Good morning and welcome to Molina Healthcare First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ryan Kubota, AVP Investors Relations. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2018. The company issued its release reporting first quarter 2018 results earlier this morning and this release is now posted for viewing on our company Web site. On the call with me today are, Joseph Zubretsky, our President and Chief Executive Officer and Joe White, our Chief Financial Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you have multiple questions, we ask that you get back in the queue, so that others have the opportunity to ask their questions. Our comments today will contain forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous Risk Factors that could cause our actual results to differ materially. A description of such Risk Factors can be found in our earnings release and in our Reports filed with Securities and Exchange Commission, including our Form 10-K Annual Report, our Form 10-Q Quarterly Reports, and our Form 8-K Current Reports. These reports can be accessed under the Investor Relations tab of our company Web site or on the SEC's Web site. All forward-looking statements made during today's call represent our judgment as of April 30, 2018, and we disclaim any obligation to update such statements except as required by the securities laws. This call is being recorded and a 30-day replay of the conference call will be available at our company's Web site, molinahealthcare.com. I would now like to turn the call over to our Chief Executive Officer, Joseph Zubretsky.

Thank you, Ryan, and thank you all for joining us this morning. The financial results that we announced today reflect a good first step toward our goal of sustainable margin recovery. First quarter earnings were $1.64 per diluted share and included $0.38 of net favorable impact not contemplated in our original preliminary guidance. These results are a significant improvement over 2017 and are favorable to our expectation. As a result of these developments, we have increased our full year 2018 guidance to a range of $4 to $4.50 per diluted share. When we analyze the business by key operating metrics, product line or local health plan, we met or exceeded our expectations, modest as they were along nearly all dimensions. To summarize the key takeaways from the first quarter, our medicated Medicare products combined performed well. This improvement despite a higher than normal flu season was primarily due to our medical cost management initiative and better than expected retention of at risk revenue. The performance of our marketplace business exceeded our expectations as the significant price increases replaced into the market were more than competitive and allowed us to surpass our membership forecast particularly in Texas, our most profitable market. From a local market perspective, our large high performing plans continue to perform well in the aggregate despite higher than expected medical costs in Washington. In our underperforming markets, our newly implemented intense and rigorous performance improvement processes began to show signs of success particularly in Florida and Illinois. Our administrative cost improvement plan continue to reflect favorably in our results as evidenced by our lower administrative expense ratio. Finally, our focus on balance sheet discipline not only avoided the unfavorable prior year reserve development that we saw throughout 2017 but rather produced significant favorable prior year development in the…

Thank you, Joe and hello everyone. Today we reported earnings per diluted share of $1.64 and adjusted earnings per diluted share of $1.71. As Joe mentioned these results reflect a good first step toward our goal of sustainable margin recovery. I will briefly discuss the items we called out in the earnings release, prior year development of our claims reserves, our March 31 balance sheet and our revised guidance before we open up the call to take questions. We have highlighted three significant items in today's release that were not included in the preliminary guidance we shared with you in February. First, we recognize the benefit of approximately $70 million or $0.83 per diluted share and reduced medical expense related to 2017 when the Federal Government confirmed that the reconciliation of 2017 marketplace CSR is up to-date will be performed on an annual basis. In the fourth quarter of 2017, we had assumed a nine month reconciliation of this item pending confirmation from CMS. Second, we recorded a $10 million charge for the retirement of an additional $97 million of face value of our 2044 convertible notes. This action had the double benefit of strengthening our balance sheet, while also reducing the volatility in our earnings caused by the optionality of convertible debt. As part of this transaction, we issued 1.8 million shares of common stock. On a time weighted basis, these additional 1.8 million shares added 0.5 million to average shares outstanding for the quarter and a 1.4 million to average shares outstanding for the full year when calculating our revised full year 2018 guidance. Third, we recorded $25 million in restructuring charges in the quarter, these charges primarily related to the write-down of capitalized costs for an in-flight software implementation that did not meet our needs. Let me…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Josh Raskin of Nephron Research. Please go ahead.

