027.

The imbalance between trend and rates appears to have stabilized and is well positioned to be corrected with future rate increases. We estimate that the broader Managed Medicaid market is underfunded by 300 basis points and not sustainable at these funding levels. Recall, every 100 basis points on Molina's MCR yields $5 per share. We are well positioned for early 2027 rate updates with approximately 55% of our premium scheduled to receive rate updates on January 1st. Finally, any further improvement in our Medicare Duals segment represents upside to these building blocks, with each 100 basis points on the MCR worth $0.75 per share. These building blocks position us well for profitable growth in 2027. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. As a reminder, we do ask that you please limit yourself to one question. At this time, we'll pause for just a moment to assemble our roster. Today's first question comes from Kevin Fischbeck at Bank of America. Please go ahead. Great, thanks.

I guess, maybe multi-part one question. As far as the exchange commentary, I guess you probably gave us the math that we could do it, but can you just break it up from an EPS perspective as far as how much was 2025 related versus 2026 related to the changes that you made to EPS, on the exchanges? Do these changes keep coming through? I guess I want to get a better sense from you about why they keep coming through, your visibility on that, and these types of fluctuations in 2026 so that they won't recur again over the next few quarters. Are these things that you kind of have to reprice for? I'm just trying to think about, you talk about $1 billion less revenue next year. How big is the repricing issue versus kind of one-time things versus core?

Thanks. Sure, Kevin. I'll provide some high level commentary on the exchange business and then hand it to Mark for the current year, prior year accounting.

As you recall, coming into 2026, we put on average 30% rate increases into the market, ranging from 15%-45%, depending on the state, all with the sole purpose of allocating less capital to the business and reducing our footprint. Recall that we positioned the product to be number one and number two priced in only a handful of markets. We were successful in doing that, now at $2.5 billion of premium and 280,000 members. We did include an element in pricing to account for the potential for an acuity shift.

Now, the weekly reports are showing that acuity shift is probably less in the entire market, but we're not a microcosm of the entire market. At 280,000 members, we had more adverse selection, if you will, or member acuity mix than the rest of the market, and that element of pricing was underestimated. Going into next year, we again plan to put prices into the market to reduce our footprint again. Our philosophy is until we're convinced that the risk pool is stable in that market, we're going to allocate less capital to it. Mark, do you want to comment on Kevin's other question?

Hey, Kevin, good morning. Just a quick rundown on the numbers. Right now, our guidance is a $0.75 loss in Marketplace for the full year. That guidance includes about $1 for prior year items of loss and about $0.25 of gain in the current year book, netting to $0.75. That's $1.50 lower than where we were previously on guidance. $0.50 of that lower guidance is due to prior year items, and about $1 is on a lower outlook for the current year membership. On the prior year items, what we said in our prepared remarks is it's split pretty evenly between risk adjustment true-ups from last year and program integrity items. Hope that helps. Thank you.

Our next question today comes from Andrew Mok at Barclays. Please go ahead. Hi. Just wanted to follow up on the ACA acuity comments.

Can you help us understand sort of the underlying dynamics that drove the adverse selection? To the extent your acuity is worse, how are you accruing for 2026 plan year risk adjustment? Thanks. Sure, Andrew. It's really a simple case of as the book shrinks in size consciously due to our positioning of the product and the pricing.

The old adage in insurance is people that need coverage are going to seek it. We've certainly priced for an acuity shift. Many of these members are on high-cost drug therapies, HIV, oncology, and the like. Even with a $50, $75 or even $100 per month price difference, they tend to stay with the health plan that they're comfortable that their drug therapies will be prescribed and paid for. We're seeing a lot of that. We're seeing high cost drug utilization without corresponding HCC to drive risk adjustment, which is creating an imbalance. We priced for this phenomenon, as I said, coming into 2026. That increment to pricing was not enough. We underestimated it. Mark, anything to add?

