Good day, ladies and gentlemen and welcome to the Molina Healthcare Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Julie Trudell. Please go ahead.

Good morning and thank you for joining Molina Healthcare’s second quarter 2019 earnings call. With me today are Molina’s President and CEO, Joe Zubretsky and our CFO, Tom Tran. The press release announcing our second quarter earnings was distributed yesterday after the market closed and the release is now posted for viewing on our company website. A replay of this call will be available shortly after the conclusion of the call for 30 days. The numbers to access the replay are in your earnings release. For those listening to the rebroadcast of this presentation, we remind you that the remarks made herein as of today, Wednesday, July 31, 2019 have not been updated subsequent to the initial earnings call. In this call, we will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2019 press release that we issued last night. During our call, we will be making forward-looking statements, including statements relating to our growth prospects, our 2019 guidance, our pending Texas RFP and our long-term outlook. Listeners are cautioned that all in the 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 10-K Annual Report for 2018 filed with the SEC as well as risk factors listed in our other reports and filings with the SEC. After the completion of our prepared remarks, we will open the call up and take your questions. Finally, as you may have noticed from our earnings release issued last night, we have enhanced our disclosures of information eliminating the need for a quarterly supplement. I would now like to turn the call over to our Chief Executive Officer, Joe Zubretsky. Joe?

Thank you, Julie and thank you all for joining us this morning. Last night, we reported earnings per diluted share for the second quarter of $3.06, pre-tax earnings of $257 million and after-tax earnings of $196 million, resulting in pre-tax and after-tax margins of 6.1% and 4.7% respectively on a reported basis. We are very pleased with our second quarter and first half performance in which we are demonstrating that we can sustain our attractive margin profile, while pivoting to top line growth. The business continues to generate significant excess cash flow and our revenue growth initiatives are well underway. We are raising our full year earnings per diluted share guidance by $0.60 at the midpoint of the prior range, with a new range of $11.20 to $11.50 for the full year. Now, some highlights for the first half of the year. Premium revenue was $8 billion and in line with expectations. As our membership flows have stabilized, our rates remain sound and our retention of at-risk premium continues to improve. We managed to a medical care ratio of 85.5% in the first half as we continue to demonstrate our ability to manage medical costs, execute strong rate advocacy efforts and continue to improve our claim payment practices. The year-to-date G&A ratio was 7.6% also in line with expectations. As we efficiently managed our resources to provide excellent service to our members and providers, all while continuing to invest in revenue growth initiatives. We continue to harvest dividends from our operating subsidiaries and have used the cash to pay down debt, lower interest expense and provide ample dry powder at the parent company to reinvest in growth. We have a very strong balance sheet and a simplified and efficient capital structure. Now some comments on performance by line of business.…

Thank you, Joe and good morning. We report second quarter earnings per diluted share of $3.06 on a GAAP basis and adjusted earnings per diluted share of $3.11 excluding the amortization of intangible assets. Our pure performance earnings for the quarter is $2.91, which exclude the positive impact from the net $0.15 gain on repayment of the convertible notes partially offset by restructuring costs. Let me provide some additional commentary on our performance for the second quarter. Premium revenue for the second quarter of 2019 decreased 10.3% to $4 billion compared to $4.5 billion in the second quarter of 2018, which was in line with our expectations. Premium revenue for the second quarter increased 2.5% sequentially. The consolidated MCR for the second quarter of 2019 was 85.6% compared to 85.3% in the second quarter of 2018. Our continued focus on medical management, combined with a relatively stable trend environment, result in favorable prior period development of approximately $28 million pre-tax or $0.33 per share. The MCR for the 6 months ended June 30, 2019 improved to 85.5% compared to 85.7% for the same period in 2018. Favorable prior year period development for the first 6 months of 2019 was in line with the same period in the prior year. The G&A ratio for the second quarter of 2019 was 7.8% compared to 6.9% in the prior year. For the six months ending June 30, 2019, the G&A ratio was 7.6% compared to 7.2% for the same period in 2018. For both periods, the increase in the G&A ratio was mainly due to the decrease in total revenue year-over-year and was generally in line with our expectations. G&A expense increased in the second quarter from the first quarter of 2019 and was impacted by the timing of expenditures. Interest expense was…

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is from David Windley of Jefferies. Please go ahead.