Hi. Thanks. Good morning guys. Just wanted to talk about Florida, New Mexico briefly from a balance sheet perspective. And I don't know if you guys have specific goodwill totals associated with those plans and maybe help us with the timing of when a write-off would come, is that after all of the appeals are done or is that kind of done now. And I guess part of that is, what's the expected sort of debt-to-cap what do you think your leverage looks like post those changes? Thanks.

Josh, its Joe. We rewrote the goodwill associated with Florida and New Mexico off when it was announced we lost the contracts in the fourth quarter of last year. So there would be no additional goodwill or intangible write offs in those particular markets. Obviously, with nearly $400 million of capital as the reserves run-off and the premium flow stop we'll approach each of the state regulators with the dividend plan, to dividend that cash to the parent company to provide excess capital which is used to retire debt should have a meaningful impact on our leverage ratio next year. So, obviously disappointed, we lost the contracts but additional capital will be released from those entities.

Nice. That's a positive. And then, the Texas reprocurement could you just walk us through the timing in terms of award dates and contract dates? And then, what's Molina's current run rate in terms of revenues on that business?

The Texas Starplus program bid was submitted. Awards will be announced in October of 2018, with a January 2019 inception date to the contract. Bear in mind, we are only in six regions in Texas and we are bidding on all 13, so we actually view this as a potential revenue upside for us. Any comments on the tactics…

The question I got Joe was just the -- I just wanted to know what the -- on the Starplus portion of that in Texas, what's the total revenues that you guys are -- at the run rate today?

It's approximately $1.5 billion.

Got you. And then, just last quick one on the flu, I know you said the $18 million was that relative to prior year or relative to guidance?

Both. We expected a normal flu season which averages between $15 million and $20 million and it came $18 million higher which is about 40 basis points in the MLR for the quarter.

Thanks. Perfect. All helpful. Thanks Joe.

Thank you.

And our next question today comes from Justin Lake of Wolfe Research. Please go ahead.

Thanks. Good morning. First question is on the marketplace. Can you talk to us about what the updated margins assumed in your new guidance for the marketplace for the full year? And then, any early thoughts on your marketplace footprint for 2019?

On the marketplace results Justin, we're still taking a very cautious view of the balance of the year. We beat our expectations in the first quarter with a 67% adjusted, MLR adjusted for the CSR benefits, 800 basis point improvement over last year. Obviously, the result of nearly 60% price increases we put into the marketplace. And as we said, we will confirm that those prices perhaps will be uncompetitive, but they weren't. And we beat our membership forecast by 50,000 members. We now have 450,000 members and a significant portion of that beat was in Texas, our most profitable state. The reason for the cautious approach is utilization is very back ended into the last three quarters of the year as each quarter progresses, you have special enrollment members utilizing enrollment generally is of healthier members during the year. And of course benefit design out of pockets and out of pocket maxs and copays obviously have an impact on the back half of the year. But, we want to make sure that we have our seasonality projection correct. And we also want to make sure that our estimates of risk adjusted revenue are accurate. As you know, we haven't been as accurate as we needed to be in prior years. We think we have a better methodology now, but we have not included a lot of outperformance in the back half of the year for marketplace.

Okay. So is there margin I think you said 4.6 was what you expected for the full year on your bids, but you were only in your guidance were flat to maybe a slightly positive margin. I'm just trying to figure out where on that -- cycle are you?

You recall when we did our preliminary guidance when we announced our fourth quarter. We said that the marketplace had a low single-digit loss last year. And in our guidance, we reversed the loss and basically forecasted a breakeven result even though we price to a 4.6% target margin. And what I would say in our revised guidance is the first quarter beat in the market place is in our guidance, but certainly not a lot of improvement in the back half of the year. So we want to wait and see the second quarter before we get a really robust forecast of what the marketplace is likely to produce this year. But the target is still 4.6% on gross revenue.