I think that's well summarized. The weeklies are a tailwind for 2026. The market attrition as well as the market acuity impact is probably less than most people thought. It's less than we thought. As Joe mentioned, the members we did retain, our view right now, halfway through the year, is that their medical expense will not fully be offset by risk adjustment. That's an evolving view, as you know, with the weeklies being a moving target. Right now, we're taking a conservative pick on that, and it looks like the members we did retain, about 280,000 right now, as Joe said, are likely to skew negative from our original outlook.

Thank you. Our next question today comes from Stephen Baxter at Wells Fargo. Please go ahead. Yeah. Hi.

Just I guess one more on the exchanges. When you think about how you're trying to fix this, clearly, just taking rate did not solve your problem for 2026. How do you think about what needs to be done in terms of maybe restructuring the products? I think there's a lot of concern that maybe you've seen a lot of the good risk migrate out of silver and into potentially low-cost bronze and gold categories, and that might be related to the issues that you're seeing. How do you think about what needs to happen from a product restructuring point of view to actually make this business more stable and durable? Thank you. We don't think it's a product design.

It literally is the members retained. In fact, the members retained individually are not higher acuity. We had the acuity per member right. We retained more high acuity members. That's why we call it a mix shift. We just underestimated the amount of stickiness on these high-cost members that don't have commensurate HCC codes. It's not a metallic tiering issue. It's not our formularies are not designed properly. It literally is in a declining book of business that acuity shift was underestimated in pricing, pure and simple. Unfortunate, pure and simple. Thank you.

Our next question today comes from Justin Lake at Wolfe Research. Please go ahead. Thanks. Wanted to ask a question on Medicaid, or a couple actually.

First on just Medicaid cost trend. You talked about it being in line in 2Q, talked about it being slightly favorable in the first quarter. What was running better in Q1, and did that go away, or did something else kind of offset it as you went into 2Q? Maybe you just confirm that the $0.25 guidance raise, was that all coming from Q1, given Q2 was in line? Just one last question, have you gotten any off-cycle rate updates so far this year? Maybe if so, you can quantify them. Thanks. Justin, we have a very small number of off-cycle rate increases, but they're all within expectations.

We estimated 4% for the year. There were pluses and minuses. We had very minor, not worth mentioning, that's why we're sticking to our 4% rate assumption for the year. On the quarters, we're actually sort of splitting hairs on that. When we said the first quarter came in slightly better than 5%, it did. All we said was, if you annualized it might be slightly better than 5%, which then implies that maybe the second quarter was slightly north of 5%. We're very comfortable that the first half is 5%. We're projecting it 4%-5%. The high-cost categories that were providing pressure in the past, like behavioral, high-cost drugs, outpatient visits, and the like, are still high cost, but stable trend, meaning the trend has plateaued.

That's why we say that this is a trough year for margins. While the trend is still high at 5%, it has plateaued, that acuity shift of 250 basis points that occurred last year has not recurred this year. After two quarters of it not recurring, we're pretty comfortable that it's only core trend that's going to impact our results, we're very comfortable at the 5% trend assumption in the first half extending into the second half. Mark, anything to add? Hey, Justin.

Good morning. I'll just build on what Joe said a little bit. We may be parsing decimals here. When we said trend was 5% for the full year, each quarter is roughly a quarter of that. Maybe a little bit more, or maybe a little bit less, but very close to a quarter of that. Very stable first and second quarter. Why did MCR come off a little bit? The rate cycle is a little bit skewed to the first quarter. Remember, 55% of our revenue comes up for fresh rates on January 1st, less in the second quarter, so it's just timing of the revenue. Recall that trend is 5% split evenly across quarters. Rate is 4% for the year, but lumpy into certain quarters, and that will explain small variances quarter to quarter.

Just building on what Joe said about the stability of that underlying 5%, remember we exited 2025 feeling pretty good that third and fourth quarters were much closer to that new run rate of 5%, which gave us the confidence that that was the right pick for this year. So far, it looks like that's playing out.

Just to add one more point to what Mark said. Obviously, you're getting into a first half, second half question, which leads to a jump-off point into 2027, which we talked a lot about in prepared remarks. In the second half, ex Florida KidCare, Medicaid is positioned to produce a 1.9, nearly a 2% pre-tax margin in the second half. That assumes no rate increases and the 5% trend continues, which we're very comfortable with. Strong second half result, good jump-off point for 2027.