Dave, you ready?

David, your – David, your line is open.

Sorry, just can you hear me now? How about that?

Yes, yes we can hear you.

Can you hear me? Yes, okay. Sorry, multi-part question on rates. Joe, you’ve talked about the Medicaid environment being kind of better than average. Curious, if you still view it that way. Second, on your comments on risk adjustment and at-risk revenue retention, where do you think you stand there in terms of your recapture on at-risk premium? And third, in the exchange market environment, you talk about kind of easing your pricing in that environment to resume enrollment growth. Can you talk about the dynamic with such a high percentage of the enrollment subsidized, to what extent does, do changes in pricing have an impact on consumer decisions, in that highly-subsidized market? Thanks.

Great, Dave. I’ll take those in order. We believe the Medicaid rate environment is very stable, rational and actuarially sound. We have been experiencing a medical cost trend in the very low single-digits in our Medicaid business. And rates have generally kept pace with the rate of medical cost inflation. With respect to risk adjustment and at-risk revenue, across all of our lines of business, Marketplace, Medicare and Medicaid, we continue to improve our performance and retaining at-risk revenue and that is obvious – emerging in the results in a very obvious way. So we continue to get better at, whether it’s quality withholds in Medicaid, whether it’s risk adjustment in marketplace, whether it’s star ratings in Medicare across the board, we are just getting better and better at retaining at-risk revenue. And as I said, it’s showing up in our medical care ratios. And lastly, yes, with the performance of our marketplace business, when the year is over, we’ll have 275,000 members, $1.5 billion in revenue and a 11% after-tax margins. There is ample flexibility to improve the value-added benefits we inject into the products, to ease up on rates. We’ve seen some of the rate filings in certain states and we believe our pricing for 2020 is well positioned us to grow versus the competition. So our prospects for growing the marketplace business in 2020 are seem to be moving along at good execution path. But we’ll know more when we see some of the competitive rates, particularly in the larger states like Texas and Florida. Hope that answers your question.

Great, thanks. Yes. Great, thank you.

Thank you. Next question is from Peter Costa of Wells Fargo Securities. Please go ahead.

Thanks. I wanted to ask about the TANF and CHIP business medical loss ratio. It seems like it deteriorated a little bit year-over-year. Others have talked about pressure in Medicaid loss ratios, what do you think the issue there – is it really just that the mix is no longer improving with tightened eligibility and no longer getting sort of the incremental people found from signing up for healthcare reform, meaning that you need a higher rate from states going forward or what’s happening in there that’s causing the rates not to keep up with trend?

Thanks, Peter. For the most part our TANF and CHIP business is performing as expected. And you’re right, in many states and for us, in particular – places like Ohio and Michigan, where eligibility redetermination efforts have been ongoing. It is fair to say that there is an acuity mix shift that occurs. Generally speaking, healthier people are the ones returning to work and the unhealthy population will stay on the Medicaid roles. So, you do get in acuity mix shift, not only in traditional TANF and CHIP, but in Medicaid expansion where the incomes are a little higher. So there is a phenomenon there, but I will tell you that for the most part, the states have been very reasonable and recognizing the acuity mix shift and our rate advocacy efforts have allowed us to actually get rate relief on some of these acuity mix shift. So, I would call it a sort of a mild trend that’s putting a little bit of pressure, but not really a phenomenon that has to be dealt with in a dramatic way.

Okay.

And Peter, last year, we didn’t have any Mississippi start up at a time so that also add a little bit to the start of business in Mississippi to our – if you compare Q1 this year – Q2 this year versus Q2 last year, so that’s another data point for you.

Yes, great. That brings me to my second question which is, you have very high targeted margins in your businesses, but you don’t have as much growth as some others have. And where you have had growth like Mississippi or Washington and places like that. And you’ve seen pressure on your margins. Would you be willing to trade your high margin targets for more growth going forward? And can you talk about sort of the trade-off between growth and margin at least in the first year or two?