And then, any early thoughts on marketplace footprint for 2019? Thanks.

Yes. We are obviously in the process of developing our preliminary rate bids which as go in early June. We have decisions to make in Florida and New Mexico, if we lose our Medicaid contracts marketplace will be the only substantial business we have in those markets. Florida is seeing improvement this year and New Mexico is doing really well. It is possible, we would resubmit rates in Utah and Wisconsin. And certainly, the other states are performing well so there's no reason to believe that we wouldn't still be successful in our other states such as Washington, Ohio, in Michigan and California.

Great. Thanks.

And our next question today comes from Zach Sopcak of Morgan Stanley. Please go ahead.

Thanks for the question and congrats on the quarter. I want to circle back on the comments in Washington state. It sounded like it was within the expected variability. Just wanted to understand a little bit more what happened in the quarter those related at all to some of the expansion you had into the north central region starting this year. And if that's something that could occur in other states similarly as we progress through the year?

It really wasn't related to the two regions that we procured. In the fourth quarter of 2017. We began to see the emergence of high acuity inpatient cases. We thought we had captured it in our reserves, but early in 2018, we saw some negative development in Washington related to high acuity inpatient. That trend continued for the first quarter date of service. I will tell you that inpatient cases are over $50,000 in total cost. The reported number of those cases increased by over 65% in the quarter. And I also think we dropped our guard a little bit on some of our utilization controls. In those cases hit the stop-loss threshold and revert to build charges you need intense concurrent review procedures and the resources to make sure that you're paying appropriate amounts. And I would say that our concurrent review resources in Washington will not keep pace with the additional volume. So we of course corrected that and we project Washington to have better performance in each of the next three quarters than we had in the first, but probably not back to our full year annual expectation.

Hey, guys. That's helpful. Thanks. And then, as you've brought in outside consultants to help with your RFP process. Can you contrast it all where you are now in that process as you look forward versus maybe when you were on the last quarter call and it sounded like you're just recently started engaging them?

Well, I think the way I would characterize the entire process has been reengineered not just with external resources, but now that we have new leadership of our health plan operations bringing more local knowledge and subject matter expertise there and writing the proposals. It's just a better and more robust process that it will get better with time. So it's been reengineered from the bottoms up and we have a high degree of confidence that our Texas, Washington and Puerto Rico bid submissions were written in a high quality manner very responsive what the state wanted to hear about our capabilities and service profile.

Hey, great. Thanks for the questions.

And our next question comes from Ana Gupte of Leerink Partners. Please go ahead.

Yes. Thanks. Good morning. The first one is on the guidance and it sounds like it feels like you've put the entire workforce reduction run rate in there in part on the marketplace and Medicaid and potentially not much else on the PBM. And you're at about 35 basis points you raised your net margin guidance. Wanted to get a sense for -- do you think assuming everything goes okay on the upside, will you get to your original target margins, net margins of 1.5 to 2 potentially this year and then you can you talk about the trajectory in 2019. And is there any upside there as well with any of additional levers?

The way we think about it is, if you just ignore the $0.38 which are onetime operating items that we raised our guidance by $0.60 to $0.65 and we view that as a $0.40 [beat] [ph] on the first quarter. And $0.20, $0.25 raise on the rest for the year. That's just a cautious approach we're taking not only on marketplace, but across all our business lines, we want to see another quarter of positive experience emerge. As you know our previous guidance on net margin basis was 1.1 to 1.3. That's now 1.3 to 1.5 adjusted for the CSR. And if that's the starting point for a trajectory marching toward our 2% after tax a goal, we think that's a great starting point. And we'll talk more at Investor Day about what profit levers will pull to make up the rest of the way. So, if we can hit it, it's a great starting place. Keep in mind that this is the year where we got the benefit of a tax rate decrease and premium rates were already set. So there could be some "tax windfall" in our current profitability and we're mindful of that. But, if we could hit that net after tax margin included in our guidance great starting place to get to our ultimate goal of 2%.