Thank you. Our next question today comes from A.J. Rice at UBS. Please go ahead.

Hi, everybody. Just wanted to also ask about Medicaid more broadly. Obviously, the states have a lot on themselves now with the administration's initiatives around waste, fraud, and abuse, putting in place work rules and other priorities, budgets, et cetera. Two things maybe. Is that affecting in any way their pacing on RFPs? It seemed like that slowed down a little bit when we went through redeterminations. I know you've got a number of RFPs over the next year or two that you're looking to come to market. Do you have any sense that they may slow down? You did specifically mention in your prepared remarks about the self-attestations under work rules. I know the states, I believe, have discretion On whether they allow that in the first year.

Have you got any sense of what they're going to do at this point? Is it meaningful to you if they allow self-attestation in the first year, and then the documentation's required in year two?

A.J., I'll take the second part of the question first. Obviously, every state is slightly different, but they're all working within the framework outlined by CMS. The only real data point we have is Nebraska, which actually started this process early. You would not be surprised, nor are we, that the two biggest issues that any state is dealing with is what types of information are we going to accept to verify eligibility, self-attestation or ex parte, either one, and two, what definition of medical frailty are we allowed to use? In Nebraska, they have 290 pages of diagnosis codes to support medical frailty. They have a very comprehensive program of the types of information that they will accept to verify eligibility.

Nothing we learned in Nebraska, nor in any of our other states, causes us to change from our long-term assumption that Medicaid membership will decline by 2%-3% each year for a three-year period, which is fully baked into our $64 billion premium projection, and our assertion that the acuity shift will be minor and protracted, so it'll be picked up in rates. Your first question was about RFP timing. No, the RFP calendar appears to be intact. I think it was announced that Missouri dropped about a week ago, maybe two weeks ago. Nothing in the regulatory realm seems to be inhibiting the pace of RFP, so the projection we showed you at Investor Day still holds, in our opinion.

Thank you. Our next question today comes from John Stansel at J.P. Morgan. Please go ahead. Great.

Thanks for taking my question. I want to talk about that minimal acuity shift for the Medicaid expansion population. Can you just frame, I think you've talked about the narrowing of the gap between stayers and leavers in previous quarters, but can we dig into that for Medicaid expansion particularly? Then as you're having discussions with states as they've started to internalize the IFR, how are they thinking about potential acuity shifts? When they start kind of thinking about 2027 rate updates, how are they going to incorporate that or not into their updates? Thanks. John, I want to make sure I understand.

Your question is related to Medicaid and expansion, correct?

Exactly, yes. Okay. That is true that in the big wave redetermination process that happened over a three-year period, the skews, as we call them, on your average MLR being 90, the skews were significant, which means that if stayers and leavers could provide a significant acuity shift, which it did by 250 basis points, those skews are much tighter right now, which means that a lot of the low and no users exited the enrollment rolls during the first wave of redetermination, therefore, the work requirements is unlikely to have a significant shift.

The work requirements will happen in a more measured process, call it protracted and measured over time.

If you look at the last CMS bulletin on rate setting, they specifically mention capturing acuity shifts due to enrollment changes, which gives state actuaries the leeway, gives them the imprimatur to actually include an element of rating, addressing an acuity shift on membership changes if it should occur. Mark, do you have anything to add to the one of those?

Joe, I think that's well summarized. I'll just reinforce a couple of those things. In the big redetermination coming out of the pandemic, the market declined 20% over two years, it started with a lot, as Joe said, of low acuity and no acuity users, and a lot of those fell out during that period. We're at a very different situation. We're expecting over the next three years an 8%-9% decline, which is why we say 2%-3% a year. A total cumulative of 8%-9% decline. We're at a starting point where within expansion, so many of those low and no acuity users are already out of the system. The only other thing I'd add is as the state actuaries look at this, they certainly have a case study on what happened before and how to think about some of this.