So, I would say on with Washington in particular when you grow 30,000 members, due to an incredibly successful re-procurement and there is a major carve-in of the integrated behavioral benefit there will always be some level of uncertainty as to whether the rate you obtained was reasonable and enough to capture the trend that you’re going to experience. If I consider some of these pressures that we’ve been experiencing, more benefit related then trend related and they will essentially and effectively end up in rates as they did in Ohio with the integrated behavioral benefit and the higher acuity mix shift that happened in the expansion population. So, in answer to your broader question about would we be willing to invest margins and growth? Yes, I mean, we do believe we can sustain these margins and perpetuity and start growing the top line at double digit rates. We believe our cost structure is very, very effective and we aim to be the lowest cost, highest margin producer and high-growth industry. So we will invest some of our marketplace margins and product features and pricing next year to grow, but we really do believe we can maintain a single-digit Medicare margin and a 3% Medicaid margin in perpetuity.

Thanks and congrats on the quarter.

Thank you.

Thank you very much. Next question is from Josh Raskin of Nephron Research. Please go ahead.

Thanks. Good morning. Just two questions, the first is just, it is using about the three segments into 2020 and maybe even beyond, are there specific sort of margin resets? I know, you’ve talked about the pricing on the exchanges or in the marketplace for you guys. But in Medicaid or Medicare, are there minimum MLR resets? Are there state arrangements on profit? Are you sharing things like that or other sort of like technical requirements, where you would expect the margins to normalize, just based on sort of being above target margins? And then the second question just on the M&A commentary, certainly appreciate you guys looking for books of business and understand that rationale. Is that a commentary around the potential divestitures from Centene, WellCare? Or is that a broader commentary around provide your own plans and other plans in the marketplace?

Well, Josh, on your first question about margin resets in our three segments, the margins we’re achieving today are subject to all the caps and corridors that exist in the various markets. Various markets as you know, G&A caps, there are profit caps, there’s quality withholds, there’s all types of features to sort of regulate the amount of profit, you can earn in the 3% margin in Medicaid is subject to all of those puts and takes. So, I don’t see a margin reset coming in the Medicaid business at all, and Medicare and our MMP product, they have introduced a various levels of minimum MLRs that probably will change over time, maybe a little bit of pressure on the MMP product, but that’s the only phenomenon, I can actually think of, that represents anything close to profit pressure due to profit caps, corridors and the like. On your last comment on M&A, that was a very general comment recognizing the significant financial capacity we’ve created in a short period of time and returning to positive operating leverage. As a reminder, we had negative operating leverage last year when we lost the Florida and New Mexico contracts and we want to start creating positive operating leverage and there is significant operating leverage to create if we can attract books of business. So, as a recognition of positive, returning to positive operating leverage and the significant financial capacity, we have created. We would never comment on any specific situation with respect to M&A.

Okay, that’s helpful. Thanks, Joe.

Bye, Josh.

Thank you. The next question is from Justin Lake of Wolfe Research. Please go ahead.

Thanks, good morning. Let me just follow up a little bit on the – Josh asked about margins, just broadly on 2020. Can you, thinking about the run rate of earnings in 2019 into next year. I know for instance, you guys typically exclude the incremental PYD that you kind of called out so far year-to-date as a headwind to next year. Is there any other headwinds that you would want us to kind of consider and anything else you – we should keep in mind as we kind of look to 2020 in that, versus that 12% to 15% growth rate target that you have out there on EPS?

Justin, no, really. The good news about this year is when we print the final numbers, if everything goes as planned, it will be a very, very clean year, the revenue base, the MCR, the SG&A ratio, the margins we’re producing are all very reflective of the earnings power of the business. So we finally have a clean stable year, where we can step back, look at it and say, this is the baseline of which we will grow. So there really are no significant headwinds or tailwinds as we emerge into 2020. As we said with 7% to 9% premium growth projected for next year, we should return to positive operating leverage and the margins on that business should hold. So, we’re feeling without giving a forecast for 2020 which we’re not – we’re feeling pretty good about the trajectory we are on for the second half of ‘19 into ‘20.

Got it. And then just following up, and I apologize if I missed this before, you talked about the 7% to 9% premium growth, were you able to give a breakdown of kind of where you see that coming from specifically, especially on the exchanges versus Medicaid.