Okay, great. Thanks. On the risk adjusted, I noticed you had raised your payable estimate a little over $200 million from the fourth quarter and is that contemplate any third party data with weekly, you said you have a new methodology. And is that assuming the 350,000-ish that you have now on marketplace membership and do you feel it's adequately conservative.

Joe, you pick up.

Sure. Its Joe White speaking. We have the -- we continue to refine our procedures for estimating risk adjustment liability. We have the same basic processes, we've always had we've had our internal estimates. We have third party estimates and we merged those two to develop an estimated at any given point in time. But I think it's fair to say we are being more conservative. This goes back to last year when given our experience with this, we thought it was appropriate to take a more conservative approach. So as you can see the balance has increased a bit this year that's a combination of just taking a conservative approach to 2018 and a little bit of adjustment in 2017. So we feel confident in the numbers right now.

Maybe one final one, on Florida with Region 11, you had the ITN, was this something partly driven even by you and that you didn't want to incur any more runoff G&A and the state reduced the rates as well or was something else that came up during the negotiation process that caused you to not…

First of all, we don't actually know yet why we were not awarded a contract in Region 11. We will potentially learn the reasons, but we don't know yet. But no, in full transparency, we went in attempting to secure the region whether it be the service profile and rates. And we were not awarded the contract. So as we learn more, I will certainly communicate that. And as I said, we're pursuing all avenues available to us to a) learn, why you weren’t selected and b) is there anything we can do to reverse the decision?

Got it. Thanks for the color.

Welcome.

And our next question today comes from Sarah James of Piper Jaffray. Please go ahead.

Thank you and congratulations on a great quarter. You've mentioned a few times today that there are multiple points of conservatism in your guidance. You've flagged specifically development in tax, so just wanted to make sure, if there are any other points that you feel you're being conservative as you view guidance now. And then, can you frame up the potential tax windfall for us. I know that the tax rate is variable, but maybe you can help us with the framework around the scale of variability there?

Well, on the tax windfall for lack of a better term when we gave preliminary guidance assume all other things being equal, I believe is about 40 basis point; 40 basis points from the margin. And that doesn't mean that it will or will not be considered as we said future rates. But I just wanted to remind everybody that the rates -- premium rates were set before the tax regime changed. We're just being cautious and conservative across the book of business particularly on marketplace. I wouldn't cite any one reason -- any one product or any one geography. We had some outperformance this quarter, our [outperformance] [ph] doing well. But, we did not project a sustainability of outperformance throughout the rest of the year. Again just being cautious and conservative given the company's past track record of missing estimates and not forecasting properly. But I think with a really good second quarter data point, we should be able to give revised guidance at the end of the second quarter that hopefully is reflective of what we are [Technical Difficulty] full year rate.

Great. You talked about hitting margin target through achieving medical management with an eye on SG&A cost maybe using external vendors or rent to buy strategy. Then, today you announced the termination of utilization and care management project. So I'm wondering is that the start of outsourcing some of this analytics work and can you provide any details on to what the alternative plan is for the -- start new project.

Sure. First thing, I would mention is that the technology platform that was in-flight in our view was misaligned with our goals and objectives. It was implemented to produce administrative efficiency, but did not focus on clinical efficacy, UM, CM and DM. And so we want a business process and our technology platform to be squarely focused on managing our members to high quality care while producing a competitive MLR. And if it happens to save a few bucks of SG&A all the better. But we've got the platform that was being implemented with misaligned with that primary objective. Now we're not going to outsource core care management that is proprietary that's a differentiator. Our strategy that's emerging is one of -- who can manage high acuity members better than their competitors. So there might be technology components, there might be business processes that are very administrative that could be outsourced. But the core clinical activities of the company is a differentiator, is proprietary and will remain owned and operated by Molina.