The fact that it's such a smaller impact over a longer period of time with fewer low/no acuity users just gives me great comfort that this is very gradual and subtle and easy to be rated for.

Thank you. Our next question today comes from Sarah James at Cantor Fitzgerald. Please go ahead. Thank you.

It sounds like the issue in Marketplace isn't formulary or benefit designs. Maybe that's not the right lever for next year. It sounds like it's not geographic specific. What is in your control to change as you think about next year? Is there any effort, at the state level or CMS to address the gap in the HCC categories? Is that more of a longer-term journey? Thanks. It's not the HCC construct, it's that it is possible to have a high utilizing member that doesn't drive commensurate HCC scores.

We believe we're as good as anyone at capturing risk adjustment. It's just not there relative to the utilization of the member. What we can control is how much capital we're willing to allocate to the business, where we make it available, and what the price levels are to make sure that if we want to de-emphasize membership in a particular state, that we're not number 1 or 2.

Next year, our forecast, based on our pricing models for this year, would suggest that with a $1 billion decline or even a decline to $1 billion from $2.2 billion, our membership will be concentrated in about six states and heretofore, up to now, we've been pretty widespread in most of our Medicaid footprint, 13 or 14 states. Next year, that should reduce to about six based on how we position the product.

Sarah, the only thing I'd add is we will price to the members we have. Our pricing will reflect the acuity and the risk adjustment we have in our book. It will result in fewer members next year, which is why we give you the headline of probably $1 billion lower next year. Our pricing will very much reflect what we see in our book today.

The question gets at elasticity of demand. At some point, a member who's on a $1,000 a month therapy and is comfortable that a competing product has that in their formulary, and they're looking at our price, which might be $50, $75, or $100 higher than the competitors, they will move at some point.

Thank you. Our next question today comes from Lance Roberts at Bernstein. Please go ahead. Great. Could you talk a little bit about G&A and your G&A leverage going forward?

In particular, interested in understanding as I'm looking at things like 2027, 2028, how much of the benefits in scale leverage are you expecting to come from just purely holding the line on G&A as opposed to being able to reduce G&A? Do you see that there are going to be efficiencies that could allow for reduction in some areas to offset inflation? Just a quick question on expectations for implementation of some upcoming contracts in Georgia, Texas, and the continuation of some coverage in Florida. Thanks. Lance, high level on G&A, I think our Investor Day outlined it exactly the way we're thinking about it.

When you're growing premium to $64 billion off of $42 billion, the G&A leverage alone should pull the G&A ratio down below 6%, just below 6%. I think we had it at 5.9% at our Investor Day. Recall that we also talked about artificial intelligence and additional benefits that should accrue to the company, if and when we, and we intend to be successful implementing artificial intelligence to reduce the labor cost that goes into the administrative burden of this business. That's not in our projection to the $25 margin, the 6% G&A ratio, it is upside to that. We have exercised discipline over a period of time. You've seen it happen. You've seen the 10, 20, 30, 40, 50 basis points of improvement as we've grown the book of business from $16 billion five years ago to $42 billion.

We are projecting the same amount of fixed cost leverage as we grow from $42 billion to $64 billion. Mark, anything to add there?

Lance, the math is real straightforward. The way I explain it for investor relations purposes is exactly how we talk about it internally. Of the G&A load we currently carry, about half is fixed and about half is variable. When we project out, and what we've been very successful in delivering, is fixed grows at inflation. When we say fixed stays fixed, it grows at inflation, and variable grows with revenue. When we give you the G&A projections that we have done, it is exactly that formula, which counts on us keeping that disciplined. To the extent we do incremental things, Joe's talked about AI and the large opportunities that are with artificial intelligence, that would be incremental. As you do your models, you can model G&A. That's simply because that's how we think about it, and that's how we execute it.

The only thing I would add to that is when we say our margins are 300 basis points better than the market, two-thirds of that is arguably MCR, as proven by regulatory reports, but a lot of that is G&A. 10, 20, 30, 40, 50 basis points of G&A leverage is just as valuable as the same amount sitting inside your MCR. In fact, I would argue it's even more valuable since you don't return it inside a corridor. We've been very efficient, and we're going to continue to be, and we're really looking at our early read on artificial intelligence is that the numbers we gave you at Investor Day, that's upside to our outlook, are real and achievable, and we're going to be transparent with that as we move forward on how much impact it has on the G&A ratio.