We haven’t done it specifically, but generally what we’ve said is, we filed in 150 new counties in our D-SNP product. We’re only in 65 today. And we actually expect to grow market share in the 65 we’re in, because we are woefully under penetrated in those 65 counties, so we have good growth prospects for Medicare. And marketplace as you suggested, we will ease up on rates as you probably saw in some of the rate filings, where our margins today are outsized we can reinvest in the product, we’re going to do a better job pricing brands, we’re seeing a lot of people select brands over silver, because of the lower monthly premium. So, we’ll do a better job there, so very confident in our ability to grow the top line in marketplace. With respect to Medicaid, it’s mostly going to come from in-market extensions of run rates we’re creating this year. Mississippi run rating into next year, we’ve had a good year in Illinois and South Carolina, building our revenue base, due to better positioning in the auto-assignment algorithm. Washington, the growth that they’ve experienced this year will extend into next year. So, most of the growth in Medicaid next year will come from things that already exist today. So, it’s merely an extrapolation of the benefits that we’re enjoying this year, due to some end market growth.

Thanks for the color.

You’re welcome.

Thank you. The next question is from Sarah James of Piper Jaffray. Please go ahead.

Thank you. It seems like you’re the second company to flag this redetermination, and I’m wondering, if this is something that’s always been going on to this degree or if states are kind of approaching it with a new vigor and that’s why it’s coming up. And then you talked about being able to resolve any shifts that causes in mix through rate advocacy, I was hoping you could give us an idea of what the turnaround timeline on that is? Is this something that you typically will resolve in the first quarter? Or does it take a couple of quarters of advocacy to get the payments where you need them to be? Thanks.

Sarah, on redetermination, I think there are a couple of factors at work here. One is, I think it’s fair to say that certain states have an increased focus on re-determination, which makes perfect sense. They’re spending tax payers’ money and they want to make sure that people on the role are actually eligible for Medicaid. So, there is an increased focus. It seems to have abated a bit. But secondly, we’re dealing with a very good economy and people are returning to work. And as they return to work, the healthier people will return to work and the sicker people who can’t work, will stay on the roles, which therefore creates the acuity mix shift that you observe. We can do, as a company, we can do a better job, keeping people that are going through the re-determination process. We believe that some of the softness in our membership roles over the past couple of years have been or because we’ve been lax and working with our members to keep them on the roles, should they continue to be eligible and they leak out of our, out of Molina into the system and wind up in other companies, and we’re going to do a better job, keeping them on the Medicaid roles if in fact they are eligible. On the rate adequacy efforts, the states are very aware of that healthier people go back to work and the less healthy people stay on the roles. A recent example in Ohio, where there was a rate advocacy effort to look at the re-determination effort that took place there, to look at the acuity mix that stayed on the Medicaid roles. And the market in general, including Molina has been very successful and making sure that rates have stayed commensurate with the acuity of the population. So, there is usually a lag time, but states have been very reasonable to observe that phenomenon. And had been agreeable to making sure the rates are adequate.

Got it. That’s very helpful. And one clarification, in the release you guys mentioned a decrease in marketplace risk adjustment compared to ‘18. Can you quantify how much that was?

I’m sorry, your question against, Sarah, risk adjusted on.

Yes, the marketplace risk adjustment that you guys experienced this quarter that relates to 2018. Can you quantify how much that was?

We haven’t quantified that. We if you recall last year, I understand your question now, last year we disclosed an amount that was very significant. I mean at the time that represented almost 25% of our earnings forecast for the year. So, we disclosed that these, we thought it was relevant. This year, the number was immaterial to the quarter to the six months and certainly to the full year forecast. So, we have not spiked it out and probably will not.

Got it. Thank you.

Thank you. The next question is from Stephen Tanal of Goldman Sachs. Please go ahead.

Good morning, guys. Thanks for the question. You guys have covered a lot of ground. So maybe just a couple of numbers questions here. Just on the prior period development, so you guys framed a $20 million to $28 million pre-tax in the quarter. I just want to confirm whether that’s net of offsetting reserve builds and what the comparable number was last year, just to understand sort of the year-on-year swing in MCR, if any?

Yes, Stephen, it’s Tom. $28 million is primarily prior year development there for the quarters. And if you look at the six months this year, as Joe commented in his prepared remarks, it is pretty consistent with prior year in the same ballpark number essentially. And for the year-to-date numbers, it’s approximately in the zone of about $90 million in total, pre-tax.