Great. And last detail here, was there any impact of the carve out of California, IHSS in the quarter or that could be reflected in full year guidance?

Hi, it's Joe White speaking. The impact of the IHSS carve out in 2018 was already reflected in our preliminary guidance and isn't particularly substantial anyway.

Thank you.

And our next question today comes from Matt Borsch of BMO Capital Markets. Please go ahead.

Sorry. Yes, thank you. Could you just a question on Texas and the market place in particular, I just noticed you cited the Texas market particularly for improvement and yet there's also a market where your enrollment expanded where it dropped very significantly in some others. So I'm just trying to understand is that, it looks little contrary to what I might have expected. What is it about the Texas situation that's different?

I think Texas, Matt is simply a combination of two things. One, a very good and highly leveraged provider network and a stable risk pool. You have a combination of those two factors and you can actually make your target margins in this business with a great deal of predictability. And Texas has been the outstanding performer in the marketplace since we launched this business a few years ago and continues to be. So with 245,000 members up from 196,000, 197,000 last year, it's adding meaningfully to our earnings profile.

Great. And also if I can just confirm, I think you had suggested that both Florida and New Mexico pretty sure New Mexico are running net unprofitable, is that correct?

Are you referring to the marketplace, Matt?

Oh, I'm sorry Joe. I was referring to overall.

Overall? New Mexico struggled on Medicaid due to higher behavioral costs, but did well in the marketplace. Florida did as expected as you know it was in our list of turnaround plans and it performed better in the first quarter than prior year and in line with our expectations and the marketplace did show signs of improvement in Florida.

And Joe if I may on both Florida and New Mexico, as you've done maybe some postmortem on the contract losses there. Do you see a common thread that you can point to or do you think they are truly one offs?

I think there are much different situations. In New Mexico, we scored highly on technical competence service profile and all the technical components of the proposal that we lost on rates. We made a calculated judgment at the time that we did in the top quartile range -- the range of rates that was offered and still win. And that wasn't true. We have to bid at the medium, your rate taker in this business, not a rate maker and yet the profitability stresses of the company at the time it took a very conservative approach to bidding on rates. I come at it from a different point of view that you need to build medium and then figure out how you are going to make your cost structure work to squeeze out of your 2% after tax margin. In Florida -- being a Monday morning quarterback and having the benefit of hindsight. It was a not a well written proposal that wasn't responsive to the state's needs. And we did have some service issues in Florida caused by the incredible growth of the marketplace that sort of tainted our operating excellence in Medicaid costs and service issues. So I think that of the two quite different reasons. They are quite specific to those situations and certainly not the case with Texas and Washington which are two very well performing health plans in great businesses run by great teams.

Joe, thank you very much and thanks to you and the team for the quarter and also all of this visibility on business.

You are welcome. Thank you, Matt.

And our next question today comes from Gary Taylor of JPMorgan. Please go ahead.

Hi, good morning. Just a couple of questions. One just looking at the California revenue run rate, is that just going back to the in-home support services, is that 100 million plus revenue drop just passed through and that's why the revenue is down, but the MLR is fine.

It's a combination. Its Joe speaking. Hi, Gary. It's a combination of that along with the fact we took a pretty substantial Medicaid expansion cut, I think in the neighborhood of 10% effective 71 last year. So it's those two factors.

Okay. And then that's great. That goes to my next question, when we look at the Medicaid expansion revenue is down about 8% versus enrollment down 3%, you took that cut in July, but the per member per month for Medicaid expansion were kind of flat to down slightly 3Q, 4Q now suddenly they are down a fair amount? It looks more like something happened in the first quarter or is there some nuance to that?

Not that I'm aware of that Gary. We'll have to go back and look at that. Again that we don't see the major cut was for Medicaid expansion in California was in July. So essentially if you have some of what you're talking about essentially a mix issue among the states.