We're very optimistic that the projections at Investor Day are going to be achieved.

Thank you. Our next question today comes from Scott Fidel at Goldman Sachs. Please go ahead. Hi. Thanks.

Good morning. Just wanted to ask about thinking about the margin sort of recovery potential and the stat mark sites around the 300 basis points of underfunding. In Medicaid, how that's going to sort of contrast against this sort of just bolus of regulations that CMS has released for the Big and Beautiful Act. Looking separate from work requirements, which I know is the big sort of reg that's in the near term focus, you've got three other regs with state-directed payment reform and with the provider tax reg that just came out last night or yesterday, and then also with the 1115 waivers now being required to go budget neutral. Those are three of the sort of levers that states have historically been using to really juice their Medicaid funding.

This is going to be a meaningful sort of tightening of that spigot of sort of the levers that the states have traditionally used. I'm just curious how you guys are. Obviously it's difficult to sort of then boil that down into how does that play out into rates and then into sort of solving for that 300 basis point funding gap. I know you guys sort of talked about trough margins this year, but this probably has more to do with ultimately the sort of the recovery and margin sort of sloping against what could be a lot of funding headwinds for the states for multiple years ahead. Joe, Mark, just really sort of curious your insights on that. Then just very quickly also, just on the cash flows. I know that the first half had some timing dynamics around government payments.

Just if you guys can give us the full year or the back half expectations for operating cash flow. Thanks. Sure, Scott. On the first part of your question, certainly, there are regulatory, political, and legislative initiatives to get at whether it's fraud, waste, and abuse or just to reduce the level of federal funding of the Medicaid program.

You mentioned a couple of them. Backing up from that, the underlying premise of our assertion is that the market, I would almost say irrefutably, is 300 basis points underfunded, whether it's public companies disclosing their Medicaid results at negative one and a half to 2% margins, whether it's the regulatory reports that include all the not-for-profits. If the market just gets back to break even, we blow through the top of our two and a half % margin assumption. 150 basis points getting the market back to break even, we're north of three.

When we only need 90 basis points to hit our target and the market needs 300 to get back to a respectable margin, we're pretty confident in the assertion that we'll hit the two and a half %. Now, you've mentioned the 1115 waiver being budget neutral, state-directed payments, caps on state-directed payments. Sure. States are going to have to get clever about eligibility, benefit levels, looking at supplemental benefits, and all the things they're going to do. Keep in mind, providers and fee schedules can help pay for this, too. Yes, certainly there's pressure on the federal funding of Medicaid over the next number of years. The current level of funding is unaffordable to those in managed care that manage it very capably. We all know that managed care saves state budgets 10%-15%.

We have 75% of the lives and 50% of the cost, it's not going anywhere. It has to get funded despite the pressures that you mentioned. Mark, anything to add on cash flows or anything on the rates?

On the rates, I think Joe Zubretsky makes exactly the right point. Some of the headwinds for rate setting you point out are very fair and justified. The market needs 300 bips, and some of that may be a challenge for the market getting all 300 bips. Again, at Investor Day, we said we need 90 bips across the three years to get to our target margins. The odds of rates moving in that small fraction of what the market needs, to me, feel very good. On cash flow, I will never give you a projection on operating cash flow because it's just not particularly relevant to the way we manage the business. Recall, in state Medicaid, every state is its own subsidiary, and every state retains its own liabilities and assets. We only dividend out the difference.

Whether operating cash flow is positive or negative is a subsidiary concept and self-contained at that level. What is important is my ability to pull dividends out of those subsidiaries up to the parent, where I can use it for all kinds of things. Our track record of pulling dividends out is very, very good. Just to put a point on that, we're holding about $300 million of cash at the parent currently. I expect that to raise to about $600 by year-end on those additional dividends. Again, it's the dividends cashed to parent that is critical to our company. The operating cash flows really just come and go with the subsidiary assets and liabilities.