Okay. Got it. And that’s sort of the way you guys are defining that as net of reserve builds, correct? Is it the right way to think about that?

Yes, we are consistent in our approach to reserve and that’s very, very fair comment.

Perfect, thanks. And maybe just one more follow-up, just sort of on the Medicaid redetermination story, it sounds like the states are actually playing ball, which is great to hear. But I just wanted to clarify, are you guys actually seeing sort of off-cycle rate increases, where those issues are playing out or are you typically having to wait for the next renewal cycle?

Typically, you are waiting for the next renewal cycle and agreeing to a prospective adjustment, every once in a while, you might be able to argue for some retrospective rate relief, but generally speaking, it will wait for if there is a mid-year true up, it will wait for that process, and if you have to wait for the following year, usually that’s the way it happens. But every once in a while, you can approach a customer for a mid-year correction, if in fact there is a dramatic shift in acuity or benefits.

Got it. It’s very helpful. Maybe just last one for me. Just on the MA sort of D-SNP business with particularly strong in MCR. I’m wondering, if you could give us maybe some specific commentary on what’s working particularly well in that business and then I’ll go. Thanks.

It’s really just the fundamentals. We continue to manage high acuity populations really, really well. The membership is very stable and we continue to get a lot better at-risk adjustment and making sure that our, the scores that we’re achieving are commensurate with the acuity of the population and that continues to give us some lift. So, we’re just really operating really well in the fundamentals of the business and with our renewed interest in growth and filing 150 new counties next year and increasing our penetration in the 65 existing counties, we’re really bullish on our prospects in the D-SNP line of business.

Awesome. Great to hear. Thanks.

Thank you. The next question is from Matt Borsch of BMO Capital Markets. Please go ahead.

Yes. I know you’ve touched on this. I was just hoping you could talk on the drop sequential drop in days claims payable relative to the favorable reserve development that you saw. And, just to put it in context, I recognize the track record that you’ve developed for conservative and favorable reserve development speaks to the integrity of your reserving process. But I just want to get a little bit more comfort on this stat, the reserves were replenished going forward given the drop-in days claims payable.

Sure, Matt. I’ll kick that question to Tom.

Yes, Matt, you’re right. We are very consistent in terms of our reserving methodology. So, regarding the quarter end June ‘19, you see a drop of four days. And you look back last year, June 2018, if you compare that to March of 2019 is a similar kind of drop of roughly about four days. June is typically low utilization months and usually set your reserve based on that. And most of your reserve balance at the end of the quarter consists of the current-month. So that’s really the phenomenal of seasonality that I mentioned.

Got it. Okay, that’s great. Thank you, Tom.

You’re welcome.

Great. The next question is from Ricky Goldwasser of Morgan Stanley.

Yes. Hi, good morning. Just a couple of follow-up questions here. First of all, on Ohio, because you keep coming back to Ohio as an example of a state where rates have been readjusted. So, the second quarter margins for the state reflect, kind of like the steady state margins or should we see margin expansion into 2020 as a result of this rate adjustment. That’s the first question. And then the second question, Centene on their call, talked about the ongoing process of divestiture and the discussions, so just any thoughts on that and any specific regions that you’d be interested in.

With respect to the profitability of Ohio, I would say that the rate adjustment that we’re getting is keeping pace with the new acuity and trend of the population. So, we’re not projecting any significant change in the margin picture that we’re presenting today. That rate was necessary to keep pace with medical cost inflation, so no change in the trajectory of the state of Ohio profitability. The rate increase that we were able to get helps us keep pace with the rate of inflation. And on the last question, we just make it a practice, never to comment on any specific M&A opportunity, but to repeat what I said in our prepared remarks. We had $1.8 billion of capacity and the desire to return to significant, positive operating leverage. We are very interested in books of business and membership in our core products and I’ll leave it at that.

Thank you.

You’re welcome.

The next question is from Kevin Fischbeck of Bank of America Merrill Lynch. Please go ahead.

Okay. Great, thanks. Just a couple of things, one is, you mentioned that I guess it sounds like the Medicare business is coming in a little bit better than you guys expected so far. I think you’re a little above your target margin there. Did you guys realize that in time for the 2020 bids or is that potentially going to be a source of upside kind of going into next year as well.