Okay. And then, last question just getting to guidance. Why include the net non-recurring items in guidance particularly if it sounds like there is potentially some severance cost in the back half of the year, why not just guide an operating number excluding the CSRs and the severance, so the guidance doesn't get impacted in the second half, if there's some additional severance cost?

Gary, really is just a stylistic question, we debated whether to leave it out of everything or putting in everything. We chose the latter. Certainly, we could have done that. But I would say that around the edges there will be restructuring continuing as you suggested. We continued to chip away at our administrative infrastructure. Keep in mind that as we unwind our operations in Florida, in New Mexico, there could be and there will be perhaps some severance costs, perhaps some lease write offs as we downsize those operations. We would prefer to transfer that infrastructure to one of the incumbents or one of the winners. We'll certainly try to do that, but there will be some restructuring probably whether we are due to those contracts. But including it was stylistic if anything -- is that responsive to your question?

Do you have an Investor Day where will we have some additional visibility and magnitude of what some of those restructuring costs might be. I think generally the street would exclude those, but in this context they would obviously impact the guidance. So can you or will you give us some more insight into the magnitude of those?

Yes. We have already started our unwinding plans. We certainly know the magnitude in ranges around what the potential these write offs, potential severance costs are. We will clearly update you at Investor Day on that.

Okay. Thank you.

And our next question today comes from Steve Tanal of Goldman Sachs. Please go ahead.

Thanks guys. Good morning. And just one thing on the MLRs, if we sort of X out or just look at an ex-PPD and MCSRs, it looks like MCR would have been up about 160 bps year-on-year about 40 of that from flu, it's ex-flu about -- up 120. Just sort of curious how you'd frame the conservatism you spoke to with respect to that number versus the core business and how we should think about that?

I think the first thing, we have to do is parse the [indiscernible] development that Joe White and I talk about this often. So the $240 million number is certainly sizable and noticeable. Bear in mind that approximately $150 million of that is the explicit margin, we rolled into our reserves that due to the way it's accounted for in our disclosures always rolls off into the prior year and is then reinstated. So it's pretty much a wash. Therefore, you're really looking at $90 million of what I call actuarial base run-off in the quarter. We fully intended and our actual techniques to reinstate that level of conservatism in the first quarter date of service January, February and March reserves. And so, we believe that the P&L impact of reserve run-off in the quarter was negligible to minimal. If there was any impact, it's likely to be in the marketplace business because we are ultra conservative on setting those reserves at year end for a variety of reasons including our pricing repositioning. But our view is that we reinstated that level of conservatism into first quarter reserves and therefore the impact on the MLR in the quarter was negligible. And certainly the other puts and takes are our flu and some of the other smaller items. But I think the MCR except for that fact is actually pretty reflective of our performance in the quarter.

Okay. Fair enough. And just a quick follow-up on guidance, the non-marketplace enrollment reduction of 64,000, what is behind that number, that's not Region 11, right which would take effect in 2019?

Joe?

I know it's not Region 11. There's a -- that will be more or less consistent through the year. Couple of things are happening. One thing it'd been New Mexico where the loss of the contract there we're going to see an enrollment, an assignment for it beginning in the first quarter. We're also -- fourth quarter, I'm sorry, beginning in the fourth quarter of this year. We're also seeing a little bit of pressure in different states as a result of recertification and lower enrollment. So it's nothing dramatic, but there is a little bit of enrollment pressure. And as a practical matter we may see some loss of enrollment in Florida beginning in the fourth quarter just like we did in New Mexico.

Got it. Thanks. Just lastly, out of Florida, what should we expect kind of closure on this the appeals and such you guys have a sense of that?

I'm sorry, can you repeat that, we couldn't hear the first part of your question.

Sorry about that guys. I was saying give a sense when you think you get closure on Florida, at this stage it sounds like the appeal is ongoing?