Thank you. Our next question today comes from Ryan Langston at TD Cowen. Please go ahead. Hey, good morning.

Maybe on Medicare, nice performance in that line of business. In the prepared remarks, you mentioned several cost categories driving better expected performance for the duals versus non-duals members. Can you elaborate on what those specific categories are and any insight why there's such a difference between MA duals and non-duals? Thanks. Thanks for recognizing the performance of Medicare.

We are really pleased with it. To be very clear on what we did, in converting the $2 billion of MMP premium to FIDE and HIDE. With the increase due to our expanded footprint in the RFP wins, we were consciously and purposely conservative in forecasting and guiding on medical cost trend, which we picked at 6%. Our new forecast is it is going to come in at 4%, which is more in line with what the Medicare market is saying. We were conservative due to the inaugural launch of these new products. The cost categories, really everything came in better, whether it is the pharmacy category, inpatient, outpatient, ancillary, it all came in better. None of it is a trend driver, plus or minus, trend is coming in sort of where the rest of the market is reporting.

We are comfortable with our 4% projection and that $1.25 duals contribution is significant. 1.4% margin pre-tax in the first year of launch. Our target, as you know, at Investor Day, is only 2.5%, which makes us even more confident that we will get to 2.5%, and we will get there sooner. Duals market is growing at 12%, exclusively aligned enrollment. The concept, as the states deliver on that, is preferential to those with a wide Medicaid footprint, and this performance out of the gate is certainly giving us a lot of confidence that the duals segment represents part of the flagship of this enterprise in the future. Mark, anything to add? Just a reminder, on our Medicare segment for the full year, we are projecting $6 billion of revenue, $5 billion is duals.

As Joe mentioned, trend is lower in just about all categories in duals. I want to just point out, we raised our full year guidance for the Medicare segment by $1.50, but all of it is attributable to the duals segment. Medicare continues right where we thought. Medicare Advantage MAPD continues right where we thought. We projected a dollar loss, and that is still where we are for the year, and that is the component that goes away. The $1.50 for the segment is entirely attributable to the duals part.

Thank you. Our next question today comes from Michael Ha at Baird. Please go ahead. Thank you.

For Marketplace, Joe, regarding your comment on high utilizing members that do not drive commensurate HCC scores, I guess I'm a bit confused by that. Is this something related to the change in seasonality of utilization amongst your members maybe occurring later in the year, so that's driving more incomplete full year risk code capture? Is that the dynamic you're talking about? If so, I guess why would that be happening? Some more color there would be helpful. Thanks. Michael, I think it's merely a case of when you're 1% of the market, 280,000 members out of a 20 million member market, the mix effects can be dramatic.

We're not a microcosm of the market. We're not representative of the market. It is possible, as our internal data shows, I'll kick it to Mark in a minute because he's the architect of all this data analysis that we do. It is possible to have high utilizing members that do not have enough HCCs to drive enough revenue to produce the target margin. As I said, we included a load in our pricing. That 30% average price increase we put into the market for 2026 included a load contemplating that we would attract higher cost members, they would stay with us.

We underestimated the number that stayed with us, therefore that's what's putting the drag on the earnings for this year. Mark, anything to add? Joe, I think that's well summarized.

Michael, not all medical expense is risk adjustable, what we're seeing is the declining book we have in Marketplace, there's more of a skew of medical expense that is not risk adjustable. That will play out across the year. The weeklies will evolve, our insights and our own memberships will evolve. Our view right now is that a lot of the medical expense we have in this membership is not risk adjustable, which results in the guidance we've given you.

Thank you. Our next question today comes from Jason Cassorla with Guggenheim. Please go ahead. Great, thanks.

Good morning. Maybe just on the Florida CMS contract, can you give us a sense on how that $1.50 headwind is spread over 2026? Obviously, it's predominantly in the fourth quarter, but I guess just wondering how much of that G&A within the $1.50 is already hit year to date and expected to hit in the third quarter before the contract goes live. You also mentioned potential upside for Florida CMS as a lever for second half upside. I guess, curious how that could develop. Is there a propensity for better rate development ahead of that contract start or any thoughts there? Thanks. I'll answer your question at a high level and kick it to Mark.