This profit picture was emerging as we were filing our bids for 2020. So that was taken fully into consideration, Kevin.

Okay. So I think you said something on the lines of that, when you have favorable development that people might not quite appreciate how that maybe sets you up for additional upside kind of later in the year, it’s maybe just final more color then it’s kind of what you’re trying to domestic there.

Well, really, what I’m saying is that I think often times favorable and unfavorable development is just seen as sort of some actuarial phenomenon, when it really is performance-related, the actuaries have to use an experience period, where they’re looking at your medical cost trends and including those trends and reserving. And if you continue to outperform those assumptions by payment integrity routines, effective utilization management, your reserves are likely to run off redundantly and your medical cost baseline and trend used for the current year dates of service are likely conservatively stated, stated another way when you’re managing into declining trend, it can’t help, but be very positively from a financial point of view. And that’s really what we’re trying to message there that favorable development and a very attractive margin position that we’ve created for ourselves really is the product of very, very effective cost management across the board.

Okay. And then maybe just last question, you guys have a lot of things going on from a cost perspective. You get the pharmacy agreement earlier, you talked about the integrity and risk adjustment, can you talk about what else is still kind of to come here over the next 12 months?

It really is more or less extensions of all the things you mentioned. We’re not done implementing all of our payment integrity routines. We have full run rate of our pharmacy, new pharmacy contract in our earnings, our IT outsourcing is now in the expense run rate. So, I would just say that more or less extensions of many of the initiatives we talked about before and that we showed you continue to show you at Investor Day. But no big other initiatives, other than the ones we’ve already mentioned, but more or less extensions of ones we’ve already begun to implement.

Alright, great. Thanks.

Thank you. The next question is from Charles Rhyee of Cowen. Please go ahead.

Yes. Thanks for taking the question. Joe, you talked earlier about trying to make sure you’re keeping members on the rules, if they are eligible. For members that are no longer eligible, are you able to focus on them to get them into sort of an eligible exchange into the marketplace? And how is the stuff like been if that’s, if you’re able to?

There are subject the state rules are all different across these lines in terms of whether you can approach members for other products whether they can be one transfers, etc. And we obviously comply with those state rules and do the best we can to keep the Molina product, but it’s hard to answer that generally, all the state rules are different in terms of what you can and can’t do. I will tell you that when it comes to the member and it comes to the network, it’s critically important, and that’s why we love our product suite. Medicaid, Medicaid expansion and Marketplace as members move up and down, the scale of their incomes relative to the Federal Poverty Levels and they love their primary care physician and they like their network and love the Molina brand and how they cared for it. When they have a choice, they will stay with the Molina product. So, whether we can transfer them or not, many of these decisions are made by the provider and the member jointly and if they have a positive Molina experience, they will stay with the Molina product.

That’s helpful. And then, and you earlier also talked about re-determinations. I think one of your peers talked about there relative to the states that they’re in, there maybe halfway through or a little bit more opportunities kind of going through this process. Can you talk about relative to your footprint, where the states are in terms of going through the cycle of sort of re-determinations?

I mean, there are always going through it, but we’ve seen, I would say in the last 12 to 18 months, most of the pressure we saw in our book of business occurred in both Michigan and Ohio. And I would say that is largely leveled out. And the fact that the re-determination leakage has leveled and then the Washington, Mississippi and South Carolina and Illinois membership has grown. Net-net we’re back into, we’re going to be back into positive territory on a sequential basis. When it comes to Medicaid member months. So, re-determination leveling, our growth initiatives started to take hold. I think we’ll be back into solid positive territory from a volume perspective real soon.

That’s great. Thanks. And lastly from me, I think you mentioned a little bit about Texas, at the very start here, in terms of just timing if I’m not mistaken, right, Texas has kind of delayed decisions before had to I think, we bit again once. Any kind of additional color you can give like as to what’s going on, maybe in Texas, in general why, things are taking so long here?

No, I really can’t. We’re just we’re just subject to the whatever decision-making process that they have decided to take, the last we heard it’s going to be the end of August. We also believe that they’ll likely announce the STAR PLUS and the STAR CHIP awards concurrently. But we’re in wait and see mode. We remain confident, but we know nothing more than you know based on what you’ve read and heard.