It's a process that you go through. It will be resolved soon. And as I said before right now we are considering these contracts plus we are pursuing all of the avenues available to us but we are contemplating the unwinding of our Medicaid operations each day. But also focusing on whether we should stay in the marketplace in each state. But, the process goes through a very as you know winding and arduous process of meetings and filings and those types of things, which we don't -- can't talk about. But it will evolve here over the next few weeks, it will resolve by Investor Day, we certainly will report to you on the outcome.

Thank you.

Our next question today comes from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. Wanted to go back to the tax reform comments that you made sustainability when you mentioned the 40 basis points to margins from taxes, was that an overall benefit to the business in 2018 or is that a comment that that's kind of what potentially that risk because you look at just the exchange in the Medicare business and potentially seeing pricing pressure on that into next year?

Hi, Kevin. Its Joe White speaking. That's just basically an arithmetic calculation of moving from a 35% effective tax rate to 21% that 40% drop in tax rate would move up 1.5% after tax returns in the neighborhood of 1.8% and 2% to the neighborhood of 2.4%. So that just that would apply to anybody measuring the tax benefit on an after tax basis, is purely arithmetic going from 35% to 21%.

Okay. So I guess is there a way for you to kind of quantify what you think that tax [Technical Difficulty] 2019 might be. I guess it's not clear 100% to me what you're assuming as far as 2018 benefit that gets maybe recouped by the states this year. Any color on that? Unlike what you think tax adjusted normalization and if they have got long term tax rates for you and it will get recouped by the states or not, repriced away or not where you think your run rate earnings are this year that we can kind of -- if you don’t have a headwind that we're trying to fight against next year we understand what's the base number is this year?

Well, you have the right question, the question that needs to be answered that is, what's the rate setting process going to take into consideration going forward? And as you know we are rate takers in this business, taxes are not as explicitly cited in rate reconciliations but they could be taken into consideration as states are projecting either what they're allowing for medical cost trend or [Technical Difficulty]. Now that the 21% tax rate is in the run rate of the business, I think we can stop talking about it and talk about rate adequacy going forward. And we'll certainly give you a view of what potential stresses there are from rate adequacy going forward as we talk about our future on Investor Day and how much of that we can erode through profit improvement initiatives. As our MCRs, as you can see by our disclosure are still running much higher than our competitors. So there's plenty of room for opportunity.

Okay. And then last question. It looks like you took down the Medicaid enrollment a little bit, you took up the exchange enrollment a little bit. How much of the MLR improvement is because of that mix shift into 70% MLR versus 90% of our business?

Hi. Its Joe White speaking. I think very little of that. That's all on the margins. Not going to have a huge…

Fine. Thank you.

And our next question comes from Jason Twizell of MUFG Securities. Please go ahead.

Hey, thanks for taking the question. Just quickly around capital deployment given your improved outlook for EBITDA this year. And then also the dividending in capital associated with Florida and New Mexico to the parent in early 2019 is the expectation of whom to use it for debt reduction or is there a potential, do we looking at new markets or M&A or share buybacks?

Jason the first thing you have to do is move toward a balance sheet that a managed care company ought to have. Obviously, the optionality in the balance sheet due to the converts need to be reckoned with. We took care of the 2024, 2020 is still out there. And so we'd have to deserve a cash position to "funded demand" for those notes should they be presented. Are part of our revolver still outstanding? So we could repay that and have some interest expense left. So yes the first thing to do is to sort of correct the balance sheet, the optionality in the capital structure. Delever get it down into a comfort zone of 50% to 55% percent initially, but that's we have earmarked for the cash generation initially. Before we start contemplating M&A or share buybacks or any of those other capital deployment techniques that once we hit steady state and start growing again we certainly would contemplate.

All right. Appreciate the color. That was my only question.

And our next question today comes from [indiscernible] of Baird. Please go ahead. Hello, Mr. [indiscernible], your line is open. It appears we have no further questions. I'd like to turn the conference back over to management for any closing remarks.

Thank you all for joining us today. And we appreciate the time.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.