We're really pleased with the build-out of the Florida CMS program. It's going to be a $6 billion annual program at full annual run rate. The build is going fine. The financial information we've received from the state, both for the rates in the current program and the medical costs in the current program, suggests that the program is we're inheriting a very financially viable program. We're in the middle of rate discussions right now for the new program year, and the early read is we're very encouraged by what we've seen. You asked the question about the $1.50 drag. Some of it is hiring people in advance of revenue, some of it is margin build, and a little bit of it is just an initial outlook in a new program that is more conservative than target margin.

Mark, do you want to take the accounting for the quarterly progression of the build?

Sure. At its simplest, the $1.50, about a third of it, $0.50, is G&A we're carrying in the third quarter before we get the revenue. Obviously, you have to put all of the resources and people in place before you book revenue. About $0.50 is dragged on G&A in the third quarter pre-revenue. Another $0.50 is in the fourth quarter. We have to book one-time margin on new revenue. We do this on all business, just this one's particularly big. The way the actuaries and the accountants think about IBNR reserves is they book their best pick, and they put a small margin on top of it. Anytime you have new business, you have to recognize that margin. In this case, it's a lot. That's another $0.50. The final $0.50 of the total $1.50 is just an MLR that we're conservatively saying is going to run a little bit hot our first quarter.

Whenever you have a new network and new members, I think you need to be just a little bit conservative on how that first initial period might run. I think we have been with that additional $0.50. Those three pieces, each $0.50, should give you a view on how this is. The good news is that additional revenue in the fourth quarter helps me with my overall G&A leverage story. With overall enterprise efficiency, I'll defray some of that. On discretely Florida, those are the three components of $1.50.

That's why we're comfortable saying that this reverses next year, because the first two pieces that Mark gave you, by definition, do not repeat. They're non-recurring in nature. With the financial information that we're seeing now and the rate development process, we're as comfortable or even more comfortable saying now that this program breaks even in the first full year of contract and gets to target margin in year two.

Thank you. Our final question today comes from George Hill at Deutsche Bank. Please go ahead. Good morning, guys, and thanks for taking the question.

I think two quick ones. Number one is, Mark, just to ask the Medicare question a different way, I guess, can you kind of bucket what drove the upside in Medicare versus expectations, either from a care delivery perspective or a disease state perspective? Number two is in the Marketplace business, do you guys think there's any impact from the IDR process that's driving increased MLR in that space? Or is this just utilization and acuity and kind of all the other things that you call it, just because some of your peers have called out IDR as a cost driver. Thank you. I'll answer the last question first, and then kick it to Mark for the other two.

Yes, we have the same types of impacts from the IDR process, which the industry is legitimately claiming is flawed in its construct. That certainly does cost us in our medical cost line, but not beyond expectations. It's really the acuity shift that we're referring to that's causing the pressure. The IDR process in two states in particular certainly is a drag, but not outside the bounds of our original expectations. Mark, do you want to take the rest of the question?

Absolutely. George, on Medicare, on the MAPD product, trend pretty much what we thought. That's the part we're exiting. On the other $5 billion of revenue, trend wasn't just one thing. Pretty much across the board, we're seeing claims just a little bit better than we thought. Certainly, inpatient and pharmacy down meaningfully. In the past, outpatient and ER have sometimes been an issue. Not at all. Professional office visits and LTSS are always a meaningful part of that population. Even there, we're seeing a little bit of favorability to what we might have thought. Chalk this up, I think, to two things. One, trends are a little lower than most folks expected. Two, we might have been just a little conservative in our first-year picks on these new FIDEs and HIDEs.

Remember, these converted from MMPs last year, and then we won a whole lot of RFPs to put on more of these. This is the first year in this product. We could have been just a little bit conservative, but a 4% trend is what we now believe year-over-year we're at, and it's across the board. It's not just one thing.

Thank you. That concludes our question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.