Great. Thanks a lot, guys.

You’re welcome.

Thank you. The next question is from Steven Valiquette of Barclays. Please go ahead.

Hi, great, thanks. Good morning, Joe and Tom, thanks for taking the question. So, actually two questions just on the marketplace quickly. One just a follow-up on the marketplace risk adjustment true up in 2Q ‘19 and while you’re not disclosing the number are you able to clarify whether the true-up was contemplated in the guidance for 2019. And then number 2, the marketplace MLR of 64.7% in the quarter, while it was up versus roughly 54% in 2Q, last year. Is still a pretty phenomenal number in the grand scheme of things, especially if it did not include any material benefit from any sort of risk adjustment true up you mentioned it could trend higher from here, which makes sense, but I guess, the question I’m just looking for a little more color on how this 2Q marketplace MLR stacked up versus your own expectations, just for the quarter specifically. Thanks.

I’ll let Tom add some more color to this. But I think two perspectives Steven are important. One is that we true up our accruals in our risk adjustment every quarter. So, I think you can assume that not all of that was actually adjusted in the second quarter. Some of it was adjusted in the first. It wasn’t material to the quarter and I think the phenomenon you are looking year-over-year in terms of loss ratios, obviously, last year was benefited hugely, by that number. On a going forward basis, you’ve got to captured correctly, at 67.4% year-to-date, 69% projected we’re right where we want to be, it’s a very profitable book of business. It will produce over $220 million of pre-tax profits for the year and gives us a very solid baseline off of which to grow. But we are just getting better and better risk adjustment and we keep outperforming the assumptions that the accounts and actuaries use to account for the risk adjustment and that bodes well for the continued profitability of the business.

Yes. I will add a little bit more color to the question you asked about last year, marketplace MCR at 57%. And last year quarter’s benefit tremendously by the marketplace risk adjustment and if you kind of normalize for that, then the MCR would have been around 67% and we are very comparable to what you see this year.

Yes, that’s helpful. I quote it this is excellent, that was not that quarterly, so thanks for credit in that to you and thanks for the extra color.

Okay. Steven thanks.

Thank you very much. Ladies and gentlemen, our final question is from Gary Taylor of JPMorgan. Please go ahead.

Hi, good morning. Just a couple of quick ones. I appreciate all the comments today. Just trying to understand and I have certainly heard the comments about the re-determinations and so forth, but as I just look at and I understand this portfolio business that’s part of the answer. But when you look at TANF, in the first quarter, MLR was down 500, this quarter, up 120 and then expansion, the complete opposite first quarter MLR was up about 420 and then down 350. So on both quarters the trend that’s sort of offset each other. So, when we look at just how that’s progressed year-to-date, are we to think that there has been more rate adjustment in the expansion population or is that just much better operational performance in that population?

If you were to look at parsing the different components of the Medicaid business, I would look at the 6 months versus 6 months, this year versus last year. If you look at that, our TANF and CHIP over a year-over-year comparison for the 6 month last year is actually improved by almost 100 and almost 200 bps. So and on Medicaid expansion, it’s fairly stable. And so we have had some rate efficacy in Ohio that came through in the quarter, so really help really bring the overall loss ratio for expansion business back to a more normal zone if you will. So on balance, the portfolio is really doing well.

Year-to-date I totally get it, just a little more quarterly fluctuations, I guess, maybe have anticipated, so just trying to think about that better. My last one would just be and maybe I missed this earlier we are talking about one state and I missed it, but just Illinois. So it was a good quarter, so I am going to pick on one where it looked like the MLR was up to just try to understand anything specific around Illinois for 2Q?

No, Illinois is doing really well. It will be a $1 billion business shortly and the margin recovery of last 2 years has been significant. In the quarter, if memory serves me correctly, there was a provider settlement that hit the quarter. One-off effect, Illinois is doing great. It’s got mid-single digit margins. It will have $1 billion of revenue soon and the prospects for growth there is very strong.

Great. Thank you very much.

Thank you very much. Ladies and gentlemen that concludes today’s conference. Thank you for attending the presentation and you may now disconnect your lines.